What Are Student Loans: Understanding College Loan Options

Many families don’t receive enough grants and scholarships to cover the full cost of college. Loans are a way to get money for college and pay it back later. When you take out a loan, you’re borrowing money from a bank, the federal government, or even the college itself. A loan must be paid back, usually with interest added. The federal government offers low-interest loans to students. It’s important to understand the different types of loans your college may include in your financial award.

Here are some things to keep in mind as you consider whether a loan is the right approach for paying for your college experience:

  1. Learn about federal loans first.
    A federal student loan is money that you or your parents borrow from the federal government to pay for your education and repay later with interest.
  2. If needed, research private loan options.
    If you aren’t able to cover the costs of going to college with the federal loan you receive, you may need to look into private loans. Unlike federal student loans, a private loan is made by a private organization such as a bank, credit union, or state-based or state-affiliated organization, and its terms and conditions are set by the lender. Private student loans should be the last option you consider after maximizing all other types of financial aid. Private loans typically don’t offer the same benefits federal student loans do (e.g., fixed interest rates and income-driven repayment plans).
  3. Understand the different loan options.
    Although many students borrow money to attend college, it’s not a decision that you should take lightly. You should consider borrowing only after you’ve explored all other financial aid options. Once you’ve explored those options, you can investigate the different loan options available for college.

Understand some important definitions:

Defer: Some federal loans let you defer─or delay─paying the loan back until after you graduate.

Interest rate: The interest rate is the cost of borrowing. It’s usually a percentage of the loan that’s added to the amount you borrow. The higher your interest rate, the more you'll owe over time.

Need-based: Aid that’s need-based is awarded to students who have been ascertained to have financial need (i.e., the amount they can pay for college is less than the cost of attending the college). The federal government offers need-based loans to students. Eligibility for these loans is determined by the Free Application for Federal Student Aid (FAFSA®).

Subsidized: Some federal loans are subsidized, which means the government pays the interest on the loan while you're in college. Learn more about the rules for subsidized loans at studentaid.gov.

Types of Loans

Colleges, private organizations, and federal and state governments provide college loans to students and parents. Here’s an overview of the types of loans that are available.

Need-Based Loans

  • Federal Direct Subsidized Loans are interest-free while you're in college and have a borrowing limit that increases for each year of school you complete.

Non-Need-Based Loans

  • Federal Direct Unsubsidized Loans charge interest, but they allow you to add the interest fees to the amount you borrow until after graduation. However, doing this means you’ll actually end up owing more.
  • Federal Direct PLUS Loans allow parents (or graduate students) to borrow the total cost of college, minus any financial aid received.

State Loans

To learn about college loans that may be available from your state, use the contact information on the U.S. Department of Education's list of state higher-education agencies.

Private Loans

In general, private loans aren’t subsidized or need-based. They also often require a cosigner. A cosigner is someone who promises to repay the money if the student fails to do so. The interest rates of private loans vary:

  • Banks and other financial institutions usually have the highest interest rates.
  • Some private organizations and foundations offer lower interest rates.
  • Some colleges offer loans with low interest rates.

Why Need-Based Loans Are Best

The federal government's Direct Subsidized Loan is need-based. Federal need-based loans are often the best choices for the following reasons:

  • The government supports your education by subsidizing the loan (paying the interest fees while you’re in college).
  • These loans often provide low interest rates.
  • They allow you to defer repaying any money until you’re out of college and, hopefully, earning an income.
  • They don’t require a credit check.
  • They may provide better benefits than private loans.
  • If you qualify for this type of loan, choose it first.

With all that said, you may be thinking “How can I go to college without taking on so much debt?” Thankfully, there are ways you can minimize or eliminate the student loans you take out.