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Looking at the cost of attending college can lead to serious sticker shock. During the 2021-22 school year, the average undergraduate tuition price was $10,740 for a four-year in-state public school and $27,560 for a four-year out-of-state public school, according to CollegeBoard.
For school costs that savings, scholarships and grants can't cover, student loans can help foot the bill. A student loan is a type of loan that you borrow from the government or a private lender to help pay for education expenses, including tuition, textbooks, school supplies, housing and food.
Understanding Student Loans
Student loans can be used to cover education-related expenses when you're attending a college, accredited trade school, graduate school or professional school. These installment loans are repaid over time, typically with interest, according to terms you agree to when you take out the loan.
Borrowing money for higher education is pretty common. In fact, 55% of students who obtained a bachelor's degree during the 2019-20 school year left with student debt. The average student loan balance as of the third quarter of 2021 was $39,487, according to Experian data.
Before going the loan route, however, it's important to understand key loan terms that affect your monthly payment and overall cost. Here are loan terms to check when reviewing options:
- Interest rate: The loan interest rate is often expressed as an annual percentage rate (APR) and represents the ongoing cost of borrowing.
- Origination fees: An origination fee is an upfront fee a lender might charge to process your student loans.
- Repayment terms: The repayment term is the number of years you have to pay back what you borrow. Generally, private student loan terms range from five to 20 years, but certain federal loan terms can stretch up to 30 years.
Different Types of Student Loans
There are two main types of student loans: federal student loans and private student loans. Federal student loans are originated by the government, while private student loans are made through private lenders. Here's what you need to know about each loan type.
Federal Student Loans
Student loans from the government come with a fixed interest rate that's federally regulated. Federal loans also have borrower benefits like income-driven repayment plans, payment relief if you face financial hardship and student loan forgiveness programs. Under the federal student loan umbrella, there are four main loan options:
- Direct subsidized loans: Loans offered to undergraduate students where eligibility is based on financial need.
- Direct unsubsidized loans: Loans for undergraduate, graduate and professional students where eligibility isn't based solely on financial need.
- Direct PLUS loans: Loans that can be taken out by parents paying for a dependent's undergraduate education or students pursuing a graduate or professional degree.
- Direct consolidation loans: A consolidation loan that can combine many federal loans into one student loan for easier repayment.
How interest is charged on federal loans depends on whether the loan is subsidized or unsubsidized:
- Subsidized loans: The government pays interest on subsidized loans while you attend school at least part-time, for the first six months after you leave school and during periods of deferment.
- Unsubsidized loans: Interest starts accruing on these loans immediately and you're responsible for paying interest that accrues while you're in school. Any unpaid interest is added to your balance when it's time to begin repaying the loan. With this type of loan, paying at least the loan interest while you're in school can save you money.
Private Student Loans
A private student loan is a loan through a private lender, which could be a bank, credit union or online lender. In some cases, education institutions themselves may also offer private loans. Eligibility requirements and terms for private loans can vary, and undergraduate students with limited credit may need to apply with a cosigner.
Before borrowing, be sure to consider that private loans don't come with the same protections and benefits as federal loans. For example, if your loan balance ends up being high compared to your income, federal loan payments may be adjusted to a manageable level. And if you work in the public sector, you may qualify to have federal loan balances forgiven in 10 years under the Public Service Loan Forgiveness (PSLF) program.
Private student loans, on the other hand, don't qualify for these same advantages, which is why it's usually a good idea to exhaust federal financing options first before turning to private loans.
What to Consider Before Taking Out Student Loans
Student loans are loans you have to pay back, usually in full. That's why you should keep track of how much you're borrowing, understand the grace period you'll have before you need to make payments and make sure monthly payments will be manageable.
Moreover, consider that certain loans have borrowing limits. Currently, the most an independent student can borrow in federal loans for an undergraduate degree is $57,500, and the loan limit is $138,500 for graduate and professional programs. The loan limits for private student loans can vary depending on your financial situation and the type of degree you're pursuing.
How Do You Apply for Student Loans?
The process of applying for loans depends on what type of loan you're applying for.
Applying for Federal Loans
You must fill out the Free Application for Federal Student Aid (FAFSA) to apply for federal loans. The FAFSA asks for financial information about the student (and the parent if the student is a dependent). Once you complete the FAFSA, your Student Aid Report (SAR) is sent to your school, and you'll get an award package with financial aid options that may include federal loans. A credit check isn't performed for federal loans unless you're applying for a direct PLUS loan.
Applying for Private Loans
The process of applying for private student loans works more like applying for a car loan or personal loan. You'll shop around with different lenders to compare rates, and then you apply on the lender's website by entering your personal and financial information. If you don't qualify for a private student loan on your own, you can apply with a cosigner. Private student loans typically require a credit check.
The Bottom Line
While a spotless credit report and a perfect credit score isn't needed to qualify for student loans, adverse credit history could make it harder to qualify for direct PLUS loans. And having strong credit can also qualify you for better interest rates on a private loan. If you're interested in taking out a private student loan, Experian's comparison tool can help you get personalized loan offers based on your credit profile.
Keep in mind that borrowing is just one of many ways to pay for school. Federal work-study programs, grants and scholarships can also reduce your out-of-pocket costs. Exploring these options first could limit the amount you need to borrow, which means less debt to worry about repaying when you leave school.