Complete Guide to Student Loans

Student loans are an integral part of the higher-education financial aid structure. They come from different sources and can be paid at different rates, in different times, and under varying conditions. Although its a point of controversy, student loans, especially federal and institutional loans, are a crucial mechanism to obtain the financial resources to go to college.They are almost certainly a part of most comprehensive aid packages, and should therefore be thoroughly understood and explored.

Here is a complete guide to student loans. They are first defined in terms of a general category of aid, and then explained and described based on the differences between the three main creditors: the government, schools, and private firms.


Gift Aid vs. Self-Help Aid (Student Loans)

Gift aid is free money given to students to pay for tuition and other costs of attendance. It usually comes in two forms, grants and scholarships, which are awarded based on demonstrable financial need, academic merit, minority status, and specific skills or disadvantages.

Student loans on the other hand have to be paid back. There are three major buckets into which student loans fall: private loans, institutional loans, and public loans. The first two vary widely and can only be thoroughly discussed on a case-by-case basis, the third is an established debt structure where interest rates, deadlines, and other terms are set by the government in advance.

Types of Gift Aid

Grants are need-based aid generally given by the government through Pell Grants and Federal Supplemental Educational Opportunity Grants (or FSEOG) . There are also state and institutional grants which students may be eligible for if they meet the financial needs requirements.

Scholarships are similar to grants because they are also awarded based on merit and/or financial need, but they differ in that they are usually offered based on specific criteria, not just general financial requirement. Each school, state, and non-profit will have its own catalog of scholarships for students.

Types of Loans

Private Loans
Private loans are given to students by private financial services firms. Their rates depend on the prevailing market rate, the student’s financial situation, credit score, whether there is a co-signer or not, and a number of other factors.

Institutional Loans:
Institutional loans are given to students by their individual schools. Every school has different priorities and financial flexibility, and thus will differ in the kind of eligibility criteria and aid amounts they choose to enforce and give out.

Federal Loans
Federal Loans are awarded by the Department of Education’s Federal Student Aid office. The loans are part of a greater system of aid that includes grants and work-study programs that help students get through college. The benefit of these public loans is that they have a predetermined low interest rate and clear terms of use set up by the government. There is technically no purpose to them other than helping students pay for college, which is not necessarily the case with other creditors.

Federal Loans

There are differing kinds of loans the federal government provides [see table below]; each have specific interest rates, timelines, and terms. Still, there are some important similarities they all share, namely: how you apply, how they are disbursed, payment options, consolidation options, and terms of default. Let’s go through these one by one.

How to apply
To be eligible for any federal loans, or federal aid for that matter, you have to fill out FAFSA, or the Free Application for Federal Student Aid. The application gives the Federal Student Aid office an idea of what your total Cost of Attendance (COA) and Expected Family Contribution (EFC) will be, and based on that will calculate your aid. Depending on your need, your award package will include a mix of grants, loans, and work-study. In theory, the less a family can contribute, the more aid will be awarded.

How they are disbursed
Most federal aid is disbursed, or “paid out”, by the schools. The government does not send the money that is awarded to students directly to them, but rather will give it to the school which will then deduct it from their tuition. This is done to ensure students don’t use the funds intended for college to pay for a new playstation or rolex. However, if the award exceeds the cost of tuition, students will receive a “tuition refund” from their school. This will give them pocket money to pay for things such as textbooks, supplies, and other essentials.

Repayment Plans
There are a couple of repayment plans the government offers to help students pay off their federal loans. Federal loans made to students can be paid off through these plans, parent PLUS loans however do not qualify.

The most popular payment plan is the Income-Based Repayment Plan (IBR) wherein your monthly loan payments are based on a percentage of your income. The percentage depends on the level of income and number of people in a household. The loan is discharged after 25 years if it has not been fully paid yet under this plan.

Pay As You Earn (PAYE) is another popular plan where you also pay based on your income, but if you earn below 1.5 times the poverty income level, your required payment is $0. It scales with your level of earnings and number of people in your household, but the payments are capped at 10% of earnings. The loan is discharged after 20 years under this plan.

Loan consolidation is a useful tool for students that employ different kinds of federal loans in their aid package. It allows them to combine ( or “consolidate”), all their loans into a single one with a sole interest rate and monthly payment. This gives them the opportunity to repay the entirety of the debt in a longer period of time and under a fixed rate. Consolidation does come with some drawbacks, but it’s a good option that makes federal loans easier for students to handle in the long run.

What if you default (don’t pay back)
Default on federal loans is not a good idea. The government imposes some of the strictest terms on student loans, and only in the most extreme cases will they forgive, cancel, or discharge a student’s debt. Usually what will happen, if a debtor misses too many payments, is that they will begin garnishing wages. In other words, take money from their income by force.

There are situations however, such as bankruptcy or severe financial distress, where the loans may be forgiven or cancelled. There are also specific government programs that make you eligible for loan forgiveness.

