Loans 101: What are Student Loans? Student Loans 101 is the must-read guide for students, both traditional and online, seeking financial aid. Learn about how student loans work and the different types of student loans.
by Priya KumarSchool is expensive. And although money is out there, looking for it can be overwhelming. Options, including scholarships, grants, and loans, can usually be applied to distance and online learning. A financial aid officer from your school’s financial aid office can help you create a personalized plan for paying for school.
How Do Student Loans Work?
When students need assistance paying for their tuition and other college expenses, they can turn to student loans. These loans are specifically for those pursuing an education and will usually cover the costs of tuition and living. Student loans also tend to have lower interest rates.
What are the Different Types of Student Loans?
Loans for students fall into two categories: federal and private.
Federal Loans
Applicants for federal aid must meet the following eligibility requirements. To apply for financial assistance, simply fill out the Free Application for Federal Student Aid (FAFSA).
Schools participating in the Federal Perkins Loan program receive federal money to lend directly to students. The government administers Stafford and PLUS loans through the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan Program. Check with your school’s financial aid office to see in which program your school participates. Students receive FFEL loans from a private lender such as a bank or credit union, while Direct Loan money comes from the Department of Education.
| Financial Need | Amount | Interest | Repayment | |
| Federal Perkins Loan | Must demonstrate financial need | Up to $5,500 per year for undergraduates and up to $8,000 per year for graduate students | Fixed at 5 percent. Interest does not accrue while student is in school | 10 years, repaid to the school |
| Stafford Loan | Subsidized: Must demonstrate financial need Unsubsidized: No financial need required |
Amount depends on year in school and status as a dependent or independent student | Subsidized: Fixed at a rate no higher than 6 percent for undergraduates and 6.8 percent for graduate students. Government pays interest while students are in school. Afterwards, student pays interest at same fixed rate. Unsubsidized: Fixed at a rate of 6.8 percent for undergraduate and graduate students. Students are responsible for all interest payments. |
10 to 25 years depending on amount and repayment plan. FFEL loans repaid to lender; Direct loans to the Department of Education. |
| PLUS Loan (for parents of dependent undergraduate students or for graduate or professional students) | Borrower cannot have a negative credit history | Cost of attendance minus other financial aid | FFEL loans are fixed at an 8.5 percent rate. Direct loans are fixed at a 7.9 percent rate. Borrower is responsible for paying all interest. | 10 to 25 years depending on amount and repayment plan |
Private Loans (also known as Alternative Loans)
Like getting any other private loan, eligibility depends on your credit score. These loans often have higher or adjustable interest rates, so students should exhaust all federal loan options before taking out a private loan. Read the Federal Trade Commission brochure on deceptive loan practices and be wary of loan scams.
Always work with your school’s financial aid office to set up a payment plan that works for you.
For more information:
Loans 101: What are Private College Student Loans?
Loans 101: How to Avoid Defaulting on Student Loans
Federal student aid information from the U.S. Department of Education
Financial aid search site
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