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Student Loans: Everything You Need to Know

Financial barriers shouldn’t get between you and your education. If you need money for school, you may consider applying for a student loan. 

We’ve got you covered on understanding how they work. 

What is a student loan?

A student loan will allow you to borrow a large sum of money and pay it back with interest at a later date. With higher education becoming more and more important in today’s job economy, many students are utilizing this choice. 

Grants and scholarships are also a great option if you can get them as they don’t need to be paid back. Loans can also help make up the difference if you don’t win a full-ride.

See video: Abby’s Corner: What Are Student Loans?

Types of student loans — what are my options?

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

The biggest difference is federal loans are issued by the U.S. government, while private loans are issued through various different sources, such as schools, banks, and credit unions.

Federal loans

A federal student loan is lent by the U.S. government. This is the most popular choice because it is often the most affordable one in terms of paying it back. 

They also typically come with more benefits compared to private lenders. Some of these advantages include:

  • Fixed and lower interest rates
  • The option to borrow money without a cosigner
  • A repayment plan that starts six months after you leave college (or attend less than half the time)
  • A possibility that some of your loans can be forgiven (they won’t need to be paid back) if you work in a certain field like teaching or public service.

Private loans

A private student loan comes from a private lender, like a bank, credit union, or a non-bank financial institution. These are a good alternative to federal loans if you are ineligible to receive money from the government or you need more money than a federal loan will provide. 

Here are some other facts to know about private loans:

  • They often require a cosigner
  • You loan won’t be subsidized, so the loan will begin accruing interest as soon as you borrow money
  • They come with fixed or variable interest rates
  • You may have to start paying back the loan while still in school
  • The interest might not be tax deductible

Parent PLUS loans (Direct PLUS loans)

A Parent PLUS or Direct PLUS loan is an option for parents to take out for their child, or dependent. This process requires the parents meet certain requirements and have good credit standing.

The maximum amount of the loan you can borrow is equal to the cost of attendance at the school the child will attend, minus any financial assistance they might receive. 

Unsubsidized vs. subsidized student loans

There are two categories for student loans: unsubsidized and subsidized. Whichever you take out will determine how much you owe after graduating. If you qualify for a subsidized loan, you’ll save more money in interest. 

Here are a few other key differences to note:

Direct Subsidized Loan: This is when the government pays the interest of your loan while you’re in school and during any period of deferment. These are available only to undergraduates who prove financial need. The amount of the loan is determined by FAFSA (The Free Application for Federal Student Aid).

Direct Unsubsidized Loan: This loan is given when the student does not demonstrate financial need. The borrower is responsible for the interest that accrues when they’re in school, and after. This type of loan is available to undergraduates and graduate students. The amount is determined by the cost of attendance, plus any other financial aid given.

How student loan interest works

Interest rates are one of the most complicated aspects of any student loan. When the new loan is first issued, the borrower (a student or parent) signs a promissory note that details the terms of the loan.

It’s very important to read this note in its entirety and also make sure you understand all of it, as it explains how much you owe and when your payments will be due. 

Here are some key things to look out for:

  • The amount borrowed. This may seem obvious, but know the total amount borrowed in each of your loans.
  • The disbursement date. This is the date the funds will arrive (and when interest starts accruing).
  • Interest rate. This is how much you will have to pay to borrow the funds.
  • How interest accrues. This tells you if the interest is charged daily or monthly.
  • First payment date. This is when you have to make your first loan payment.
  • Payment schedule. This is how many payments you have to make

How to apply for student loans

The process to apply for federal versus private student loans is very different. Here’s what to know:

Federal Loans: Borrowers can get a student loan by filling out the free application for FAFSA. 

If you’re a dependent student, use your parent or guardian’s financial information when filling out the form. If you’re an independent student, use your own. 

You’ll need your federal tax statements, bank statements, pay stubs, and employment information to complete the application.

If you’re admitted to a program, your school will send a financial offer that may include aid and any federal loans.

Private Loans: The borrower goes straight to the bank or financial institution where they hope to get the loan. 

