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Compare offers from private lenders, learn about refinancing and consolidation options and explore the full timeline of what happens after you take out your first student loan.
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You have two options when you’re looking for a loan to pay for school: Federal loans or private loans.
Typically, both private and federal lenders recommend that students apply for federal loans first, since they often have lower interest rates than federal loans and more forgiving repayment options. However, there is a limit to how much federal funding you can qualify for — and how you can use it. For a more in-depth look, check out our guide to 14 types of student loans.
Take our four-question quiz to get a quick recommendation on which type of student loan might be best for your needs.
What is a student loan and how does it work?
Federal student loans | Private student loans | |
---|---|---|
APR | Fixed rates from 2.75% to 5.3% depending on the loan type | Variable rates as low as 3% or lower, but can reach as high as 18% for fixed rates |
Restrictions | Only for education-related expenses while you’re a student | For education and post-graduate expenses, such as studying for a bar exam or starting a medical residency |
Repayment options | Deferred until six month after school, full fixed repayments or graduated and income-based options. | Typically deferred or interest-only repayments until six months after school, full fixed repayments over five to 20 years. |
Federal student loans generally attract lower interest rates than private student loans, but there’s a limit to how much you borrow and what you can use it for.
They also loans tend to be a first choice because they come with benefits like loan forgiveness programs, flexible repayment schedules, extended terms and multiple repayment options.
Students typically turn to private student loans after they’ve maxed out their federal loans or need help paying for a career-related postgraduate cost like studying for the bar exam or relocating for a medical residency.
Read our full guide on how federal and private student loans compare
In addition to taking out a loan in the student’s name, there’s also the option to take out a loan the parent’s name. You might want to consider a Parent PLUS loan if you’ve exhausted all federal financing options. And if you need private financing, it could be an easier choice since parents with good credit and high income don’t have to bring on a cosigner.
You can find out if one is right for you by visiting our guide to parent loans.
Student loan | What it is | How it works | Where to get it |
---|---|---|---|
Undergraduate student loans | Federal and private student loans to pay for an undergraduate degree program. | ||
Graduate student loans | Federal and private student loans to cover the cost of attending a master’s or professional degree program. | ||
Bar exam loans | A loan meant to help recent or soon-to-be law school graduates cover the cost of studying for and taking the bar exam. | Typically borrow between $1,000 and $15,000 from a private lender and start repaying it between six and nine months after receiving your funds. | Private student loan providers that offer bar exam loans. |
Medical residency loans | A loan meant to help recent medical school graduates cover the cost of applying to and relocating for a medical residency, plus required exams. | Typically borrow between $1,000 and $15,000 and defer repayments until between six and 36 months after leaving school. | Private student loan providers that offer medical residency loans. |
Student loan refinancing | Take out another loan with new rates, terms and repayment options to pay off your current private or federal student loans. | Private student loan providers that offer refinancing. | |
Parent loans | Parents can later refinance the loan into the student’s name. |
You can apply for a federal student loan by filling out the Free Application for Federal Student Aid (FAFSA) — which also allows you to apply for other types of federal aid like work-study. You can complete this online.
Private student loan providers typically offer online application applications that you can complete along with your cosigner in a few minutes. If you’re applying with a cosigner, they can typically either apply with you or are sent a link to access their part of the application once you’ve completed yours.
A step-by-step guide to applying for student loans
Federal student loans are the same for everyone, but private student loans aren’t as simple. You can find a loan that works best for you by comparing lenders. First make sure you’re eligible, before comparing features like APR, terms and repayment options.
If possible, consider prequalifying with a few lenders once you’ve narrowed it down. That way you’ll get a closer idea of what you’re eligible for than a general range of rates and terms.
You can get a quick start by using our comparison table. Or for a more detailed comparison, check out our top picks for private student loan providers.
Many private lenders recommend undergraduate borrowers to apply with a cosigner. But you might want to consider a cosigner even if it isn’t required. That’s because most lenders have minimum credit requirements that most college students can’t meet — usually a minimum credit score of at least 600 and a debt-to-income ratio below 43%.
Student loans aren’t the only way to pay for college. If you’re not certain you want a student loan, look into these financial aid alternatives.
The federal government, state governments, schools and corporations offer grants and scholarships to students that you typically don’t have to repay.
Grants tend are often based on need, while scholarships are usually merit-based. Outside of need and merit, you can find both scholarships and grants for members of underrepresented groups, members of the US Armed Forces, veterans and specific career paths.
Because it’s rare for grants or scholarships to cover your full tuition, they’re most often used in combination with other financial aid. Popular federal grants include Pell Grants, SMART Grants, the Federal Supplemental Educational Opportunity Grant (SEOG) and the Academic Competitiveness Grant.
You likely can’t cover the cost of tuition with most part-time jobs. But you might be able to cover part of your housing, textbooks and pocket money. Bonus points if you find a job in your field to get a head start on your career.
