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How to student loans work

how to student loans work

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How Do Student Loans Work?

Student loans are used to pay for higher education expenses, including tuition & fees, books & supplies, and basic living expenses. These loans are unlike other kinds of debt. They are virtually guaranteed; almost any student can get approved for a student loan, without credit checks. The interest rates are also very low compared to other kinds of loans.

Because student loans are guaranteed and offered at very low rates, they are very difficult to walk away from without paying. They are typically not dischargeable in bankruptcy like other kinds of debts.

These loans are a boon to students who seek a higher education but lack the means to pay for it. Because a college degree is expected to help a graduate get better jobs and income in the future, student loan borrowers are expected to pay back their loans from future earnings.

However, in recent years, we’ve seen thousands of graduates emerge from college with expensive degrees, a lot of student loan debt, and no or poor job prospects. Those entering college need to be careful they aren’t borrowing more than their future career will allow them to afford.

How Do Student Loans Work – Applying

To apply for a student loan, one should fill out the FAFSA, or Free Application for Federal Student Aid.  This document can be completed in about an hour, but  certain documents are helpful to have on hand to make the application process go smoothly:

  • Income tax returns (if student is a dependent, use parents’ return)
  • Bank Statements
  • Investment Records
  • Driver’s License
  • Social Security Number

Non-U.S. citizens will also need their permanent resident card or alien registration. The form asks for information about the student’s finances, so if there is any income that is not on the student’s or parents’ tax return, paperwork relating to that income will be needed.

Another thing to know

at this point is what schools the student is considering; the FAFSA will ask for a list of schools to which they will send the results of one’s application.

Students can go to the US Department of Education website to fill out the FAFSA online .

Students will also likely be asked to complete entrance counseling by their college, and they must fill out a promissory note.

How Student Loans Work – Basic kinds of student loans

The most popular student loans include Perkins Loans, Stafford Loans, and Plus Loans.

  • Perkins Loans have the lowest rates; this is where most borrowers should start. These loans are from one’s particular school, and are given out based on need. Not everyone will qualify.
    • Undergraduate students can borrow up to $5,500 per year, depending upon the applicant’s situation.
    • Direct Loans are from the federal government. They can be subsidized, for those who demonstrate a financial need, unsubsidized for any student, PLUS loans for parents of dependent students, and Federal Consolidation Loans which allow students to combine federal loans into one single loan.
      • Undergraduate students can borrow $5,500 to $12,500 per year in Direct loans. Parents can get a PLUS loan for any amount of their child’s college expenses that aren’t covered by other loans or financial aid.

There is much more to student loans than can be covered here. We’ve only scratched the surface of the topic. And while applying for and understanding how student loans work are important, paying them off is a separate matter. Fortunately, we have certified nonprofit student loan counselors standing by to talk with anyone who is concerned about repaying student loans, understanding loan repayment options, or confused about where to turn for help. Use this web site to get started right now!

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