What Is a Student Loan?
If you don’t have enough money to pay for education, a student loan will allow you to borrow money and repay it with interest at a later date.
Student loans are considered a “good debt,” as an investment in education creates a return not just in human capital but also in financial return.
Almost always, after an investment in education, the borrower has a greater capacity to earn more income than he or she would have had without the education.
It’s crucial to understand how student loans work and how to make the most of them before you apply for a student loan.
Before we get into the specifics, it’s important to note that you don’t have to borrow money, and the more you borrow, the more difficult it might be to repay.
It may be difficult for you to picture your life without student loan payments. While student loans may be the path to a brighter future, they may also be a significant burden. To lighten the load, consider the following:
Apply for grants and scholarships to help you minimize the amount you owe. Even tiny grants are beneficial.
Work part-time to help pay for your education. You may obtain useful life experience that many of your classmates will not have until after graduation. That head start can assist you in making key decisions later in life.
Examine less expensive colleges as well as in-state education. How important will it be where you went to school after you graduate? You can also use Coursera, Google Growth, and Udacity to supplement your conventional education with specialty credentials.
Wherever possible, cut costs. Old books, low-cost entertainment, and home-cooked meals can all result in big savings.
Every time you borrow money for a student loan, remember that you’ll need to repay it – plus interest – at some point.
How Student Loans Work
Student loans are unique as they are specifically designed for funding education. But what makes them so different to traditional loans and credit cards?
Relatively Low Costs
Student loans are frequently less expensive than other forms of loans that you may be eligible for right now. Numerous things contribute to reduced costs:
- Borrower-friendly features are available with federal student loans provided by the United States government. For new borrowers, interest rates are quite modest and stable, so you won’t have to worry about dramatic swings in your interest charges or payment shock.
- For some students, interest payments may be subsidized (or paid for by the government).
- Student loans are low-risk loans for lenders, and some regard a degree—particularly in certain fields—as a sign of income available to repay your loan.
Most students do not have well-paying careers or excellent credit. As a result, individuals may be denied any loan other than a student loan.
Federal student loans normally do not have a minimum credit score requirement, but some flaws in your credit history may disqualify you.
Note: Because student loans can help you develop credit, it is vital that you pay on time so that you can qualify for other loans in the future.
Some student loans provide borrower-friendly features that make repayment easier to handle. Loans through government programs are preferable, although commercial lenders also provide flexible terms.
In-school deferment: With some loans, you don’t have to start making payments until you graduate, giving you more time to focus on your education.
During that time, interest on subsidized loans may even be paid in order to keep your loan balance from rising.
- Unemployment: Certain student loans, particularly federal student loans, allow for postponement of payments during a period of unemployment. In that case, you can stop paying payments until you find work.
- Limited income: When you have a limited income, federal student loans can reduce your needed monthly payments. You can avoid making hefty payments if you enroll in income-driven repayment options.
- Possible tax advantages: The interest you pay on student loans may help you save money on your taxes. But, because of your income and other circumstances affecting your return, the benefits may be limited.
- Student loan forgiveness: It might be possible to have your student loans forgiven. You may qualify for student loan forgiveness for your federal student loans after ten years of payment and employment with certain conditions.
Note: According to the American Rescue Plan Act of 2021, student loans forgiven between January 1, 2021, and December 31, 2025, are tax-free.
Other borrowers on income-driven repayment plans may qualify for loan forgiveness after 25 years. But forgiven loans may be seen as a taxable income.
Federal vs. Private Student Loans
You can borrow from any lender you choose but loans from government programs are often more affordable. They are also borrower-friendly and easier to qualify for. As a result, it’s recommended you apply for these loans first.
The loans offered through government programs are mainly for funding your higher education. Thus, the interest rate is low and fixed.
If you need more you may turn to private lenders – typically banks, online lenders and credit unions. They may take your loan as a “student loan” or they may offer a standard loan that you can apply to anything (like funding your studies).
You can also turn to online lenders. Financer.com lets you compare rates from 41 online lenders.
Private student loans usually allow a parent or guardian to cosign the loan with the student. Both parties are responsible for repaying the loan.
Types of Federal Student Loans
Federal student loans come with a few great benefits like the ability to tie payments with income, or have your loans forgiven in certain industries.
Federal loans mostly don’t require any co-signing and you don’t have to have good credit to apply. Almost every student with a high school diploma is can apply for a student loan.
Direct Subsidized Loans
These loans are available to undergrads with financial need. The government pays the interest on these loans while the student is still in school, in a grace period, or in paused payments through deferment.
Direct Unsubsidized Loans
These loans are available to undergrads and graduate students. You don’t have to show financial need but you are responsible for interest payments all the time.
Financial institutions like banks make private loans to graduate students and parents. These loans have higher interest rates and fees than other federal loans and you need to undergo a credit check.
Borrowers with a bad credit history will have a hard time qualifying and may need a co-signer for the application.
Types of Private Student Loans
Banks and other private institutions make private loans available for students. When you apply, you’ll need to show the lender proof that you can repay the loan and you often need a good credit score.
You can use a co-signer to help you qualify and that person will be responsible for the loan if you can’t repay it.
Bar Exam Loans
A bar exam loan will cover expenses that a normal student loan won’t. This covers expenses like exam application fees, living expenses, and prep classes, while law students study for the bar exam.
The loan terms on bar exam loans range from one to 20 years and they typically have higher interest rates than federal or private loans.
Credit Union Loans
You may also get a loan from a credit union or community bank. You may also have more favorable terms and discounts if you already have an existing relationship with the institution.
International Student Loans
In general, students who are not United States citizens won’t qualify for traditional student loans. Several private lenders offer student loans for international students; however, they often require a co-signer that is a U.S. citizen.
How to Apply for a Student Loan
Visit your school’s financial office
Find out what types of financial aid are available. Be sure to discuss grants and scholarships, as well as loans.
Fill out the application
Fill out the Free Application for Federal Student Aid (FASFA) form, which details your financial and school information.
Await the results
Apply for the aid and wait for the results. If approved, you can take all or part of the aid available.
You may need to complete an introductory entrance counseling session to learn how your loan works.
Student Loan FAQs
Are student loans good or bad?
They are considered a good debt because the money you borrow for your education will help you to earn a degree and a well-paying job.
Are there disadvantages to student loans?
Student loans may be expensive to pay back and often it means you’ll start out life with debt. You may have to put off other life or career goals while paying off student loans.
What are the four types of student loans?
The main types of student loans include subsidized, unsubsidized, Parent PLUS, and Private loans.