You and your cosigner can apply with a single credit check, along with other information depending on the loaner. If approved, the funds will be sent to the college or university each semester as requested.

Paying off student loans & debt relief — what are my options?

Depending on your financial situation, paying off your student loans can seem like a daunting task.

Remember – if you have federal loans, you won’t need to pay them back while you’re still in school and there’s typically a six-month grace period to begin repayment after you graduate. 

Whichever type of loan you have, your lender will send you a schedule once the repayment period begins. Each schedule varies by how much you have to pay per month, but the more you can pay, the less you’ll pay overall.

See video: Student Loan Debt | Real Talk with Abby – Credit & Debt

How to pay off student loans quickly

There is no magic answer to paying off your student loans entirely just like that. But it doesn’t have to be overwhelming either! Tackling student loans takes time and a plan. Start by making a budget for yourself that includes throwing money at your student loan each month. Apps like Mint or Wally are great for keeping you on track.

Then, try to pay more than the minimum payment when you have extra cash. Bigger payments equal owning less in a shorter amount of time. Use a student loan payoff calculator to help you figure out how extra payments will help chip away at the total loan amount you owe.

And be wary of student loan forgiveness! It may sound like a dream solution, but many times there are unrealistic requirements and forgiveness isn’t always guaranteed even if you do meet them. You’re better off aiming for a job that will actually pay you enough to support yourself.

How to defer student loans

 There are few instances when deferring student loans may be a good idea, such as when you’re experiencing economic hardship, graduate fellowship deferment, military service, medical reasons, or unemployment. To apply for a federal student loan deferment, visit the Federal Student Aid website to figure out which type you’re eligible for. You can fill out an application there as well. Private student loans are typically more limited, and you’ll need to reach out to your lender directly to learn about your deferment options.


Deciding whether or not to refinance your student loan is a big decision. The process of refinancing is when you take your loans, whether federal, private, or a mix of both, to another lender who pays them off for you. The goal is to secure a better interest rate and payment plan than your original terms.

(Embedded video: WHY, WHEN and HOW Should You Refinance Your Student Loans? | Ask Abby – Credit & Debt

Be careful about refinancing federal loans

If you have federal student loans, it might not be a wise idea to refinance. If you do, you could lose certain protections, such as deferment or income-driven repayment, that come with a federal loan. You can only refinance federal loans with a private lender, and the only reason you should go down this path is to save more money than you would with the government. Be sure to review offers from multiple different private lenders to find the best deal.

Federal programs

The federal government has created specific programs to ensure you’re able to pay back your student loans. Here are a few options:

  • Income-Driven Repayment (IDR) Plans: These are a viable option for people struggling to afford their monthly payments. With this plan, you’ll have a longer repayment period and your monthly payment will be a percentage of your discretionary income. Therefore, you can significantly decrease your minimum payment with this plan.
  • Interest and Payment Waivers: Due to the current global pandemic, the government is suspending payments and waiving interest on federally held loans for six months (retroactive to March 13, 2020). 
  • Potential Loan Forgiveness: Depending on your profession, you could qualify for tax-free loan forgiveness. People who work in public service or for a non-profit are eligible.


A student loan counseling service could help you organize your finances if you’re struggling to pay back your loans. Or if you’re just completely lost in the whole process! Take the expert advice if you need it–they’ll help you make all the right decisions and possibly save money too.


What happens if you don’t pay student loans?

If you are unable to make your student loan payments, or your payments are late, your loan may go into default. In other words, default is what you call a loan when the borrower doesn’t repay the loan according to the terms agreed upon. When this happens, your default status will be reported to the national consumer reporting agencies (a.k.a. credit bureaus) which will damage your credit report. It will also make it harder to borrow money in the future. You could also be at risk for required payment through your wages and withholding your tax refunds.

Do student loans affect my credit score?

Similar to other loans, student loans do affect your credit score. If you pay them back as agreed, it’s good for your credit. If not, well, it could hurt it. 

See video: How do Student Loans Affect My Credit Score? | Ask Abby – Credit & Debt

Abigail Masterson

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Get financial freedom! Talk to a financial coach for free!