(844) 845-4219

Student Loans 101: A Guide to Making Informed Decisions Before You Borrow » College Financial Planning » Student Loans 101: A Guide to Making Informed Decisions Before You Borrow



Student loans play a significant role in making higher education accessible to millions of students. However, the intricacies surrounding student loans can often be confusing and overwhelming. To navigate this complex financial landscape successfully, it is crucial to have a solid understanding of how student loans work, the different types available, associated costs, and potential pitfalls to avoid. This article aims to provide a comprehensive guide to understanding student loans, empowering borrowers to make informed decisions about their education financing.

Types of Student Loans

When it comes to student loans, there are primarily three types to consider: subsidized loans, unsubsidized loans, and private loans.

Subsidized Student Loans

Subsidized loans are a type of federal student loan available to undergraduate students with demonstrated financial need. The government pays the interest on subsidized loans while the student is in school, during the grace period, and deferment periods. This feature helps reduce the overall cost of borrowing. To qualify for subsidized loans, students must meet specific eligibility criteria and complete the Free Application for Federal Student Aid (FAFSA). Subsidized loans offer competitive interest rates and flexible repayment options.

Unsubsidized Student Loans

Unsubsidized loans, also offered by the federal government, are available to undergraduate and graduate students regardless of financial need. Unlike subsidized loans, interest begins accruing on unsubsidized loans from the disbursement date. Students are responsible for paying the interest while in school or during deferment and grace periods. Unsubsidized loans have slightly higher interest rates compared to subsidized loans. Similar to subsidized loans, students must complete the FAFSA to apply for unsubsidized loans.

Private Student Loans

Private student loans are offered by banks, credit unions, and other financial institutions. Unlike federal loans, private loans are not backed by the government and may have varying terms and conditions depending on the lender. Interest rates on private loans can be fixed or variable, and they may require a cosigner, especially for students with limited credit history. Private loans are an alternative source of funding when federal aid is not sufficient to cover educational expenses. However, borrowers should carefully review the terms, interest rates, and repayment options before committing to a private student loan.

How Do Student Loans Work?

Understanding the process of obtaining and managing student loans is essential for borrowers. Here’s a step-by-step breakdown of how student loans typically work:

  1. Applying for student loans: To apply for federal student loans, students must complete the FAFSA, which determines their eligibility for different types of aid. Private student loan applications involve submitting an application directly to the lender.
  2. Loan approval process: After submitting the FAFSA or private loan application, the borrower’s information is reviewed, and the loan is approved based on eligibility criteria.
  3. Loan disbursement: Once approved, federal loans are typically disbursed directly to the educational institution to cover tuition, fees, and other educational expenses. Private loans may be disbursed to the borrower or directly to the school, depending on the lender’s policies.
  4. Grace period and repayment start: Most student loans offer a grace period, which is a period of time after graduation or leaving school when borrowers are not required to make loan payments. Once the grace period ends, borrowers are expected to begin repayment.
  5. Repayment options: Student loans provide various repayment options, including standard repayment, extended repayment, income-driven repayment plans, and more. Borrowers should explore these options and choose the one that best fits their financial situation.
  6. Deferment and forbearance: In certain circumstances, borrowers may be eligible for loan deferment or forbearance, which allows them to temporarily pause or reduce their loan payments. These options are typically available for borrowers facing financial hardship or going back to school.
  7. Loan forgiveness and cancellation: Some borrowers may qualify for loan forgiveness or cancellation programs, such as Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. These programs provide relief from loan repayment obligations under specific conditions, such as working in certain professions or for qualifying employers.

What are Origination Fees?

Origination fees are charges imposed by lenders to cover the administrative costs of processing a loan. In the case of student loans, origination fees are deducted from the loan amount before it is disbursed to the borrower or the educational institution.

It is important to note that origination fees are typically associated with federal student loans and not private loans. The fee percentage may vary each year and is a small percentage of the loan amount. For example, if a borrower is approved for a $10,000 loan with a 1% origination fee, $100 would be deducted from the loan amount, resulting in a net disbursement of $9,900.

When comparing loan options, borrowers should consider both the interest rates and origination fees to accurately evaluate the total cost of borrowing.