Don’t have time for that kind of commitment? Take on side gigs when you have the time. These gigs might not always cover your entire rent, but they can keep more money in your pocket.
You can use a personal loan to pay for college, though you might not want to foot the entire bill with one. Personal loans are typically better for covering extra costs like flying back home for the summer, relocating for an internship and similar expenses that come with being in school.
You can typically borrow between $2,000 and $100,000 with rates that compare to private student loans. However, you often need good credit to qualify, and cosigners aren’t always allowed. Repayments also start immediately.
Schools are starting to offer income share agreements as an alternative to student loans. With an ISA, your school agrees to front you a fixed amount of money from a private investment account or college endowment to apply toward your expenses. In turn, you agree to pay a percentage of your post-college income over a fixed time — typically 10% to 20% of your income over a fixed period of time, typically around 10 years.
Parents or students can withdraw from their IRA without penalty to pay for qualified higher education expenses (QHEE), which includes tuition, fees and other costs related to attending college. Doing this essentially turns the IRA into a joint college savings fund and a retirement account. However, you might not want to use it to cover all of your education expenses — withdraw too much and you’re required to pay an income tax. Consult a tax expert before you withdraw from your retirement account early.
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Simply put, student loan refinancing means taking out a new loan to replace your current one. Refinancing can help you save now and in the future by reducing your interest rate, changing how much time you have to repay your loan or reworking the terms of your debt.
Generally, you need good credit and a steady income to qualify for a refinancing loan with low rates. But if you refinance a federal loans with a private lender, you could lose federal benefits that include income-driven repayment plans and loan forgiveness.
Find out how much you could save and cautions to consider before refinancing
You can, but it might not be the best idea. When you refinance your federal loans with a private lender, you give up several benefits that include loan forgiveness for teachers and public servants, deferment programs for healthcare and legal professionals and flexible repayment plans.
Federal loans also generally come with some of the lowest interest rates out there — rates that are fixed by the federal government. Chances are, you might not be able to find a better deal with refinancing. Talk to your loan servicer to explore your options before turning to refinancing for federal loans.
Parent PLUS loans don’t come with as many benefits as most other student loans so refinancing might also help you save. You can also refinance a Parent PLUS Loan in your name or your child’s name to help build their credit and release you from their student debt, improving your personal debt-to-income ratio.
Watch our short video explaining your different repayment options or read more below.
Unlike other types of debt, student loans come with several repayment options. Immediately after you take out your student loans, you might start making full repayments, interest-only repayments or none at all if you’re lucky enough to get a direct subsidized federal loan.
What happens after you take out your student loan depends on the type of student loan you have.
Your school receives your student loan money, using it to pay for your tuition and fees. It then gives you the option of taking leftover funds for other education-related expenses or returning them to the government. Here’s what you can expect, depending on your loan type and application:
Once you graduate, leave school or drop below half-time enrollment, you’ll do exit counseling to learn what’s involved in repaying your student loans.
Your school pays your tuition from your private student loan funds before forwarding any leftover money to you. You might need to repay your student loans immediately, make interest-only repayments or defer your loan until after you graduate.
Unless you have a PLUS Loan, you have a six-month grace period before your loan repayments are officially due. Your interest starts to accumulate, if it hasn’t already. At this point, your loan servicer reaches out to set up your account and go over repayment plan options.
You might find yourself of one of these four scenarios, depending on the loan terms you chose when you signed up. Either:
If you haven’t already begun repaying your loan, you start making repayments to your loan servicer based on your repayment plan. Setting up autopay at any time could knock 0.25% off your interest rate.
You either start making repayments after a grace period or continue making repayments. Ask about discounts for autopay — some lenders are willing to discount your rate by 0.5% if you sign up.
Loan servicers are companies that lenders hire to manage your loan repayments in exchange for a portion of the profits. The federal government uses loan servicers for all of its loans, but some private lenders use servicers as well.
You don’t get to choose your servicer, and they won’t always reach out after your loans are due. If you’re not sure who your loan servicer is, find it through the National Student Loan Data System.
When you start making repayments, you might have a choice between several different repayment plans. These can include monthly repayments that stay the same throughout the life of your loan, or repayments that better fit an earning curve as you start your career.
Generally, federal loans come with more flexible options, including several based on your income. Private student loans typically come with fixed repayments over five to 20 years regardless of how much you earn.
Life happens. You might that you’re unable to make repayments on your loan, even if you’re on an income-based plan. Or maybe you want to let your cosigner off the hook to lower their overall debt load.
Some of the options you might come across for repayments include:
Both federal and private student loans can include interest capitalization, adding accrued interest to your loan balance. The most common time for interest capitalization is with a change in your repayments — at the start of repayments deferral or forbearance. Some private lenders also capitalize interest annually or quarterly.
