The basics of student loans

Calendar Icon Updated January 17, 2019

For many students, financing a the cost of their higher education at a college or university, community college, or a trade or technical school may be the only way they can afford to attend.

Fortunately, there are many options available to help students pay for college.  Depending on need, they may be eligible to receive subsidized loans or unsubsidized loans from the U.S. Department of Education.  Students may also be able to tap private loan sources as well.

It all starts with the FAFSA

If you’re looking to finance your college education, the best place to start is by seeking assistance from the federal government.  Because the federal government deals with millions of students seeking aid every year, they have developed a standardized application process that starts with filling out the Free Application for Federal Student Aid (FAFSA) form.  The FAFSA is a key component used by college financial aid offices to help students determine how much and what kind of financial aid may be available them.

Each Fall, a student must complete the FAFSA, supplying personal and family financial information which is then used to calculate expected family contributions and estimated financial need for a college the student would like to attend.

Based on this information, college financial aid offices then make financial aid offers to students to cover all or a portion of the estimated expenses to attend that particular institution.  Sometimes this involves the awarding of grants, but in most cases, students are offered either direct subsidized or direct unsubsidized loans.  Sometimes, they are offered a combination of both.

The differences between subsidized and unsubsidized loans

Direct subsidized loans offer better terms for students because once your amount of need is determined, the U.S. Department of Education will pay the interest on your loan while you are in school at least half-time and for the first six months after you leave school.  To receive a subsidized loan, you must demonstrate financial need.  This applies either when you graduate or simply stop going for any other reason.  In some instances, you can also apply for a deferment on the loan, which is a temporary postponement of loan payments.  You will not accrue any interest during that period either. 

Direct unsubsidized loans are available to all undergraduate and graduate students.  There is no requirement to demonstrate financial need.  The school you are attending will determine how much you can borrow based on your cost of attendance and factoring in any other financial aid you might receive. 

The biggest difference with an unsubsidized loan is that you are responsible for paying interest on the loan as soon as you accept it.  You do have the option of not paying interest on the loan while you are in school and during grace periods or if you are approved for a deferment.  However, interest will still accrue and will be added to the principal amount of your loan. 

There are limits to the amounts you can borrow that are determined by a number of factors.  Generally, a first year undergraduate student may borrow no more than $5,500 and no more than $3,500 of this amount may be in subsidized loans.  Dollar amounts rise for each you are in school, but because of certain variables, it is best to work closely with your financial aid office to ascertain your personal maximum amount. 

You should also be aware that there is a small loan origination fee of just over 1% for both subsidized and unsubsidized loans.  In addition, the first time you accept a direct loan, you will need to complete entrance counseling and sign a Master Promissory Note that shows you agree to the terms of the loan. 

Repaying your loan

After you graduate, leave school or drop below half-time enrollment, you have a six-month grace period before you must start repaying your loan.  Payments are generally due monthly and you will be contacted by your loan servicer with exactly how your loan will need to be repaid.

There are several repayment options that are normally available.  In most cases, you’ll have between 10 and 25 years to repay your loan, depending on the plan you choose. 

If you have trouble repaying your loan, it’s essential that you contact your servicer immediately.  They will be able to help you understand what options are available to you to keep your loan in good standing and without damaging your credit rating.  You may be able to request a deferment or a forbearance that will allow you to temporarily stop making payments, or to lower your payments to a more acceptable amount.

Private loans may be an option

For students who don’t qualify for federal student loans, the option of taking out a loan from a private lender may be a possibility.  Just as with any financial decision, there are several pros and cons to consider.

This chart is copied from the Federal Student Aid gov website.

Federal Student Loans Private Student Loans
You will not have to start repaying your federal student loans until you graduate, leave school, or change your enrollment status to less than half-time. Many private student loans require payments while you are still in school.
The interest rate is fixed and is often lower than private loans—and much lower than some credit card interest rates. View the current interest rateson federal student loans. Private student loans can have variable interest rates, some greater than 18%. A variable rate may substantially increase the total amount you repay.
Undergraduate students with financial need will likely qualify for a subsidized loan where the government pays the interest while you are in school on at least a half-time basis. Private student loans are not subsidized. No one pays the interest on your loan but you.
You don’t need to get a credit check for most federal student loans (except for PLUS loans). Federal student loans can help you establish a good credit record. Private student loans may require an established credit record. The cost of a private student loan will depend on your credit score and other factors.
You won’t need a cosigner to get a federal student loan in most cases. You may need a cosigner.
Interest may be tax deductible. Interest may not be tax deductible.
Loans can be consolidated into a Direct Consolidation Loan.  Learn about your consolidation options.
Private student loans cannot be consolidated into a Direct Consolidation Loan. 
If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments. Private student loans may not offer forbearance or deferment options.
There are several repayment plans, including an option to tie your monthly payment to your income. You should check with your lender to find out about your repayment options.
There is no prepayment penalty fee. You need to make sure there are no prepayment penalty fees.
You may be eligible to have some portion of your loans forgiven if you work in public service. Learn about our loan forgiveness programs. It is unlikely that your lender will offer a loan forgiveness program.
Free help is available at 1-800-4-FED-AID and on our websites. The Consumer Financial Protection Bureau’sprivate student loan ombudsman may be able to assist you if you have concerns about your private student loan.


Bret Colson

For more than a decade, he managed the city government public information and marketing activities for Anaheim, California, including an active role in the build-out of more than $5 billion in community and infrastructure improvements.  He also spent several years managing the public information function for an Orange County, California special district that served the needs of more than 1.6 million people, and has consulted for several local governments and private sector companies throughout the course of his career.

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