How Much Can I Take Out In Student Loans

To prevent excessive borrowing, federal student loans come with annual and aggregate loan limits. These limits ensure that borrowers have reasonable loan amounts and help maintain their ability to repay the loans effectively.

Annual Loan Limits

The annual loan limit specifies the maximum amount a student can borrow in a single academic year. The limit varies depending on the student’s dependency status (dependent or independent) and academic level (undergraduate or graduate). Annual loan limits serve as a protection measure to ensure students don’t accumulate unmanageable levels of debt.

Aggregate Loan Limits

Aggregate loan limits represent the total amount a student can borrow throughout their academic career. These limits include both subsidized and unsubsidized loans combined. The specific aggregate limits depend on the student’s dependency status, academic level, and whether they are pursuing undergraduate or graduate studies.

It is crucial for students to be aware of these loan limits and borrow responsibly to avoid reaching their aggregate limits too early in their academic journey.

What’s the Difference between a Subsidized Loan and an Unsubsidized Loan?

One common question borrowers have is the difference between subsidized and unsubsidized student loans. Here’s a breakdown of their key distinctions:

Subsidized Loans

Subsidized loans are need-based federal loans where the government covers the interest that accrues while the borrower is in school, during the grace period, and deferment periods. This feature makes subsidized loans more affordable in the long run. Eligibility for subsidized loans is determined based on the student’s financial need as assessed by the FAFSA.

Unsubsidized Loans

Unsubsidized loans are available to both undergraduate and graduate students without the requirement of demonstrating financial need. Unlike subsidized loans, interest begins accruing on unsubsidized loans from the moment they are disbursed. Borrowers are responsible for paying the interest during all periods. Unsubsidized loans provide a broader access to federal loan options but may result in higher overall borrowing costs.

Differences in Interest Accrual

The key difference between subsidized and unsubsidized loans lies in how interest accrues. With subsidized loans, the government covers the interest during specific periods, reducing the overall cost. On the other hand, unsubsidized loans start accruing interest as soon as they are disbursed. This means that unsubsidized loans accumulate interest from day one, increasing the total amount borrowers will need to repay.

Eligibility Criteria for Subsidized and Unsubsidized Loans

Subsidized loans are available to undergraduate students with demonstrated financial need, whereas unsubsidized loans are available to both undergraduate and graduate students regardless of financial need. To be eligible for either loan type, students must complete the FAFSA.

Choosing between Subsidized and Unsubsidized Loans

When deciding between subsidized and unsubsidized loans, it is essential to consider factors such as financial need, interest rates, and repayment options. Students with financial need may prioritize subsidized loans due to the interest subsidy. However, for those without demonstrated financial need or who require additional funds, unsubsidized loans can still provide valuable financial support.

How Much Does a Student Loan Cost?

Understanding the cost of a student loan is crucial for borrowers to budget and plan for repayment effectively. The cost of a student loan can be influenced by several factors:

  1. Interest Rates: Interest rates determine the additional cost borrowers will incur for borrowing money. Federal student loans have fixed interest rates set by the government, while private student loan interest rates may vary depending on the lender and the borrower’s creditworthiness. Comparing interest rates allows borrowers to estimate the total cost of borrowing over the loan term.
  2. Calculation of Interest on Student Loans: Interest on student loans is typically calculated using the simple interest formula. The interest is calculated based on the outstanding loan balance and the interest rate. It is important to note that interest accrues daily on most student loans. The longer it takes to repay the loan, the more interest will accumulate.
  3. Factors Influencing the Cost of Student Loans: The total cost of a student loan can vary based on factors such as the loan amount, repayment term, and the borrower’s ability to make timely payments. Choosing a shorter repayment term generally reduces the overall interest paid, resulting in lower total borrowing costs.
  4. Importance of Loan Repayment Terms: Loan repayment terms encompass the length of time borrowers have to repay their loans and the minimum monthly payment amount. Longer repayment terms may result in lower monthly payments but may also lead to higher overall interest costs. It’s essential for borrowers to consider their financial situation and choose a repayment term that aligns with their ability to make payments while minimizing the total cost.

To better understand the cost of a student loan, borrowers can use online loan calculators or consult with loan servicers for personalized repayment estimates.

What is a Private Student Loan?