How interest capitalization increases the cost of your loans
Anna was lucky: She got a free ride for college and graduated without any student debt. But when it came to graduate school, she didn’t have nearly as many financing options. By the time she completed her MA, she’d accumulated more than $39,000 in federal unsubsidized student loans.
Anna found income-based repayment plans too complicated, so she signed up for the extended graduated repayment plan offered by her servicer, Great Lakes. Repayments started at an affordable $208 per month for the first two years. And by the time her payments increased, she’d already landed a higher paying job.
Learn more about Anna’s experience with student loans — from how they affected her career to renting an apartment.
Andy graduated from college with $62,000 in private student loans from Sallie Mae. But after his grace period was up, he wasn’t making enough money to afford that kind of repayment.
He deferred it for another six months, but by the time his second grace period was over and he still couldn’t afford repayments. Sallie Mae began frequently calling him and his parents — his cosigners — to demand repayments.
Andy explained his situation and convinced Sallie Mae to switch him to an income-based repayment plan. It reduced his monthly repayments to $301 until 2019, when Sallie Mae will reassess his income.
8 expert tips for taking out student loans
Back to topAnswers to commonly asked questions about student loans.
Student loan refinancing is when you take out a new loan to pay off one student loan. Student loan consolidation typically refers to a Direct Consolidation Loan, which combines all of your federal student loans into one with a similar APR. Consolidating federal loans allows you to change your servicer and might open you up to more repayment options.
Yes, but with limited options, you might not find the most favorable deal. Compare your needs against your eligibility before signing any contract.
Probably not. Generally, only federal loans offer deferral, which you give up if you refinance your student loan with a private lender.
It depends on whether you take out a federal or private student loan. Federal loans come with origination fees that range from around 4.5% to 7% of your loan amount. Private lenders don’t usually charge origination or application fees, though it varies. You might also be on the hook for late and NSF fees depending on the type of loan you take out. You can learn more with our guide to student loan fees.
Generally you can as long as you bring on a cosigner, since most undergraduate students don’t have a credit score yet — some aren’t even old enough to take on credit themselves. Don’t have a creditworthy family member or friend? You still might be able to qualify for student loans through lenders like Sixup, which considers your grades instead if you don’t have a credit score.
You can if you meet your lender’s credit requirements. Generally, you’ll need to have good credit and a certain salary if you go without a cosigner — something most undergraduate students don’t have. Some lenders specialize in student loans without a cosigner, considering your grades and future salary instead of credit and current income.
The money goes directly to your school when you take out a student loan. If there’s any left, the bursar’s office or financial aid office should contact you and let you know. If you want that money, you can pick up a check. Otherwise, you can request to have all or some of it returned.
Yes, student loans are meant to cover your total cost of attendance. This includes living expenses, transportation and travel, housing and other miscellaneous costs that you have to pay because you’re a student.
No, student loans aren’t taxable. In fact, you might be able to deduct up to $2,500 per year if you pay that much or more in interest payments. The only time your student loans might be taxed is if you qualify for forgiveness or some types of cancellation.
No. But if you’re the primary borrower, a cosigner can ask you to refinance your loan and stay on as a cosigner. If you’re the cosigner, you can request a cosigner release if you’re unhappy with the way the terms of the loan are affecting your personal finances.
Refinancing a student loan can improve your credit in the long run by adjusting your monthly repayments to something you’re more likely to afford. However, it hurts your credit in the short run because most lenders conduct a hard credit inquiry during the application process, which causes your score to temporarily dip.
How student loans affect your credit score
It depends on which school you attend. Many universities abroad are part of a deal with the federal government that give US citizens access to federal loans. Learn more about paying for studies in another country.
You have both federal and private student loans to consider, though you may have fewer options due to lifetime loan limits. Find out what you might qualify for with our guide to student loans for a second degree.
Yes, you can qualify for many federal and private student loans if you’re enrolled half time. But you aren’t eligible for federal and some private student loans if you drop below half-time enrollment. You can learn more with our guide to student loans for part-time students.
Yes, some student loan providers like Climb Credit specialize in loans for skills-based programs that don’t qualify for federal aid. However, these may come with higher interest rates and less-flexible repayment plans.
Yes, if your community college is a Title IV school, you may qualify for federal student loans. Otherwise, you can look into private lenders you might qualify with. You can learn more with our guide to student loans for community college.
Probably not. Federal student loans don’t transfer between schools, and most private student loans don’t either. Instead, you’ll need to take out a new student loan to use for the school you’re transferring to. You can find out how to do this with our guide to student loans for transfer students.
It depends on your career and financial goals. However, most Americans believe college is worth the high costs since it opens you up to more job opportunities and increases your earning potential. You can explore more benefits of getting a college degree to help you decide if it’s right for you.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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