It’s no secret that college is getting incredibly expensive.
In the US, the cost of attendance for college is now an average of $35,720 per school year — and that figure is growing at a rate of 6.8% each year.
The reality is that it’s now incredibly difficult to pay for college without taking out student loans.
Fortunately, government-subsidized student loans provide fairly easy access to funding, allowing more students to pursue higher education than ever.
But how do student loans work? How much do they cost in interest?
This student loan guide will explore everything you need to know about student loans.
What are student loans?
Student loans are simply loans that you take out to help pay for school. They must be paid back later, with interest.
These loans are primarily used for tuition, books, and supplies. However, they can also be used for living expenses. Some students choose to take out larger loans in order to cover expenses like rent and food.
In many ways, student loans are similar to any other type of loan. You apply for them, get approved, and borrow a certain amount of money. Then, you’ll have to pay that money back over time, with interest.
The details are a bit different, however. Many student loans don’t require payments until after you graduate college. Some providers offer a deferment until 6 months after you graduate. And it’s generally easier to get approved for student loans than it is for other types of debt.
Student loans are very common. Among today’s college students, around 65% graduate with student debt.
And student debt is substantial: The typical public university student borrows $30,030 for a bachelor’s degree, while private for-profit college attendees borrow $43,900 on average.
Types of student loans
“Student loan” is a blanket term that covers any type of loan used to pay for higher education expenses.
There are several different types of student loans, however. Here’s an overview.
Federal student loans
The majority of student loans are federal student loans.
- Offered directly by the federal government
- Generally offer the lowest interest rates
- Most students can be approved for these loans
- Applied for by filling out the FAFSA
These loans are offered by the US Federal government, with interest rates being set each year by Congress and the US Department of Education.
However, while the government backs up these loans, most are managed by companies called “student loan servicers.” The most common servicers include FedLoan Servicing, Great Lakes, Navient, and Nelnet.
So while the government technically issues the loan, a private company may manage the loan, collect payments, and handle disputes.
Benefits of federal loans
Federal education loans have several benefits. For one, they’re the easiest to get approved for, regardless of income level or creditworthiness. Almost any US citizen with a high-school diploma can get federal student loans.
Second, they generally offer lower interest rates than comparable private loans.
And third, there are subsidized loans available to students from lower-income households. These loans provide various perks that make them cheaper for students.
To apply for federal loans, students simply need to fill out the Free Application for Federal Student Aid (FAFSA). Learn how to submit the FAFSA here.
There are two main types of federal student loans, outlined below:
Direct Subsidized: Direct Subsidized Loans are available to students from families who can demonstrate financial need. For these loans, interest doesn’t accrue while the student is in school at least half-time and doesn’t typically accrue until after the grace period post-graduation (typically six months).
Direct Unsubsidized: Direct Unsubsidized loans are available to almost any student, regardless of their income level. Interest begins accruing immediately.
There are aggregate limits to how much you can borrow using direct subsidized or unsubsidized federal loans. If you exceed these loan limits, you may need to take out a different type of loan to cover the gap.
This is where PLUS loans come in. Direct PLUS loans are available to most students and are still a type of federal loan. However, they have higher interest rates and higher loan origination fees.
Direct PLUS loans are also common among graduate students and professional students, who have often exceeded the lifetime limits for subsidized/unsubsidized loans.
It should be noted that there are other federal loan types that are either for very specific situations or are no longer available (like Perkins loans). However, the three varieties listed above are most common for new applicants.
Private student loans
The other main category of student loans is private student loans, which are offered by private lenders.
- Offered by private banks, credit unions, and companies
- Generally harder to get approved for than federal loans
- Generally have higher interest rates
- The application process will involve a credit check and may require a cosigner
These loans are offered by private companies, including banks, brokerage firms, and in some cases, private schools themselves. Essentially, any student loan that isn’t backed by the government will be considered a private student loan.
Private student loans function more like traditional loans. Applicants must go through a lengthy application process, and the bank will gauge a student’s creditworthiness by looking at their credit history and income.
Because of this, private loans are more difficult to get than federal loans — particularly for young students who may have limited credit histories.
Cosigners, such as parents, can help students get approved for private loans.
Private loans have variable interest rates that change significantly depending on creditworthiness. For very well-qualified borrowers, they may be lower than federal rates, but private loan rates will be higher than federal ones for most students.
Additionally, private loans generally aren’t eligible for the more flexible income-driven repayment plans that federal loans offer.
Benefits of private student loans
Despite their drawbacks, private loans do have some benefits.
- The borrowing limits are generally higher (technically unlimited for qualified borrowers)
- Students with excellent credit may get substantially lower interest rates
- Cosigners (such as parents) may be able to help you get better interest rates
Which student loan is best?
For most students, federal student loans are best.
- They’re easier to get approved for
- The interest rates are subsidized by the government
- They have more flexible repayment periods and payment plans
- They don’t typically require a cosigner or good credit
Federal direct subsidized loans are the best, but not everyone will qualify. You’ll need to fill out the FAFSA to determine which loans are available to you.
For higher-income students with great credit scores, private loans may be the superior option.
How do student loans work?
Student loans are similar to any other type of loan.
You apply for the loan (using the FAFSA for federal loans) and may be approved for up to $X amount.
You’ll then receive the funds, usually directly to your bank account. The funds can be used for tuition, fees, living expenses, and more.
Eventually, you’ll have to pay back these loans — along with interest.
For most federal loans, you start making payments six months after you graduate, or six months after you drop out or go under half-time enrollment.
