Student Loans 101: How They Work and How to Apply

what is a student loan

You’ve done everything you needed to do to get into college: got good grades, talked to your guidance counselor, and filled out applications. But then comes figuring out how to pay for it.

Although you’ve likely heard of and applied for scholarships, you might be wondering where student loans come into play. Given the average cost of a four-year private college is $33,480 per year, loans are likely going to be part of financing your education. But, what is a student loan?

Here are the basics you should know about student loans and how they work.

What is a student loan?

A student loan is money that you borrow for college and pay back with interest. These college loans help pay for tuition, books, room and board, and other education-related costs.

Although all student loans serve the same purpose in helping you fund your education, they come from two distinct places: the government (federal student loans) and private lenders (private student loans).

How student loans work

For both federal and private student loans, you’ll need to go through an application process to find out if you’re approved and how much money you’re allowed to borrow. You’ll also learn about your repayment terms. Once you’re approved for a student loan, the money will be disbursed to your school to cover educational costs.

The process for securing a student loan is different depending on whether it’s federal or private. Knowing the differences is key to ensure you get the best repayment terms for your situation.

Types of student loans

As mentioned, there are two types of student loans: federal and private. Each has its own benefits and drawbacks.

Below are the basics of these loans, but you can also check out our complete guide for more information on how private and federal student loans differ.

Federal student loans

Loans issued by the government are considered federal student loans. There are three types: Direct Subsidized, Direct Unsubsidized, and Direct PLUS. Here’s a handy chart to understand the basic differences between them.

Loan type


Interest rates

Direct Subsidized

You have to prove financial need and be enrolled no less than half time to qualify for this type of loan. You can borrow up to $5,500 each year, depending on a few factors. The Department of Education will cover your interest charges while you’re enrolled, for the first six months after you leave school, and during deferment.


Direct Unsubsidized

To qualify, you don’t need to prove financial need. But you must be enrolled at least half time. Undergraduates can borrow up to $12,500; graduate and professional students can borrow up to $20,500. Interest accrues while you’re in school.

4.45% for undergraduate students and 6.00% for graduate or professional students

Direct PLUS

PLUS Loans are available to parents of dependent students and graduate and professional students. To qualify, you or your parents must pass a credit check. Payments can be postponed while you’re enrolled. Interest accrues even while you’re in school.


How to apply for federal student loans

To apply for federal student loans, you must fill out the Free Application for Federal Student Aid (FAFSA). States and schools use the FAFSA to determine your eligibility for aid, from federal work-study to grants and student loans.

The application opens Oct. 1, but submission deadlines may vary based on your school and state. So, fill out the FAFSA early to ensure you qualify for the most aid.

When looking for ways to pay for school, prioritize federal student loans over private ones. Federal loans tend to have more flexible repayment terms and borrower protections. Undergraduate students can also qualify for loans without a cosigner.

Private student loans

So, what is a student loan from a private lender? Private student loans are issued by financial institutions, such as banks, credit unions, and online lenders.

As private student loans are offered by a variety of companies, the interest rates and repayment terms you’ll find will vary. Federal loans, on the other hand, have interest rates and repayment terms set by the government. That’s why it’s important to shop around with different lenders before taking out a private student loan.

How to apply for private student loans

To apply for a private student loan, you have to submit an application to each lender you’re considering. Private lenders take your credit and debt-to-income ratio into consideration when determining your eligibility for a loan. However, lenders can have different application requirements.

If approved, the lender will inform you of how much you’re allowed to borrow, your interest rate, and your repayment schedule. In many cases, private lenders will allow you to defer payments until after you leave school. However, you can expect interest to accrue starting on your disbursement date.

Since there are so many variables and a lack of regulations, you should only consider private student loans after you’ve secured federal financial aid, grants, and scholarships.

Using student loans to help pay for college

Unless you’ve scored a full ride to college or your family has enough money to pay out of pocket for school, you’re likely going to need to take out loans to cover some educational costs. If you do, you won’t be in the minority.

In fact, about 44 million people have student loans, according to our student loan debt report. And Americans owe over $1.48 trillion in student loan debt. Some borrowers have even taken out more money than they can afford to repay.

By taking the first step to understand the basics and different types of student loans, you’ll be in a much better position to make the best financial decision. Loans can be a great way to help you pay for college. But be sure to review all the details of your federal and private loans. That way, you don’t get stuck with debt you can’t pay back.

Need a student loan?

Here are our top student loan lenders of 2018!

1 = Citizens Disclaimer.

2 = CollegeAve Autopay Disclaimer: The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of
Smart Option Student Loan customers.

3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.



CollegeAve3.92% –
Undergraduate, Graduate, and ParentsVISIT COLLEGEAVE
SallieMae3.62% – 11.85%*3Undergraduate and GraduateVISIT SALLIEMAE
CommonBond2.93% –
Undergraduate, Graduate, and ParentsVISIT COMMONBOND
Citizens Bank3.53% –
Undergraduate, Graduate, and ParentsVISIT CITIZENS
LendKey4.33% – 9.69%Undergraduate and GraduateVISIT LENDKEY