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Student loans are one of the most common ways to finance a college education. They are interest-bearing loans that the government or a commercial lender often grants.

Borrowers can use student loans to cover expenses such as tuition, books, room and board, and other related costs. The interest rate and payback terms can change depending on the type of loan.

Student loans come in two primary categories: federal and private.

What is a Student Loan?

A student loan is a crucial tool for many individuals who wish to continue higher education but cannot do so due to financial constraints. A student can take out a loan from the government, a bank, or another financial organization to cover their tuition and other expenses.

A student who takes out a student loan must agree to pay interest, though the interest rate may differ based on the lender and the loan’s terms. Student loans often fall under the “long-term debt” category and must be repaid over some time, sometimes up to ten years.

What Types of Student Loans are Available?

Federal Student Loans

There are several federal student loans available to students:

Directly Subsidized Loans: These loans are for undergraduate students who show financial need according to their FAFSA.

Up until the point at which the loans must be repaid, the government covers the interest. There is a six-month grace period following the student’s departure from school or reduction in credit hours before repayment and interest accrue.

Direct Unsubsidized Loan: Undergraduate or graduate students may only apply for a direct unsubsidized loan if they show proof of need. With unsubsidized loans, interest builds up as soon as the school gets the loan and the government doesn’t pay it.

Direct PLUS Loans: Parents may borrow Direct PLUS Loans for their dependent children, or graduate students may borrow them for themselves. These must be applied separately from the FAFSA.

Private Student Loans

Banks, credit unions, and other financial entities typically provide private student loans. These loans require a borrower to have a solid credit score and frequently have higher interest rates than government-backed loans.

A cosigner, such as a parent or relative, could also be required for private student loans. Borrowers should carefully evaluate loan terms and interest rates before choosing a loan and only take out what they need.

How Much Can I Borrow From a Student Loan?

The maximum amount you may borrow from a student loan depends on several factors, such as:

  • Cost of attendance: The amount you can borrow is generally determined by your school’s cost of attendance, which covers tuition, fees, lodging and board, books, and other expenditures associated with your education.
  • Dependency status: Based on your dependency status, you can borrow less or more if you qualify for federal student loans. Those who are dependents often qualify for fewer loans than independent students.
  • Year in school: The amount you can borrow may also vary on your year in school, with higher amounts being made available for graduate students and those in their last years of undergraduate studies.
  • Loan limits: Federal loan restrictions limit how much you can borrow overall and annually. For instance, the most dependent undergraduate student can borrow from federal loans is $31,000 throughout their academic career.

Undergraduate federal loan limits

Year in school Annual loan limit (dependent undergraduate student) Annual loan limit (independent undergraduate student)
Year 1 $5,500 (up to $3,500 may be subsidized) $9,500 (up to $3,500 may be subsidized)
Year 2 $6,500 (up to $4,500 may be subsidized) $10,500 (up to $4,500 may be subsidized)
Year 3 and beyond $7,500 (up to $5,500 may be subsidized) $12,500 (up to $5,500 may be subsidized)
Lifetime maximum limit $31,000 (up to $23,000 may be subsidized) $57,500 (up to $23,000 may be subsidized)

How Does Interest Work for Student Loans?

Most student loans charge interest from the moment you get the money. This implies that the loan you obtained during your first year will accumulate interest while you are a student.

Federally subsidized loans are an exception to this rule; if you are approved for one of these, the government will cover the interest while you are enrolled in school or during the deferment period for your loans.

When you repay a student loan, the interest accumulated since your last payment is paid off first. Any balance is then added to the outstanding loan balance. When you initially start repaying your loans, your interest payments will take up a sizable amount of your installments.

How Much do Student Loans Cost?

The government determines the interest rates on federal student loans, which vary depending on the loan you take out.

The loan interest rates for the 2022–2023 academic year are as follows:

  • 99% for direct subsidized and unsubsidized undergraduate loans
  • 54% for unsubsidized direct loans to graduate and professional students
  • 54% for direct PLUS loans for graduate or professional students and parents of dependent students

Private student lenders base your interest rate on your creditworthiness or your cosigner’s creditworthiness if you’ve got one. Additionally, some private student loans have origination or late penalties.

How Can I Apply for a Student Loan?

You can follow these steps to apply for a student loan:

  • Fill out the FAFSA (Free Application for Federal Student Aid): You need to submit the FAFSA to be eligible for federal student loans. Your eligibility for financial aid, such as loans, grants, and scholarships, will be determined by the information provided in this application.
  • Explore loan options: Numerous student loans are available, including federal and private student loans. Find out which loan type best suits your needs by researching your alternatives.
  • Complete a loan application: Once you’ve chosen the kind of loan you want to apply for, do so by filling out the necessary forms. This could entail completing more paperwork and sharing details about your financial condition, academic performance, and future aspirations.
  • Review loan terms and conditions: Examine the terms and conditions of the loan before accepting it. Pay close attention to the interest rate, loan alternatives, and any fees involved.
  • Accept the loan: Once you’ve read the terms and conditions and are OK with the loan, accept it by signing and returning the loan agreement to the lender.
  • Monitor loan status: Follow up with the lender if necessary and keep track of the progress of your loan application.

How Can I Repay My Student Loan?

There are several repayment plans for both Federal Loans and Private pans:

  • Standard Repayment Plans: A schedule with a predetermined monthly payment amount is provided by the government or your lender. The term for federal loans is ten years. Private loans will differ.
  • Graduated Repayment Plans: The payments begin low and gradually climb over time. In ten years, everything is still expected to be paid off.
  • Extended Repayment Plans: These plans let people with debts of more than $30,000 make payments for longer than the usual ten years.
  • Income-Based Repayment Plans: With these plans, your payments are determined by a portion of your income. After paying for taxes and other expenses, you’ll typically pay between 10 and 15 percent of your salary.
  • Income-Contingent Repayment Plans: These are similar to income-based repayment plans, but they are based on 20% of your discretionary income, which is the amount of money you have left over after paying your fixed expenses.
  • Income-Sensitive Repayment Plans: These are identical to the other income-related plans. Instead of basing payments on your discretionary income, they base them on your total income before taxes and other expenses.

Key Points

  • Student loans are meant to help college students pay for tuition, fees, room and board, books, and other costs that come with college.
  • Student loans come in two primary categories: federal and private.
  • You must be a United States citizen or an eligible noncitizen enrolled in an approved school to be eligible for student loans.
  • To apply for student loans, you must fill out the Free Application for Federal Student Aid (FAFSA) form.