So you won’t need to make any student loan payments while you’re in school (though you can if you want).
While payments aren’t required, interest may start accruing immediately for many loan types. This means that if you borrow $10,000 and make no payments while in school, the balance may grow substantially by the time you graduate.
Once you graduate, you have a brief grace period, which is typically six months. After the grace period, you’ll need to start paying the loan back.
Various loan repayment options are available for federal loans, including income-driven repayment plans that base your required payments on your current income.
How much can I borrow?
For private loans, there are no limits to how much you can borrow. However, the bank will only approve you for how much they’re comfortable with loaning you — so it all depends on your creditworthiness and income level.
For federal loan programs, the amount you can borrow is determined by your FAFSA results and the school you plan to attend. You must fill out the FAFSA to determine eligibility, and you typically cannot request larger loans than those you were approved for via the FAFSA.
There are also some yearly and lifetime limits on how much you can borrow in federal loans.
These limits are based on your dependency status, which is calculated using the FAFSA. It’s essentially a measure of whether or not your family is considered able to help you with school costs.
The graphic below shows the borrowing limits as of early 2022.
For full details, see this page on studentaid.gov.
How much do student loans cost?
When you first take out a student loan, you’ll be charged a loan origination fee. For federal loans, this is usually between 1.057% and 4.228% of the amount you borrowed.
For instance, if you take out $5,000 in federal direct student loans, you’ll be charged an upfront fee of around $52.85. The fee may be up to $211.40 for direct PLUS loans (see here for the latest fees).
But the true cost of student loans comes from ongoing interest expenses.
Every student loan will charge you some amount of interest. This means that if you borrow $10,000, for example, you’ll end up paying back substantially more than the original loan amount over the life of the loan.
The amount you pay in interest depends on the size of your loans, the loan term you choose, and the interest rate you receive.
For private loans, this interest rate is set by the loaning bank and is based on your creditworthiness. Rates can range from as low as 1 or 2% to as much as 12% or more.
For federal loans, the interest rate is set by the US Congress. For undergraduate students, most federal loans currently have a fixed interest rate of 3.73%.
This is subject to change, though — you can check here for the latest federal student loan interest rates.
What does this mean in practical terms, though?
The best way to estimate what student loans will actually cost you is to use the Loan Simulator. This tool will help you calculate your monthly payments, interest amounts and experiment with different repayment schedules.
Are you wondering about the best strategy for paying off student loans? Check out our student loan debt payoff guide.
When do I have to pay back student loans?
For federal loans, student loan repayment generally starts six months after graduation or six months after dropping out of school/dropping under half-time enrollment.
Repayment terms — or the length of time you’ll be making payments — can vary.
The standard loan term is 10 years and includes fixed payments. This means that you’ll typically pay off your loans about 10 ½ years after you graduate unless you change payment plans.
For federal loans, there are several different payment plans available that can affect your payment amounts and loan terms.
Private loans vary in their terms but are usually for fixed terms of 5–10 years.
Student Loan Forbearance
Due to the COVID-19 pandemic, federal student loans are in forbearance until May 1, 2022. With forbearance, loans temporarily do not need to be repaid and accrue no interest. However, without payment you will not be making any progress toward loan forgiveness or repayment.
In addition to forbearance, there are a couple possible student loan forgiveness programs that could be enacted, including additional forbearance extensions and loan cancellation.
How do I apply for student loans?
The application process depends on whether you’re applying for federal loans or private loans.
Either way, students should start by submitting the FAFSA, as this will also determine eligibility for grants (free money, which you don’t have to pay back)
Here’s a breakdown of the general process for applying for student loans:
- Gather necessary information. You’ll need your personal information and social security number (SSN), your tax information, as well as your parent’s information (names, addresses, income, etc.) if you are still a dependent.
- Create an FSA ID. This is an account number that you’ll use to file the FAFSA and to log in to manage your financial aid information.
- Submit the FAFSA (see our guide here).
- Wait for your FAFSA results (3-14 days typically).
- Examine your financial aid results to see if they will cover your financial need. If they do not, you may wish to consider exploring other loan options (like private student loans) in addition to the federal loans. For private loans, check with the issuing financial institution for details on how to apply.
- Consider applying for scholarships to help supplement your student loans.
Once you’ve completed these steps, you may wish to check in with your school’s financial aid office. They can help provide guidance on when your loans will be issued and any additional steps that you should take.
Do I qualify for student loans?
To qualify for federal student loans, applicants must:
- Be a US citizen or eligible non-citizen
- Have a valid social security number
- Be enrolled or accepted for enrollment in an eligible degree/certificate program
- Be enrolled at least half-time (a requirement for qualifying for a federal direct loan)
- Maintain satisfactory academic progress (SAP)
- Read about the full qualification requirements here
In short, most US citizens and eligible non-citizens can qualify for federal student loans as long as they fill out the FAFSA accurately and enroll in school at least half-time.
Students do not need any sort of specific credit score or specific income level to qualify.
That said, certain types of student loans (like direct subsidized loans) are reserved for students from households with a greater financial need.
To see what you qualify for, you simply need to file the FAFSA. Conveniently, this is also how you can apply for grants and work-study opportunities.
For private loans, the qualification standards vary by bank. But for the most part, you’ll need to have good credit and income (or a cosigner).
Get informed with our student loan guide
Student loans can help you pay for college, but it’s important to understand the true costs of these loans.
In most cases, students should opt for direct loans to get the best student loan interest rates. In some cases, private loans may be a useful additional way to fund your studies.
If you’re getting ready to head off to school, check out our ultimate guide to saving money in college.