How Do Student Loans Work? What You Need to Know in 2022Posted July 26, 2022, 10:00 am by
If you're a teen or parent asking yourself "how do student loans work" you're not alone.
Student loans can be confusing, intimidating and hard to navigate, and parents and students alike can quickly get overwhelmed with all of the student loan options out there. With so many different kinds of student loans available, it can be hard to know where to start looking, what loans to take, or if student loans are even right for you at all.
In this article, we'll briefly answer the following questions:
Please note that this blog is meant to be a brief overview of the different types of student loans available to students and their families, not a comprehensive guide. Once you’ve taken a look at the different kinds of loans available then, talk with family, friends or even a financial advisor to do more research on what kind of student loan, if any, is right for you.
This article is part of TeenLife's brand new 2022 Guide to College Admissions. Featuring more than a dozen articles from college pros and admissions experts, this new TeenLife guide is the perfect resource for tackling college admissions head on. Download it for free today!
How Do Student Loans Work?
College is expensive, and while scholarships, savings, aid and other awards are great, they unfortunately don’t cover the full cost of education for many students out there. That’s why, in the United States and elsewhere, student loans are a common way to supplement the cost of higher education.
For better or for worse student loans are a fact of higher education. It's estimated that about 55% of Bachelor’s Degree recipients graduating from four-year public and private nonprofit colleges in 2020 had some form of student loan debt when they graduated, and that number is only going up.
So, if more than half of all college students will interface with student loans during their time in college, it’s important to us at TeenLife to make sure that students know what they’re getting into and how to best prepare themself for college and beyond.
But how do student loans work exactly?
Well, while there are dozens of different kinds of loans, one thing is true about all of them: student loans, no matter the type, consist of money that you borrow and must pay back with interest. Be sure to consider your options carefully before committing to a loan or to a college then.
Most student loans don't require payments to be made until after a student has graduated, though this is not true 100% of the time.
What Are Federal Student Loans?
A majority of student loans in the United States are handled by the U.S. government. These federal student loans are made with the U.S. Department of Education as the lender, and almost always have better terms and benefits than private student loans.
To qualify and apply for federal student loans and all other types of federal aid, students must complete the Free Application for Federal Student Aid, or FAFSA, each year.
So how do student loans work on the federal side? There's three main types of loans to know about:
- Direct Loans
- PLUS Loans
- Direct Consolidated Loans
Direct Loans (Subsidized and Unsubsidized)
Commonly referred to as Stafford Loans, money for these loans comes directly from the United States government. In a subsidized loan students are not required to make payment until six months after they graduate college, and the federal government pays the interest on the loan for that period. In an unsubsidized loan, payments are still not due until after graduation, but the student, not the government, is responsible for the accumulated interest on the loan. The maximum amounts, interest rate, and repayment plans for direct federal student loans varies based on need, income and a whole host of other factors.
PLUS loans are available to parents of dependent undergraduate students as well graduate students. These two types of loans are referred to as Parent PLUS Loans and Grad PLUS Loans respectively. Unlike direct student loans, PLUS loans have flexible maximum amounts and can be used to cover education costs not covered by other financial aid.
Direct Consolidation Loans
Many students who take out student loans will receive them from a different borrower depending on the year or semester. This results in some students having up to a dozen different loan payments due every month after graduation. A direct consolidation loan is a way to simplify the repayment process for students who have already graduated. As the name implies, these loans let students make one payment to one servicer every month.
What are Private Student Loans?
If more assistance is needed, students and their families may consider a private student loan, also referred to as an alternative education loan. These loans do not come from the government and are instead offered through various banks or credit unions. Familiar names in this space include Sallie Mae and Citizens Bank.
Private education loans require a credit check for eligibility, resembling other types of personal loans more than they do federal ones. Private education loans have higher interest rates and are never subsidized – meaning that students are responsible for paying any and all accumulated interest. Some require payments while students are still in school, and deferment and forbearance options are limited. For these reasons, private education loans should typically only be considered once all federal options have been exhausted.
That being said, the industry is growing, and many students might not have other options. Right now private student loans only account for about 9% of all student loans debt, but since 2012 the industry has outpaced credit cards, automobiles and almost all other forms of consumer loans. If you are considering a private student loan, be sure to do your research on interest rates, repayment plans and more.
Conclusion: How Do Student Loans Work?
Student loans are intimidating, but they don't have to be. We hope that this article has answered some of your most burning student loan questions and set you down the path for more research. For more information about paying for college and all things college admission, be sure to check out TeenLife's brand new 2022 Guide to College Admissions, free to download now.