In addition to federal student loans, borrowers may consider private student loans as an alternative source of funding. Private student loans are provided by banks, credit unions, and other financial institutions. Here’s what you need to know about private student loans:

Private student loans are educational loans offered by private lenders. These loans are not backed by the federal government and may have different terms and conditions compared to federal loans. Private student loans can cover educational expenses such as tuition, books, housing, and other related costs.

Eligibility Criteria for Private Student Loans

Eligibility requirements for private student loans vary depending on the lender. Typically, private lenders consider factors such as the borrower’s creditworthiness, income, and enrollment status when determining loan approval. In cases where students have limited or no credit history, a cosigner may be required to increase the chances of loan approval.

Interest Rates and Repayment Options

Private student loans may offer fixed or variable interest rates. These rates can vary depending on the borrower’s credit profile and the overall market conditions. Private loans may also have different repayment options, such as immediate repayment or deferred repayment while the borrower is in school. It is important for borrowers to review and compare the interest rates and repayment options offered by different lenders to make an informed decision.

Comparison with Federal Student Loans

When considering private student loans, it’s crucial to evaluate the terms and benefits offered by federal student loans. Federal loans often have more favorable interest rates, repayment options, and forgiveness programs. However, private loans can be an option when federal aid is not sufficient to cover all educational expenses. Borrowers should carefully review and compare both options before making a borrowing decision.

Pros and Cons of Private Student Loans

Private student loans provide flexibility and accessibility for borrowers who need additional funds beyond federal aid. Private loans can bridge the gap in education funding, especially for students attending expensive institutions or pursuing specific programs. However, private loans may have higher interest rates, fewer borrower protections, and less flexible repayment options compared to federal loans. It’s crucial for borrowers to carefully consider the terms, interest rates, and repayment options before choosing private student loans.

The Most Common Mistakes When Borrowing Student Loans

When it comes to borrowing student loans, there are several common mistakes that borrowers should avoid. By being aware of these pitfalls, borrowers can make informed decisions and minimize potential financial challenges:

  1. Taking out student loans in the first place: Too many students and parents are not diligently looking for other means to help them pay for higher education. The first thing you should do is fill out a Free Application for Federal Student Aid. They can be difficult to understand, but it could pay off big time. Parents and future students should investigate 529 savings accounts, local civic organizations that provide aid to good students, ROTC options, and more. Go to your high school guidance counselor, explore the web, and hit up the local library for scholarship-based databases. There are some very weird scholarships, too, that almost anyone can apply for. The point is, a variety of ways to help pay for college are available. Don’t just rely on college loans, because you could end up joining those Americans who owe $1.5 trillion in student loans.
  2. Borrowing More Than Necessary: One common mistake is borrowing more money than is needed to cover educational expenses. It’s important to calculate the exact amount required for tuition, books, and living expenses and avoid taking out excessive loans. Borrowers should create a budget and stick to it to ensure they only borrow what they truly need.
  3. Not Understanding the Terms and Conditions: Failing to carefully review and understand the terms and conditions of the loan can lead to surprises and financial difficulties later on. Borrowers should be aware of interest rates, repayment options, grace periods, and any potential fees associated with the loan. Reading the loan agreement thoroughly and asking questions to the lender can help avoid misunderstandings.
  4. Not paying interest while you’re in school: If you take out an unsubsidized loan, the interest starts adding up the moment your loan is disbursed. That interest won’t stop accruing until you pay off the loan. Where does the interest go? It’s added on to your principal, which is the total balance you owe. That’s not the case with subsidized loans, which are based on financial need and don’t start gathering interest until you’re done with school. Get all you can of these before turning to unsubsidized loans, and you won’t have to worry about interest until later. But when you ignore your unsubsidized loans for four or more years, the principal quietly grows. A $10,000 loan could realistically end up being $12,000 after graduation, so make sure you find out the interest rate on your loan before signing up for one. If for some reason you can’t make interest payments while attending school at least you’ll know how much more money you’ll owe, though that’s not much of a consolation.
  5. Ignoring Repayment Planning: Many borrowers overlook the importance of repayment planning. It’s crucial to understand the monthly repayment amount and the total cost of the loan over the repayment term. By planning ahead, borrowers can ensure they can afford the loan payments and make a realistic budget.
  6. Not knowing what your monthly payment will be: It’s crazy, but students and parents accept loans without ever inquiring how much their monthly payments will total. Would you buy a car and just walk out of the showroom without knowing your monthly payment? It’s no wonder so many graduates are floored by the amount they owe each month.Use one of these calculators to figure out what you’ll owe, because like it or not, you’ll have to pay back your loan unless you qualify for a student loan forgiveness program. But that’s not something you should count on.
  7. Not saving for college ahead of time: The best way to save for college is to start early. Parents can start contributing to 529 plans that grow their savings tax-free while their kids are still young.But young people can save for their own college, too. According to the American Institute of Certified Public Accountants, millennials are the most likely generation to say they’ll delay starting college so they can save more and take out fewer loans. Living at home for a few extra years, and working before or during college is one option to keep costs down.
  8. Not Exploring Federal Aid Options First: Federal student loans generally offer more favorable terms, such as lower interest rates and flexible repayment options, compared to private student loans. It’s important to explore federal aid options and maximize their benefits before turning to private loans. Completing the FAFSA is the first step to accessing federal aid.
  9. Not Seeking Financial Aid Counsel: Seeking guidance from financial aid counselors or professionals can be beneficial for borrowers. They can provide valuable insights and help navigate the complexities of student loans. These professionals can assist in understanding the loan options, repayment strategies, and potential forgiveness programs.

