Student loans 101: A guide to loans for college

Paying for college can be really expensive — even if you spend years saving for it.

According to the National Center for Education Statistics, the average annual cost of tuition and fees for a private four-year university was around $34,041 for academic year 2021-22.

If that price tag leaves you with sticker shock, you’re not alone. Every year, students and families must figure out a way to pay for college. And although scholarships and personal savings can help, sometimes they can’t cover everything — meaning students or their parents are left to opt for student loans.

If you’re considering financing your child’s or your education with student loans, here’s a primer on some of the options available and how you can repay them after you graduate.

• An overview of student loans
• Federal loans
• Private loans
• Repaying student loans
• Should you consolidate your student loans?

An overview of student loans

A student loan is money you borrow from a financial institution to pay for school-related expenses, which typically include things like tuition and fees, room and board, textbooks and a personal computer.

Prospective and returning college students must fill out the Free Application for Federal Student Aid every year to determine if they’re eligible for financial assistance to cover college costs. If you’re eligible, then your school could offer you a combination of grants, work-study and loans as part of your financial aid offer. 

If you’re approved for a loan, it can help a lot. But remember, it’s not free money. Eventually, you’ll need to pay it back — and with interest.

Type of student loans

There are two types of student loans: federal and private.

Federal loans are backed by the federal government and generally have lower interest rates, whereas private loans are backed by banks, credit unions and other private lenders. Private loans often have much higher interest rates.

Let’s dive into the details of each type of student loan.

Federal loans

Federal loans, which have fixed interest rates, are a great option for prospective college students to consider. These loans typically will be less expensive over the long term than private loans.

You need to be enrolled in school at least half-time to be eligible for certain federal loans, and you won’t have to begin repaying the loan until after you graduate, leave school or decide to take classes less than half-time (depending on your loan terms).

Even in these circumstances, you’ll likely have a grace period before you begin making payments. Grace periods vary by loan, but repayment generally starts six months after you graduate or change your enrollment status.

The federal government has two main loan programs: the William D. Ford Federal Direct Loan Program and The Federal Perkins Loan Program. Let’s explore the differences between these programs.

The Direct Loan Program is the largest of the federal government’s student loan programs and includes four different types of direct loans.

• Direct subsidized loans: Direct subsidized loans are available to eligible undergraduate students who have demonstrated financial need. The federal government pays the interest for direct subsidized loans while you’re in school at least half-time. They also pay the interest for the first six months after you leave school and during deferment periods when you postpone loan payments.
• Direct unsubsidized loans: Direct unsubsidized loans are available to eligible undergraduate, graduate and professional students, regardless of financial need. With unsubsidized loans, you’re responsible for paying all the interest, even as it accumulates while you’re in school or during grace or deferment periods.
• Direct PLUS loans: Eligible graduate or professional students, or eligible parents of dependent undergraduates, can take out a PLUS loan. The maximum amount you’re approved for depends on the cost of attendance minus other financial aid you’ve received.
• Direct consolidation loans: This type of loan allows you to combine all of your eligible federal student loans into a single loan with a single loan servicer.

The Perkins Loan differs from other federal student loans in that your school is the lender — not the federal government. However, not every school offers this loan program.

This low-interest loan is available to eligible undergraduate, graduate and professional students who have exceptional financial need. The interest rate for these loans is 5%, and whether you qualify or not will be based on your financial need and available aid at your school.

How to know if you’re eligible for federal student aid

To qualify for federal student aid (grants, loans and work-study funds), the government requires that you meet certain requirements. The basic eligibility criteria, according to the U.S. Department of Education, include that you must …

• Demonstrate financial need for most programs (financial need is defined as “the difference between the cost of attendance at a school and your expected family contribution”)
• Be a U.S. citizen or eligible noncitizen 
• Have a valid Social Security number (unless you’re a student from the Republic of the Marshall Islands, Federated States of Micronesia or the Republic of Palau)
• Be registered with the Selective Service if you’re a male (you have to register between the ages of 18 and 25)
• Be enrolled (or accepted) as a regular student in an eligible degree or certificate program (a regular student is defined as a student “enrolled or accepted for enrollment at an institution for the purpose of obtaining a degree, certificate, or other recognized education credential offered by that institution”)
• Be enrolled at least half-time for Direct Loan Program funds
• Maintain satisfactory academic progress in your college or career school (satisfactory academic progress is a “school’s standards for satisfactory academic progress toward a degree or certificate”)
• Sign the certification statement on your FAFSA^® application
• Show you’re qualified to obtain a college or career school education. This means having a high school diploma or a recognized equivalent (such as a General Educational Development certificate), completing a state law-approved home high school education, or enrolling in an eligible career pathway program

If you have additional questions about being eligible for federal financial aid, check out the U.S. Department of Education website.

Private loans

Private loans are another option for students and their parents, but the government recommends you consider private loans only after you’ve tried to get federal loans, grants, scholarships and work-study funds.

That’s because private loans are generally more expensive and often have higher and variable interest rates, so the amount you’re required to pay back may increase over time, if the rates go up.

In some cases, however, a family may not be eligible for federal financial aid options, or the total financial aid package may not be enough to cover the entire cost of school.

Here’s what else you should know about private loans.

