College is on the horizon and you’ve never felt more excited. You’ve already got plans for what you’ll do to your dorm and what classes you’re going to take. But there’s just one little problem: student loans. You know you might need to take out some student loans for college, but you just don’t know if you should. And if you did decide to get student loans, you wouldn’t know where to start. Sound familiar?
If you’ve ever thought “what is a student loan?,” here’s what you need to know.
What Is a Student Loan?
A student loan is a form of financial aid where you borrow money for college from a lender with the expectation that it’s going to be paid back. There are two main types of student loans you need to know about — federal and private.
Federal Student Loans
Federal student loans are issued by the federal government. There are four basic types of federal loans that you can get.
- Direct Subsidized Loans are for eligible undergraduate students who have financial need.
- Direct Unsubsidized Loans are available for undergraduate, graduate, and professional students.
- Direct PLUS Loans are available to graduate or professional students and parents of students.
- Direct Consolidation Loans let you combine your federal loans into one.
Because these are all part of a federal student aid program, you can find the applications on the Federal Student Aid website. To apply for Direct Subsidized and Unsubsidized Loans, fill out the FAFSA. This application will also determine if you have any financial need based on factors like your annual income or your income level. To apply for Direct PLUS and Direct Consolidation loans, complete their individual applications.
Private Student Loans
Private student loans are issued by private lenders such as banks, credit unions, and financial institutions. To be eligible for private student loans, you must have at least a strong credit score and a steady income. Additionally, each lender will also have their own set of requirements that you’ll have to meet. Be sure to talk to lenders about their qualifications. You’ll also want to ask them about their application since each private loan will have its own application process.
How Do Student Loans Work?
The basic idea of student loans is that, unlike with scholarships and grants, you are borrowing the money which will have to be paid back over time with interest. Calculated as a percentage of your loan amount, student loan interest is essentially the cost of borrowing student loans. It’s what lenders will get for letting you borrow their money.
The amount you pay in interest will depend on a variety of factors such as your interest rate, your loan amount, and the length of your loan term. Generally speaking, the higher your interest rate and the longer your loan term, the more you will pay over the life of the loan. Take a look at the table below to get a better idea of this.
| Loan #1 | Loan #2 | Loan #3 | |
| Loan Amount | $10,000 | $10,000 | $10,000 |
| Interest Rate | 5% | 3% | 5% |
| Loan Term | 10 years | 10 years | 5 years |
| Total Interest | $2,727.86 | $1,587.29 | $1,322.74 |
Notice how although all the loans have the same loan amount, the differences in their interest rates and loan terms impact how much total interest is paid. Both Loan #1 and Loan #2 have a loan term of 10 years but two different interest rates. The difference in those interest rates results in saving nearly $1,200 with Loan #2. Similarly, Loan #1 and Loan #3 have the same interest rates but different loan terms. This time the difference results in about $1,400 in savings.
Even the smallest changes to your loan term or interest rate can have an impact on how much you’ll pay over the life of the loan.
Why Do Students Get Student Loans?
Student loans are a great resource to help fill in the gaps in paying for college. Because the cost of college is getting so high, students often don’t have the money to pay for it out of pocket. So, they’ll resort to financial aid like scholarships, grants, and loans.
Do You Have to Pay Back Loans?
Yes. The money is borrowed, which means it has to be paid back. You’ll do this by making monthly loan payments over a period of time. There are different repayment plans available to federal and private student loans. The exact repayment plan you should get will depend on your financial situation and what you think is best for you.
Federal Student Loan Repayment Options
There are four different types of repayment plans for federal student loans:
Standard Repayment Plan
- Higher monthly payments based on loan amount
- Repayment period over 10 years
- Pay less interest over time
Income-Driven Repayment Plans
- Four different types of IDR repayment plans
- Monthly payment is 10-20% of your discretionary income
- Repayment period is between 20-25 years
Graduated Repayment Plan
- Monthly payments start out low and gradually increase over repayment term
- Repayment period is 10 years
- Can be difficult if your future income doesn’t grow as expected
Extended Repayment Plan
- Lower monthly payment compared to other plans
- Repayment period is extended to 25 years
- Pay more interest over time
Private Student Loan Repayment Options
The private student loan repayment options available to you will depend on what your private lender offers. That said, there are four standard plans that you’ll typically hear about:
Immediate Repayment
- Start repayment as soon as the loan is disbursed
- Must make full payments even while in school (monthly loan payment + monthly interest payment)
Interest-Only Repayment
- Start repayment as soon as the loan is disbursed
- Only make full interest payments while in school
Partial Repayment
- Start repayment as soon as the loan is disbursed
- Only make partial interest payments while in school
Deferred Repayment
- Start repayment after grace period ends, usually 6 months after graduation
- Must make full payments (monthly loan payment + monthly interest payment)
Is a Student Loan a Good Idea?
Student loans are a great form of aid that can help college students afford an education that would otherwise be challenging to pay for. But, it’s important to be realistic. Keep in mind that you’re borrowing money you will pay back with interest, so only take out what you need, and have an idea of how you’ll pay it back. Also, do your research on loans and how they work to help you stay ahead. As long as you do these things, you can keep your loans from becoming the ghost that haunts you at night.
Final Thoughts from the Nest
Student loans are a great resource to help pay for college as long as you are mindful about how you use them. Think about what kind of loan you want, how much money you need, and how you’ll start repayment.
Don’t forget that Sparrow is here to help. The Sparrow application can match you with what private student loans you qualify for with any of our 15+ partnering lenders. Sign up to get started now.