By avoiding these common mistakes, borrowers can make informed decisions when taking out student loans and manage their debt more effectively.



How do I apply for federal student loans?


To apply for federal student loans, you need to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA collects information about your financial situation to determine your eligibility for different types of federal aid, including student loans.


Can I get a student loan without a cosigner?


Federal student loans generally do not require a cosigner. However, private student loans may require a cosigner, especially if you have limited credit history or a lower credit score. A cosigner is someone who agrees to be responsible for the loan if you are unable to make the payments.

Learn more about what rights a student loan cosigner has. »


How can I lower the cost of my student loans?


There are several strategies to lower the cost of student loans. You can consider making extra payments to reduce the principal amount and decrease the interest over time. Additionally, exploring loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF), can help eliminate a portion of your loan balance if you meet specific criteria.

Learn more about Public Service Loan Forgiveness (PSLF) »


Can I refinance my student loans?


Yes, refinancing student loans is an option that allows you to obtain a new loan with different terms and interest rates. Refinancing can be beneficial if you can secure a lower interest rate or change your repayment terms to better suit your financial situation. However, refinancing federal loans into a private loan means losing federal loan benefits and protections.

Learn more about refinancing student loans »


What happens if I can’t repay my student loans?


If you’re struggling to repay your student loans, it’s crucial to contact your loan servicer immediately. They can provide guidance on options such as income-driven repayment plans, deferment, or forbearance. Defaulting on student loans can have serious consequences, including damage to your credit score and potential legal actions.

Learn more about what happens if you can’t pay your student loans. »


Is going to college the only option?


One mistake students make outside of student loans, might be their choice to go to college, when it isn’t the only option.

We applaud the 43 percent of the AICPA survey participants who said they’d choose a trade school for a specific profession. Knowing what you want to do saves time and money. The U.S. Department of Education has a website where you can compare the costs of different private schools, public schools, and trade schools.
But if you do choose a trade or technical school, we advise against choosing a for-profit college. The Department of Education has threatened to shut down some of these schools for having some of the highest loan-default rates in the country. Overwhelmingly, they tend to be beauty schools, design schools, or hair styling schools.

Another cost-effective alternative is community college. They include that you attend at least half-time, maintain a 2.5 GPA, and are working toward a degree or transferring to a four-year college.

But if you’ve already gotten yourself in deep, visit’s guide How to Get Out of Student Loan Debt.

Understanding student loans is crucial for students and their families as they navigate the financial aspects of higher education. By grasping the differences between subsidized and unsubsidized loans, considering the cost of borrowing, and being aware of common mistakes, borrowers can make informed decisions about their educational financing. It is essential to carefully review loan terms, repayment options, and explore all available federal aid before considering private loans. With proper planning and financial literacy, borrowers can ensure a smoother repayment journey and minimize the long-term financial impact of student loans.

Find the best solution to pay off federal and private student loans.

Free EvaluationCall To Action Link

How Much Could You Save?

Just tell us how much you owe, in total, and we’ll estimate your new consolidated monthly payment.