Types of Federal Student Loans

Federal Student
Loan Programs:
Interest Rate:
Payment Details:
Unsubsidized Stafford Loans All prospective students are eligible for this type of loan through FAFSA. The loan amount will depend on your EFC and cost of attendance. 4.45% Payments begin as soon as loans are disbursed and payments will include the annual interest rate.
Subsidized Stafford Loans Students must demonstrate financial need to be eligible for this loan. It is available through FAFSA, and like unsubsidized loans will take EFC and CoA into consideration. 4.45% Interest is paid by government during attendance and 6 months after graduation, then student payments begin
Perkins Loans “Exceptional financial need” must be demonstrated to be eligible for this loan. It’s not available at all institutions b/c it’s the schools that act as lenders. The amount awarded is based on need and other aid already granted. 5% Payments begin 10 months after graduation or after you leave school or drop out.
Direct PLUS Loans Loans given to parents of dependent undergraduates and graduate or professional students. To be eligible you must not have an adverse credit history and must meet the requirements for general federal aid 7% Payments for graduate or professional students begin 6 months after the loan is taken out. The payments for parents receiving the loan begin immediately after the loan has been fully paid out, but payments can be deferred until after graduation.

Institutional Loans

Institutional loans are different from federal and private loans in that they are given to the student by their particular school, not the government or a private lender. The significance of this is that, though they also depend on a student’s financial situation, they are also heavily contingent on their report card and standardized test scores (among other things). In other words, schools will help out students who need money, but they do so based on how much they want that student to attend their school. It’s a mix between need and merit-aid, and it varies in specifics and amounts from school to school.

Where they come from
Generally speaking colleges and universities will dip into their endowment funds and alumni donations to put up the money for student loans. Some schools have greater financial flexibility (i.e. greater endowment funds) and will be able to provide their students greater amounts and better terms of credit.

How it’s calculated
After a student receives their federal aid package, schools will look at their net-price of attendance, and decide how much in scholarship and loan money they give out. Once again, this also depends on how much they want the student to enroll and what the school’s financial situation is.

What to expect
Institutional loan rates generally hover around 3-10%, and carry with them certain perks and responsibilities other kinds of debt don’t have. For example, a grace period for payments is common, wherein a student will have to begin payments only after they graduate, drop out, or fall below half-time enrollment. “Exit interviews” are also standard, and are designed to inform students of their payment responsibilities after college. The financial aid offices at each school have all the resources necessary for students to apply and receive information on their school’s specific loan policies.

Private Loans

Private Loans should be your last source of aid, and be turned to only after you’ve exhausted all federal and institutional options because the terms and rates on these will almost always be better. Further, some private lenders, not all, will take advantage of students’ vulnerable situations and financial illiteracy. They will stamp unreasonable fees and terms on their loan agreements, and mask them with seemingly low interest rates and flexible payment options.

What to look for in a Private Lender
In general, when choosing a private lender, you should look for reputation and transparency. If a lender has a track record of having a good relationship with their student debtors and hasn’t been accused of slapping rapacious fees or terms on their clients, then that is a good sign. If this is the case, then it probably means they are transparent in their loan agreements. The less fine print and confusing language the better. That’s why students should consult with friends, adults, financial aid counselors, or even a lawyer if they can, before opting for a specific loan contract.

What to watch out for
If reputation and transparency are what to look for in a lender, well then the opposite is what to avoid. The multitude of scams and schemes out there is scary. For example, some lenders will make their aid look like gifts on an award letter when they are actually loans in disguise. Even so, options from established lenders that aren’t outright scams won’t necessarily make the best options either. High interest rates, hidden fees, difficult terms of payment and default, and cosigner requirements are all factors students should look out for.

What to expect
You can expect a 2-12% interest rates on private student loans, depending on credit worthiness, the amount of the loan, and what lender you choose. Private loans will almost always require a cosigner if the student does not meet the lender’s requirements. The loans will usually have 5, 10, or 15 year term options which allow students to pay their loan off more quickly if they can. Payments tend to begin as soon as the loans have been paid out, and the terms of default and forgiveness are offered on a case by case basis.


If you’re applying for federal aid to pay for college, as you should, it’s important to start planning early and get your paperwork in as soon as you can. Aid is generally given on a first-come-first-serve basis, so the earlier you apply the more likely you are to get the free money you need for college. You should also take advantage of the work-study program, which lets you earn money by working during school without your aid being compromised by the increased income. Using these resources and programs efficiently will lower the amount of loans you need to take out, and will give you more financial freedom in and after college.

It’s also a good idea to apply for other types of aid like private and institutional grants and scholarships. This will increase your gift aid which again will lower the amount in loans you have to take out. You can do so pretty easily by filling out a CSS Profile and also researching online for scholarships you may be eligible for. Everything helps, and there is a lot of aid that goes unused every year because people don’t bother applying.

The key to paying for college is to be organized, responsible, and resourceful. If you choose to rely too heavily on loans, you may be compromising your future financial health. Getting a loan from the bank as an adult for a car, house, or even a business will be contingent on your credit history. That that begins with your student loans.

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