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Overview
Student Loans 101
How they work and what to know before you borrow
College is a major milestone—and a major expense. If you haven’t been able to save enough to cover the full cost, you’re far from alone. For the 2025–26 school year, the average tuition and fees for out-of-state students at a public four-year college reached nearly $30,780 per year, totaling more than $125,000 over four years. And that doesn’t even include housing, books, or living expenses.
Fortunately, student loans can help bridge the gap, but borrowing is a big decision. Before your child takes out loans, it’s essential to understand how they work and what repayment involves. Here’s what every family should know:
How Student Loans Work
Student loans provide funds to pay for tuition, fees, and other college expenses. Every loan comes with an interest rate—the cost of borrowing—set either by the government or a private lender.
Repayment usually begins six months after graduation, known as the grace period, although some private loans may require payments sooner.
Key Terms to Know
- Co-signer: A person (often a parent) who shares legal responsibility for repaying the loan if the student can’t make payments.
- Deferment: A temporary pause on payments under certain conditions, like being in school, serving in the military, or facing financial hardship.
- Grace Period: The time after graduation when payments aren’t required—usually six months.
- Interest Rate: The percentage charged by the lender for borrowing.
- Principal: The original amount borrowed, before interest is added.
- Public Loan: Also called a federal loan, funded by the government.
- Private Loan: Issued by banks or credit unions, with terms set by the lender.
- Repayment Schedule: A plan outlining monthly payment amounts, due dates, and the total repayment period.
What student loans can be used for
Student loan money can be used for most things related to the expense of college. Student loans are tools to help cover the costs of the following:
- Tuition
- Fees
- Living expenses, including housing and groceries/meal plan
- Books
- Computers
- Tutoring
- Disability services
While students have fairly broad discretion to use student loan money, they can’t use it for just anything. For instance, they can’t use the money for things like buying a house or car—or even clothes.
Public Student Loans
Interest Rates:
Public (federal) student loans are funded by the government, with interest rates set by Congress.Subsidized vs. Unsubsidized Loans:
Federal loans can be subsidized or unsubsidized. With subsidized loans, no interest accrues while the student is enrolled, during the six-month grace period after graduation, or during deferment periods—the government pays the interest during these times.Application process
To apply for federal loans, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA), which helps determine how much financial aid they are eligible to receive—whether in the form of student loans, grants or federal work study. This information usually appears in the student’s college financial aid package.
For the 2024-25 school year, the federal deadline to apply for financial aid is June 30, 2025. But colleges often have earlier due dates, and certain forms of funding are paid out on a first-come, first-served basis. That means that it can pay—literally—to be early.
Private student loans
Interest rates
Private student loans are those issued by banks and other lenders. Private loans typically carry higher interest rates compared to federal loans—potentially much higher.
Additionally, an interest rate on a private student loan could be fixed or variable. With a fixed rate loan, the interest rate will remain steady. But the interest rate on a variable loan can change over the life of the loan. It could be an advantage if the rate goes down or a disadvantage if the rate increases.
Application process
Students can apply for private student loans similar to the way they apply for any other type of personal loan. They fill out an application with a private lender, who will determine how much to offer them and at what interest rate based on their creditworthiness (how likely the lender believes it is that the student will pay back the loan). A private student loan lender will determine this based on a borrower’s credit score and the information in their credit report. If the borrower doesn’t have much of a credit history, then the lender may require a co-signer.
Public student loans tend to be preferable to private student loans because the federal government offers more flexibility when it comes to borrowing and repayment. And, as mentioned above, interest rates for private student loans tend to be higher than for public ones. But private loans can be a good secondary option if a student doesn’t get enough financial aid to cover college costs.
Paying Back Student Loans
Federal loans typically offer more flexible repayment options than private loans, including programs like public service loan forgiveness. This program can erase part of the balance for eligible borrowers who meet specific criteria—such as having the right type of loan, a record of on-time payments, and employment with a qualifying public service organization. Some private lenders may also allow reduced or deferred payments during financial hardship, but federal loans generally provide more repayment choices, which can be crucial if money gets tight.
