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How Student Loans Work

how do school loans work

Federal Student Loans

As student loans go in the United States, those issued by the federal government are about as good as they come. There's a good reason for that: Federal student loans offer low, fixed interest rates. This makes them much more attractive than private loans from commercial lenders.

That said, there are some downsides to federal student loans. The availability of some loans, like the Perkins loan, is based on need. Even if you could really use the loan, the federal government may deny your application based on the adjusted gross income of your household. There are also usually limits to the amount that can be borrowed from the U.S. government. In 2009, the limits for the Stafford loan began with $5,500 for a student's freshman year and ending with $7,500 for senior year, with a total limit of $31,000 [source: Kantrowitz ]. That same year, the estimated average cost for an in-state student at a public school came to just over $28,000 [source: Lewin ]. For some people, federal student loans won't cover all of college, and so financial aid advisors tend to suggest using federal loans as a way to close the gap between tuition and fees and scholarship and grant money.

There are two different ways you can get student loans from the

federal government: directly from the Department of Education (Direct Loan ) or through a private lender that's a member of the government's Federal Family Education Loan (FFEL) program. Both of these loans have the same interest rates; criteria for eligibility and maximum amounts one can borrow are also the same. The difference lies in repayment of the loan -- more on that later.

Both of these methods of disbursement will actually go to your school, not to you. The school will tally the total amount of your tuition, fees and any other charges the school levies, subtract any scholarship. grant money or any other financial assistance you may have. Any remaining difference will be deducted from your student loan and whatever is left over will be given to you in the form of cash, a check or a direct deposit into your bank account.

You'll also be given the option to allow the school to hold the surplus money from your student loans for the next year. This may be a wise idea. After a year in school, you will have a better idea of the amount you'll need to borrow for your second year. You may need to borrow less than you think.

Read the next page to learn about the different kinds of student loans.

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