How Do Student Loans Work?

Being a student means working towards a stable future for yourself and your family. In the U.S., about 19.9 million of people are students enrolled in colleges of the country. However, while some of them were always ready to take this path, not all had the necessary funds to pay their fees. This is why many of them had to seek student loans in order to deal with their tuition. But how do student loans work? You will find out everything that you need below.

What Are Student Loans?

Student loans are types of loans that function similar to the usual loans you can take as a worker. They are sums of money that you can borrow, and then you have to pay back a monthly sum over a certain period of time. More often than not, the loans have interest rates too. Student loans are meant to pay for your education.

A student loan can be offered by your school, like financial aid. Loans can be a blessing if you don’t have a wealthy family but would love to finish your studies nonetheless. There are about 40 million Americans with student loans.

What Types of Loans are Available?

What you need to know is that student loans may come in two different types, as follows:

Federal Loans

Federal loans are probably the most common form of financial aid that students all across the U.S. seek. This aid is given by the federal government. However, you should be aware that even federal loans are of different types.

First of all, there are subsidized loans. Subsidized loans are obtained if you’re an undergraduate who provided proof of financial need. In this case, you will receive only the amount that covers your financial need, and the interest is paid by the government.

Secondly, direct unsubsidized loans are another type of federal loan available to graduate or undergraduate students. But unlike subsidized ones, you will have to deal with interest rates here, as the government doesn’t pay for them. Also, how much you can borrow will be decided depending on the cost of your school attendance and a few other factors.

But aside from these two, there are other federal loan options. One of these is represented by Perkins Loans, which are loans taken directly from the school and meant for those with great financial need. It’s a program for both graduate and undergraduate students. But not all schools used to offer these loans. What you should know though is that the Perkins Loan program became unavailable after September 30, 2017. So, new borrowers can no longer take these loans.

There is also the Direct PLUS Loans program, which is meant for professional students or graduates from the U.S. Department of Education. You can take one of these loans when you need cash to afford expenses that other financial aid doesn’t cover. What you should keep in mind, though, is that this loan will require a good credit history and a credit check.

When you take out multiple federal loans, you can also take a direct consolidation loan and combine your loans into a single loan form. This will make it much easier to deal with all the cash you have to cover.

Private Loans

Private loans are another great opportunity to get some funds for your school, but they offer less flexibility compared to federal loans. But of course, they are a great option if you still need the money and federal loans are not enough for you or you just don’t qualify for federal loans.

Private loans come from different places, such as special lenders that aren’t affiliates of the government. That being said, you can take out a private student loan from a school, credit union, state organization or bank. How much you can borrow depends on a lot of things, such as how much you need, and the amount that you actually qualify for. It is up to the lender to determine how much you’re going to receive.

But to obtain a private student loan, you may need to get a cosigner, or you may require a credit check.

How to Apply for Federal Student Loans

Different types of loans will require different applications, and you need to know what to do as long as you want to increase your chances of getting the loan. If you were wondering, “How do student loans work?”, then you must also understand how to obtain one.

Direct Subsidized Loans

To apply for a subsidized loan, you will have to complete the FAFSA. In some cases, if you’re a returning student, you will have to complete a Renewal FAFSA instead. Then, you will have to receive a financial aid award letter, which will be sent either by email or mail. It’s the financial aid office of your school that’s going to send you the letter. In it, you will be able to see a summary of your available financial aid.

Once you do all of these, you have to contact the financial aid office of your school and let them know that you accept the financial aid. Then, all you have to do next is sign the necessary paperwork, and you’ll be granted access to the loan. Keep in mind that you’ll have to bring evidence of your family’s financial situation to get one of these loans.

Direct Unsubsidized Loans

The application for a direct unsubsidized loan is similar to the one for a subsidized one. Basically, you will have to submit your completed FAFSA or Renewal FAFSA, after which you receive a letter from the school financial aid office. After you get it, talk to the office and tell them that you accept it, and make sure to sign the paperwork required. The difference is that these do not take your financial circumstances into consideration, though.

Direct PLUS Loans

Direct PLUS loans can be taken by parents of students who received their financial aid. As the parent borrower, you will have to first complete a Master Promissory Note, and fill in the Borrower Section. The student will have to complete the student section.

Perkins Loans

Those who applied for Perkins Loans had to fill out the FAFSA online first, after which they had to wait for the paper from their school. This is pretty much all there was to do. It was a very easy process.

Direct Consolidation Loans

In order to consolidate your loans, you need to complete two documents. One of them is the Federal Direct Consolidation Loan Application, and the other is the Promissory Note. When your debt gets consolidated, you can make monthly payments on your consolidation loan.

Personal Loans

Personal loans are a good option to consider if you don’t qualify for federal aid. They will come with an interest rate and will have to be paid monthly. But there are a few important things to know before you borrow a personal loan.

Before Turning to Loans: Scholarships and Grants

If you don’t qualify for federal aid, then you may want to try your luck for scholarships or grants. Scholarships are sums of money offered to a student based on either financial need or merit. The best thing when it comes to scholarships is that they are different from loans in the way that they do not have to be repaid. You get them once and don’t have to deal with monthly repayments. Besides, they are renewable.

Grants are also sources of free money from the government. Unlike scholarships that focus more on merit as eligibility criteria, grants are offered based on need.

Personal Loan Options

You have a few options to consider when taking personal loans from a lender, like:

Big Bank Loans

One of the most common options for a personal loan is banks. There are many big banks offering money to people with good credit. If you want to apply for a loan, you have to usually go to the bank and talk to someone there. But you should know that each bank’s offering may be different in terms of sums and requirements, so you have to shop around a lot for the right bank and loan.

Personal Loans from Online Lenders

Given how popular the Internet is, it’s only normal that there are a lot of lenders waiting for someone like you. If you can’t be bothered to go to the bank, you can always apply for a personal loan online. You will have to fill out a form, send the application, and you will be contacted by the lender if everything’s fine.

What to Do If You’re on an F1 Visa in the U.S.

If you’re an immigrant student with an F1 Visa and want to obtain a loan, there are options for you too. There are special lenders who are willing to help immigrants with a loan. What you have to do is send an application with all the necessary personal information. You’ll get a promissory note to sign, after which the cash is transferred in 2-3 business days. Afterward, you’ll be able to set up automatic payments if you want to. The cool thing is that no cosigner is required either.

Final Thoughts

If you want a student loan, you need to understand the way these loans work. But now that you have read this article, the answer to the question “How do student loans work?” should be clearer to you. If you still want to find out some more, you can always check out Stilt and get more information.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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