How do student loans work?

If you're considering taking student loans to help pay for college, you're probably going through the loan process for the first time and having a lot of questions, the first question on your list is: How do student loans work?


Student loans are a very common and often necessary way to pay for college. The Institute for College Access and Success reports that nearly 70 percent of college students nationwide borrow money to help pay for school-related expenses. Student loans make it possible for many to go to college, which can open doors and opportunities for years to come.

Whether you're a student or a parent of a student, you need to understand exactly how student loans work in order to find the right student loan for you.

If you're just getting started answering the popular question "How Student Loans Work," we'll cover the basics here.

What are student loans?

Student loans are money that you borrow to help pay for school with the expectation that you will pay it back in the future.

Student loans are not much different from other types of loans. However, the process of obtaining and repaying student loans does have some unique attributes.

How do student loans work?

Your student loan may be the first loan you've ever sought or taken, so keep in mind that it's not just how much you borrow, but how much that amount will cost you in the long run.

Student loan interest rate

One of the most important components of any loan that directly affects its long-term cost is the loan interest rate. The interest rate is essentially the cost of the loan. It is calculated and added to your loan as a percentage of the amount you borrowed.

Fixed rates do not change over the life of the loan, whereas variable rates can change.

Federal student loan interest rates issued by the government are currently set annually and are fixed. Interest rates on private student loans issued by banks, credit unions, private lenders, and other types of financial institutions tend to be higher than those on federal direct student loans, and these rates can be fixed or variable.

Interest rates will vary by lender, so this should be a key question when you're shopping around for private student loans.

Student Loan Origination Fee

You also need to know about the loan origination fee, which is a one-time fee charged when you initially take out a loan. This percentage will vary based on the type of student loan and lender. For federal student loans, the origination fee ranges from 1.057% to 4.228% of the amount you borrow. Many private student loans do not have an origination fee, but this is not a hard and fast rule.

When charged, an origination fee is usually added to the loan amount, so you usually pay the fee as part of the loan.

Student Loan Repayment Period

Your student loan repayment term is the amount of time it will take you to repay your loan. It can vary widely depending on the type of student loan you get. Typical repayment terms range from 5 to 15 years. Before applying for a student loan, make sure you understand your loan term.

Two Types of Student Loans

When it comes to student loans, students have two main options: federal student loans issued by the government and private student loans issued by non-government entities such as banks and other financial institutions.

1. Federal Loan Options

  • Direct Subsidized Loans are available to undergraduate students whose families can demonstrate financial need. These are the only federal student loans that do not accrue interest when a student is enrolled at least half-time (or during a grace period after graduation—usually six months).
  • Direct Unsubsidized Loans are not issued based on financial need and are available to most undergraduate and graduate students. Interest will start accruing when you pay the loan.

However, direct unsubsidized and unsubsidized loans have annual and lifetime limits, so students may not be able to pay the full cost of college with these federal loan options.

Once students reach the Direct Subsidized and Unsubsidized Loan limits, in most cases, they can access Direct Grad PLUS and Parent PLUS loans.

Direct PLUS loans have higher interest rates and higher origination fees than direct unsubsidized and subsidized loans.

2. Private Student Loan Options

The terms of private student loans vary from lender to lender. Unlike federal student loans, private student loans generally require applicants to pass a credit and income test to confirm they can repay the loan.

Since most students don't yet have enough credit history or steady income to qualify for themselves, private student loans are often co-signed by someone like a parent or guardian who meets the criteria and has equal repayment responsibilities. The loan will appear on the credit bureau reports of both parties - the student and the co-guarantor.

Our credit pre-check tool allows borrowers or co-signers to find out if their credit is eligible for the loan and what interest rates they can expect.

When do I start paying off my student loans?

Another popular question when it comes to student loans is "How are student loans paid?". Student loan repayment terms vary by loan type. Federal student loans are typically designed to be paid off in 10 years, while private student loans may vary depending on the lender's terms.

Students typically begin paying federal student loans six months after graduation (or if they fall below part-time status). That said, you can always choose to start paying while you're still in school.

Many private lenders also offer options to defer payments until after school, and some, such as College Ave Student Loans, also offer on-campus repayment plans. If you can start paying—even small payments—while you're in school, you'll usually save money in the long run because you'll pay less in interest charges.

How much student loan do I owe each month?

This amount will vary based on each student's borrowing amount and interest rate. At College Ave, we offer a student loan calculator that allows borrowers to calculate their loan costs and monthly payments.

Once monthly payments begin, lenders often offer the option to sign up for automatic payments so your monthly payments are debited from your bank account on a regular basis. This can be a convenient option as you never have to worry about missing a payment. As a bonus, you usually lower the interest rate for setting up automatic payments.

If you wish to reduce your interest costs, you can always pay more than the monthly minimum required. Even if you can't pay off the loan in full by the end of the repayment period, any little bit above the minimum can help -- especially when you're talking about long-term loans.

If you pay off your loan early, make sure your lender doesn't charge you a penalty. While this type of fee is uncommon in student loans, confirmation is always a good idea.

If you still have questions about how student loans work…

If you have any questions about how a specific student loan works, please contact us for clarification before applying for a student loan. Getting a student loan is a big decision, and how you handle loan repayments can affect your credit score. Your credit score affects future loans and interest rates, so you'll want to make sure you understand the terms and conditions of your loan before signing.

If you are applying for federal student loans and need more information, you can always contact the school's financial aid office. If you're shopping around for a private student loan and have additional questions, be sure to contact the lender directly. At College Ave, we offer private student loans that fit your life and budget.

You've answered the "How do student loans work?" question, so what's your next step? Learn more about our student loans at College Ave.


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