What Exactly is a Student Loan and How Do They Work? - The Definitive Guide to Student Loans

Did you know that in the U.S. alone, there is over $1 trillion worth of student loan debt? This makes it one of the largest sources of personal debt in the country. However, for students who want to continue their education beyond high school and maybe even pursue a college graduate degree, student loans can be an excellent way to fund your education and become eligible for future job opportunities with a higher salary. There are different types of student loans available today and each has its own set of pros and cons. Depending on your financial situation, you might be eligible for one type of loan over another. In this article, we will take you through everything you need to know about Student Loans including what they are exactly, how they work, the different types available to you as well as tips on how to get one if you need it!

What is a Student Loan?

A student loan is a type of financial aid that allows students to borrow money they can use to pay for tuition, books, and other related expenses. As with most types of debt, the money borrowed through a student loan must be repaid with interest. Student loans can be federal or private. Federal student loans are government-issued loans that have fixed interest rates and repayment plans, while private student loans are offered by banks and other lender institutions and typically have a variable interest rate and a more flexible repayment plan.

How do student loans work?

All student loans – whether federal or private – are repaid through a monthly payment schedule. Repayment begins either six months after graduation or once you are no longer enrolled in school. Based on your income, the U.S. Department of Education can garnish your wages or take money out of your tax return to repay your student loans. When you first take out a student loan, the amount you have to repay is usually smaller than the total you borrowed. This is because the initial payment is based on a percentage of the total amount you owe. As the years go by, the percentage amount you have to repay increases. If you don’t make payments as scheduled, the loan will go from being in deferment to being in default.

Which type of student loan should you get?

All student loan types have certain traits, benefits, and drawbacks. You can use these as a guide to help you decide which loan type is right for you: Federal Loan - Federal loans are the best types of student loans because they have fixed interest rates and flexible repayment plans. While the interest rates on federal loans are generally lower than that of private student loans, these loans are offered in smaller amounts. Federal PLUS Loan - If you are a parent or a graduate student, you can apply for a Federal PLUS Loan. This type of loan is a great option if you have a high credit score, have a steady income, and/or have a co-signer willing to take on the loan with you. Private Loan - Students who do not qualify for a Federal Loan can apply for a Private Loan. These loans are generally more flexible and have more options than federal loans, like repayment plans that include fixed payments and even income-based plans.

Tips to help you get the right student loan

- Choose the right school: Before you purchase a single textbook for your classes, research and compare colleges to find one that fits your personality, goals, and budget. Pick a school that you’re excited about, as this will make the whole experience more enjoyable. - Apply for financial aid: Applying for financial aid is not a sign of weakness or a last resort; it’s just smart. The majority of students get some form of financial aid, whether it’s federal or state grants or loans, scholarships or work-study programs, or help from a parent. - Explore payment options: There are many ways to pay for college, including earning credits while still in high school, taking out federal or private loans, working part-time, or getting help from your parents.

Final Words: Everything you need to know about Student Loans

Student loans are a great way to help pay for a college education, but they can be stressful and overwhelming. To make sure your student loan experience is as smooth as possible, take the time to research different types of loans and explore repayment options before signing anything.