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What is a student loan?
Discover the differences between private and federal options, payment plans, alternatives and more.
Student loans play a critical role in paying for college. Unlike scholarships and grants, they have to be paid back, plus interest and fees. But they can be useful if you applied to other types of student aid but still came up short.
What's in this guide?
What is a student loan?
A student loan is money you borrow to pay for education expenses, such as tuition and fees, books, room and board. Loan amounts vary depending on the lender you’re working with, though many allow you to borrow up to 100% of your school-certified cost of attendance.
You then pay the money back — plus interest and fees — anywhere from five to 30 years. Interest rates can be fixed, variable or hybrid and typically range from 3% to 18% APR.
Students can often qualify for federal student loans themselves, since many options don’t require a credit check. But private lenders typically require a creditworthy cosigner for students to be eligible.
What types of student loans are available?
There are two types of student loans: federal and private. Federal loans are issued directly from the Department of Education (DoE), while private loans are provided by banks, credit unions and online lenders.
Your federal student loan options include unsubsidized, subsidized and PLUS loans. Eligibility requirements vary depending on the type of degree you’re pursuing, the grade level you’re in and your financial need.
As for private student loans, you typically have the choice of undergraduate, graduate and parent loans. Some lenders also offer special financing to graduate students like residency relocation loans or bar exam loans.
14 types of student loans — explained
How much can I borrow?
The amount you can borrow varies depending on whether you’re borrowing private or federal student loans.
Federal loans have yearly and lifetime limits depending on your year in school and whether you’re considered a dependent or independent student.
Private lenders typically allow you to borrow anywhere from $1,000 up to 100% of your school-certified cost of attendance, though it varies.
How can I apply for a student loan?
Applying for student loans is typically done online, whether you’re borrowing from the DoE or a private lender.
If you’re interested in federal loans, you have to submit the Free Application for Federal Student Aid (FAFSA) to determine your eligibility. For private loans, many lenders allow you to fill out the loan application on their website.
Whether you’re applying for federal or private loans, make sure you have last year’s tax returns, recent pay stubs and details about yearly expenses on hand for both you and your parents or cosigner.
How long does it take to get my student loan?
It varies depending on whether you applied for federal or private student loans.
The DoE typically processes your FAFSA application within one to three weeks. You’ll then receive a letter detailing what loans you qualify for. Once that’s done, sign your promissory note and the government disburses the funds to your school typically within 10 days of your first day of classes.
With private lenders, you might receive an immediate response after submitting your application or it could take a few days. If you’re approved, sign your loan contract and wait for the lender to disburse your funds to your school. This typically takes anywhere from two to 10 weeks depending on the lender.
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How do repayments work?
All student loans come with monthly repayments, though when they begin and how they work depends on the type of loan you borrowed. All federal student loans and many private loans come with a six-month grace period before repayments begin. Some private lenders even offer a nine-month grace period, though this is rare.
Private student loans typically come with the option to begin repayments immediately, make interest-only or small fixed repayments while you’re in school, or hold off on repayments completely until after your grace period. After that, you’re on the hook for fixed repayments of both the principal and interest based on your loan term.
With federal student loans, choose from several repayment plans once your grace period is up. Many options are based on your income or start low and increase over time — ideally with your salary.
What happens if I can’t repay my student loans?
The DoE and some private lenders offer deferment and forbearance, which allows you to pause repayments if you’ve hit a financial rough patch. Private lenders are typically less flexible, but they may have options available if you reach out to them early enough.
Can I pay off my student loans early?
Yes, one of the perks of student loans is most lenders don’t charge a penalty for repaying them early. If you’re able to make payments above the minimum, definitely take advantage of it. Paying your loans off early can save you a significant amount of money in the long run.
4 alternatives to student loans
Trying to avoid taking out student loans? You might want to consider one of these alternatives instead:
- Grants. Grants are supplied through both the DoE and outside organizations and don’t have to be repaid. Qualification depends on your level of need, which is determined by the FAFSA.
- Scholarships. Another form of funding that doesn’t have to be repaid, scholarships can be based on need or merit depending on the program.
- 529 plan. If you’re planning ahead, a 529 plan is a great way to fund education expenses. It allows students and parents to save money for college with tax advantages and savings incentives that lead to higher returns.
- Home equity line of credit (HELOC). Borrow against the equity you own in your home with a home equity line of credit. The flexibility that comes with a HELOC might be ideal for parents with several kids in college at the same time. Just keep in mind you risk losing your house should you default.
If you’re looking for a way to cover college expenses, a student loan can help pick up the slack when scholarships and grants fall short. You might want to start with federal loans first, since they typically come with lower rates and more flexible repayment plans than private loans. You can learn more with our guide to student loans.
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Finder Editorial Review Board Member: Kristin Burton, MPAS, PA-C, CAQ-HM
Certified physician assistant, money coach and keynote speaker on a mission to help others reach financial independence.
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