• Private student loans may require an established credit record. The cost of a private student loan will depend on your credit scores and other factors. Generally speaking, the higher your credit scores, the lower the interest rate on your loan will likely be. Knowing your credit scores as a student can be important because, depending on your loan provider, you may have to make payments while you’re still in school.
• The loan might come with fees. Many private loans have additional fees that will increase the overall costs of the amount you borrow. There also may be prepayment penalties if you pay off your loan early.
• You might need a cosigner. Private loans might require a cosigner to agree to pay back the loan if you can’t. Having a cosigner with good credit could potentially lower your interest rate.
• Your interest may not be tax deductible. Contrary to federal loans, the interest you pay on a private loan may not be tax deductible (depending on your private loan lender).
• No consolidation allowed. You can’t consolidate a private loan into a direct consolidation loan, which is an optional federal loan that borrowers can use to consolidate their federal loans to potentially lower their interest rate and monthly payment (more on this below).
• They may not cut you any slack during hardships. Private loans might not offer forbearance or deferments if you encounter financial difficulties and are unable to make student loan payments.

When looking at private loans, other important things to consider are the monthly payments, grace periods and repayment options.

Factor all these things into your search to help find a private loan with a reasonable interest rate, fees and repayment terms that won’t leave you with a long-term debt or high monthly payments you’re unable to afford.

Repaying student loans

Whether you take out a private or federal loan, you should be careful about over-borrowing. You also want to make sure you understand the terms of your loan, which can differ depending on the type of loan you have.

Federal loans

Federal loans can have more-flexible repayment plans.

These plans include a standard repayment plan with a fixed monthly payment; a graduated repayment plan, where payments begin with a lower amount and gradually get higher; and an extended payment plan, where your payments can either be fixed or graduated.

The repayment term periods for standard and graduated payment plans are up to 10 years for individual loans or up to 30 years if your loans are consolidated. For extended repayment plans, it’s up to 25 years.

There also are pay-as-you-earn repayment plans (also known as the REPAYE and PAYE plans), but these generally end up costing more than the standard 10-year repayment plan.

• The REPAYE Plan (or Revised Pay As You Earn Repayment Plan) caps your monthly payments at 10% of your discretionary income. If you’re married, that includes your spouse’s income and student loan debt. You’ll also need to “recertify” your income and family size each year, at which time your payments will be recalculated based on your updated information and family size. You can use this plan if you have a qualifying loan, including a direct subsidized loan, direct unsubsidized loan, direct PLUS loan (made to a student) or direct consolidation loan that does not include PLUS loans (made to a parent). And if you’re still paying off your loan after 20 to 25 years, the rest of your balance is eligible for forgiveness. (Just keep in mind that you may need to pay income tax on the forgiven amount.)
• The PAYE Plan (or Pay As You Earn Repayment Plan) is similar to the REPAYE Plan in that your monthly loan payments top out at 10% of your discretionary income. You’ll also have to recertify each year with this plan, and your spouse’s income, along with their student loan debt, will affect your payments. The same loans that qualify for REPAYE qualify for PAYE, but your debt must also be considered high in comparison to your income. Any balance left on your PAYE Plan after 20 years may be forgiven, which differs from the 20–25 years on your REPAYE Plan (though you’ll still likely have to pay income tax on that amount). And to qualify for PAYE, you have to have been a new borrower on or after October 1, 2007, and have had a direct loan disbursed on or after October 1, 2011.

Repayment plans vary by loan and each plan comes with specific guidelines, so visit the U.S. Department of Education website to learn more details.

Private loans

With private loans, you often have the option to begin repaying while you’re still in school (though it always depends on the lender).

If you decide to start paying down your private student loans while you’re still in school, you may have the option to pay a lower fixed monthly payment (typically $25 a month), or to make the full monthly payment, if you can swing it. Another option may be to only make payments toward the interest, which also can help to lower your debt once you graduate.

If you choose to wait until after you graduate to begin repaying your loan, you may or may not get a grace period — again, it all depends on the lender.

Repayment terms can vary by lender, but can be as long as 25 years. Depending on your lender, you also might be able to pick your repayment term. Some lenders may not offer deferments, while others will.

However, if you have trouble paying back your loan, refinancing at a lower interest could reduce your monthly payment and make your loan obligation more manageable.

If you’re concerned about your potential monthly loan payment, use our online loan calculator to gauge how much money you’ll have to repay over the life of your loan.

Some student loan servicers offer interest rate reductions if you set up auto-pay, so if you have the financial wiggle room, do this to save on interest and to potentially avoid late fees.

Should you consolidate your student loans?

Consolidating could make repayment easier. But there are some disadvantages.

Consolidation typically lengthens your loan term. Sure, this gives you a longer time to pay off your loan, but it might increase the amount of interest you pay overall. You could also lose key benefits like interest rate discounts and principal rebates, which can help to lower the overall cost of your loan.

Bottom line

Student loans are often necessary to pay for the costs of your education. So you should definitely consider them an investment in your future.

Still, that doesn’t mean you have to sacrifice your financial future by taking on more debt than you should to get an undergraduate or graduate degree.

Before you sign on the dotted line, make sure you understand everything you’re getting with a loan — including the amount of time it will take you to pay it all off. Doing your due diligence could prevent you from biting off more debt than you can stomach.

Calculate your student loan payments

Use this student loan calculator to estimate your monthly payments and the total cost of your student loan.

*Approval Odds are not a guarantee of approval. Credit Karma determines Approval Odds by comparing your credit profile to other Credit Karma members who were approved for the personal loan, or whether you meet certain criteria determined by the lender. Of course, there’s no such thing as a sure thing, but knowing your Approval Odds may help you narrow down your choices. For example, you may not be approved because you don’t meet the lender’s “ability to pay standard” after they verify your income and employment; or, you already have the maximum number of accounts with that specific lender.