Student Loans

Student loans are offered by the federal government and by private lenders to help students pay for college and career training. There are many types of loans available, some with fixed interest rates and some with variable interest.

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    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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  • Updated: February 15, 2023
  • 10 min read time
  • This page features 19 Cited Research Articles
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What Are Student Loans?

Student loans are one form of financial aid offered to help people pay for post-secondary education. Like all loans, a student loan is money you borrow and must eventually pay back with interest.

You can purchase student loans from banks, credit unions and financial institutions such as credit card companies. The federal government also offers student loans, often with more competitive benefits than loans from private sources.

What Kinds of Student Loans Are There?

Student loans can be categorized into two main types: federal loans, which are borrowed from the government, and private loans, which are borrowed from institutions in the private sector.

Federal Loans

The U.S. Department of Education offers student loans as part of the William D. Ford Federal Direct Loan Program. These types of loans are also known as direct loans, and the government provides four types of direct loans to students.

Types of Direct Loans
  • Subsidized loans
  • Unsubsidized loans
  • PLUS loans
  • Consolidation loans

Private Loans

Private student loans are borrowed from financial institutions like banks, credit unions or loan companies. Loans from state-based or state-affiliated organizations are also considered private loans.

Private loans differ from federal loans in a few ways. With private student loans, you may have to make payments before you finish school, while federal loans will postpone payments until you graduate or leave school. Federal loans have a fixed interest rate, while private loan providers can offer fixed- or variable-interest loans. Private loans might also require the borrower to pass a credit check or have an eligible cosigner.


How Do You Get Student Loans?

When shopping for student loans, you should consider federal loan options before private loans. Federal loans have several financial advantages over private loans, including greater accessibility and lower fixed interest rates. The major drawback of federal loans is that you can only borrow up to $5,500 as a freshman or sophomore and up to $7,500 from junior year onward.

To receive federal student loans, you must first complete the Free Application for Federal Student Aid (FAFSA). Once that’s complete, you can contact the school you’ll be attending and follow the instructions from the school’s financial aid office.

If you still need loans after federal assistance has been granted, it’s time to shop around for private loans. Look for loans with a lower interest rate and greater flexibility for repayment. Be aware that applying for too many loans at once can hurt your credit score. You should try to complete all the loan applications within two weeks to minimize the impact on your credit.

Private loans tend to have more eligibility requirements than federal loans. You may have to contact your school to obtain proof that you need additional aid. You may also have to get a cosigner, such as your parent or guardian, to sign off on the loan if your credit score isn’t high enough.

Free Application for Federal Student Aid (FAFSA)

Completing the FAFSA form is the first step in qualifying for federal student loans. Students must complete the FAFSA to qualify for any federal aid, including grants, scholarships and loans. Each year, FAFSA grants over $120 billion in federal aid to help students pay for college.

To fill out the application, you must create an account with Federal Student Aid, an office of the U.S. Department of Education. You’ll also need to gather documentation of you and your family’s financial status, including tax returns and bank account statements. Applicants who need help completing the FAFSA form can access free tools on the Federal Student Aid’s website or contact their school’s financial aid office for assistance.

How Do Student Loan Interest Rates Work?

Student loans can either have a fixed interest rate, which remains the same throughout the loan’s term, or a variable interest rate, which can change during the term of the loan. Federal subsidized and unsubsidized loans have a fixed interest rate, while federal PLUS loans and private loans may have a fixed or variable rate.

Fixed Interest Rates

If you have loans with fixed interest rates, you’ll pay the same percentage of interest on your loan for the entire life of the loan. The only time the interest rate on these loans will change is if you choose to refinance or consolidate your debt.

With fixed interest loans, your monthly payments are predictable, and you can know when you first borrow the loan exactly how much you’ll pay back in total. While the rates of fixed interest loans tend to be higher than the introductory interest rates of variable loans, experts still recommend loans with fixed interest rates over those with variable interest.

Interest rate indices change over time, so a variable interest rate loan can quickly become much more expensive than a fixed interest loan if interest rate indices spike. Therefore, loans with fixed interest rates are generally considered to be the safer and more conservative option.

Variable Interest Rates

Variable-rate student loans are only offered by private lenders, and these loans have rates that can fluctuate throughout the life of the loan. While these loans often start off with lower interest rates, that doesn’t necessarily mean you’ll pay less interest.

Interest rates on variable-rate loans change according to the movement of interest rate indices. Most lenders adjust variable rates annually, quarterly or monthly. Because of this, a variable-rate loan can have a low rate initially but can climb dramatically in a few months depending on the performance of the interest rate indices.

Despite this risk, there are some scenarios where a variable-rate loan might be beneficial. If you’re considering a low-balance loan that you know you can pay off quickly, and if economic conditions are right, you can get a good deal on a loan with a low-variable interest rate and pay it off before the rate gets too high.

When Should You Pay Off Your Student Loans?

As with most loans, the sooner you can pay off the balance on your student loans, the less interest you’ll end up paying. If you’re financially able to, you can pay off your student loans in full at any time. Most lenders won’t penalize you for paying your loans off early.

When you’re ready to finish paying off your student loans, you should contact your lender to get a “payoff quote.” Your lender will tell you exactly how much you need to pay the loan in full. This quote will usually be accurate for a few days.

Federal loans and some private loans will postpone repayment until you finish or leave school. Most federal student loans have a six-month grace period that begins when you graduate, leave school or drop below full-time enrollment. Your loans still accrue interest during this grace period, but you are not expected to start repaying the loan until the period ends.

Can You Refinance Student Loans?

You can refinance your student loans whether your loans are from the federal government or a private lender. When you refinance, you’re exchanging your existing loan for a new loan with potentially better repayment terms. Refinancing can also involve consolidating multiple debts into a single loan with one monthly payment.

Whether or not refinancing is the right choice for you depends on your personal financial situation. You may want to refinance if you have a high-interest loan or want to simplify your repayments. Before you decide, you should consider the pros and cons of refinancing or consolidating your loans.

Pros and Cons of Refinancing Student Loans
  • Lower interest rate
  • Converting variable interest loans to fixed interest rate
  • Simplify repayment with one monthly payment
  • Extend length of time to repay the loan
  • Access to income-driven repayment plansCo
  • Longer term means more interest in the long run
  • May lose borrower benefits such as principal rebates or interest rate discounts
  • May lose credit for payments made toward loan forgiveness plans

How Do You Defer Student Loans?

When you defer student loans, you delay having to make payments on the loan for a certain amount of time. Your loans still accrue interest during this time, so deferring payments may result in having to pay more interest eventually.

To be granted a deferment, you must submit a request form to your lender. Most deferments will require you to provide documentation showing you are eligible for the deferment. For federal student loans, situations that grant eligibility for deferment include economic hardship, undergoing cancer treatment, completing active-duty military service and enrolling in an approved graduate fellowship program.

Even after you submit the request for deferment, you must continue making student loan payments until you receive notice that your request for deferment has been granted. If your deferment is not approved but you stop making payments, then your loans will become delinquent, and you could go into default.

What Is Student Loan Forgiveness?

Student loan forgiveness means that a borrower is no longer required to make payments on their student loans due to their job. Currently, only federal student loans are eligible for forgiveness programs.

There are two major student loan forgiveness programs offered by Federal Student Aid. The Public Service Loan Forgiveness Program grants loan forgiveness to employees of government or not-for-profit organizations. Federal loan borrowers can also qualify for forgiveness by teaching at a low-income school for five consecutive years as part of the Teacher Loan Forgiveness Program.

You may be eligible for discharge of your federal student loans if your school closes while you are enrolled or soon after you withdraw, if you declare bankruptcy, or if you’re totally and permanently disabled. Discharge is similar to forgiveness, but the former term indicates that you are no longer required to repay your loan due to circumstances outside of your control.

In August of 2022, President Biden announced a new plan to cancel up to $10,000 in federal student loan debt for borrowers with income under $125,000. The plan includes an additional $10,000 in relief for Pell Grant recipients.

Along with these debt relief measures, the Department of Education is also establishing a new income-driven repayment plan that caps monthly payments for undergraduate loans at 5% of a borrower’s discretionary income.

Frequently Asked Questions About Student Loans

Can you get a co-signer or endorser?
Private student loans often require a co-signer to qualify for a loan. Federal PLUS loans, a type of federal student loan, require a credit check. If your credit is not good enough to qualify for a PLUS loan, you can have an endorser agree to repay the loan if you do not — like a cosigner on a private loan.
When were student loan payments paused?
Beginning March 13, 2020, Federal Student Aid paused loan payments and set interest rates on federal student loans to 0% due to the COVID-19 pandemic. The payment pause has been extended for a final time through December 31, 2022.
When does FAFSA open and close each year?
Students have from Oct. 1 until June 30 of the following year to submit the FAFSA form.
What are student loan servicers?
Student loan servicers are companies assigned by Federal Student Aid to administrate loans and loan repayment on the government’s behalf.
Are there borrowing limits for student loans?
Federal Direct loans have borrowing limits. The limit for freshmen and sophomores is $5,500 per year, while the limit for third year students and above is $7,500 per year.

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Last Modified: February 15, 2023

19 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

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