Business & Finance

How do student loans work

how do student loans work

Planning the way you are going to finance your education is equally important as planning and choosing the path of your education. Let’s check “how do student loans work”.          

What is a student loan?

The government or private lenders such as banks and other financial institutions issuing money to the students to continue their studies, under an agreed rate of interest which should be paid in each month. This interest fee is a payment you make, as you have used someone else’s money. Most of the students generally tend to borrow the student loans provided by the government first. Because the government provides those in low-interest rates.

By using these student loans, students can cover any kind of expenses related to their education. Student loans are indeed different from scholarships and grants as the loan should be payback in the coming future. let’s see how do student loans work.

Loan approved

Why you should have a proper understanding of how do student loans work?


Keep in mind that you have to pay back one day

First of all, you should have a clear idea of to what extent your expenses can be covered from the loan. Some loans provide the students with full coverage of the college expenses and some don’t. Even though, a student loan is indeed a good investment you should always keep in mind that one day you should payback. So make sure that you have taken debt into a limit that you can bear.


Think twice

When you applying for a student loan think twice whether it is affordable and manageable. There are billions of students who are making student loans each year. Trillions of students who are having an outstanding debt. The student loan is kind of an investment. Do not let it trap you in a future financial deficit.


How to apply?

As there are two types of student loans as loans provided by the government and the loans provided by the private lenders we should consider them both.

First, let’s see how to apply to the student loans provided by the government.

Students have to fill the free application for federal student aid (FAFSA) to apply student loans provided by the government. Here if the student is a dependent one they can use their parents’ financial information. If not they can use their financial information. If you are admitted to a student loan the school you chose will send you a financial aid offer including the student loan provided by the government.

To apply to the student loans provided by the private sector, students have to complete a list of eligibility.  The possibility of borrowing the loan from a private lender highly depends upon the student’s credit history. The lender will name the student as an eligible person after they confirmed that the student is having the ability to repay the loan. Most of the student’s credit histories are not much stronger. So, the lenders have provided the students the chance to present a cosigner, who is equally responsible for repaying the loan, if the student failed to do so. The loan amount will be directly sent either to the borrower or the college aid office when the institution noted you as an eligible person to borrow the student loan.

After the loan is approved the students have to sign a promissory note. It clarifies, that the student has read and understood the terms and conditions of the loan. As an example, the interest rate.

Bank loan


Once you have graduated you have to think about how to repay the loan. Most student loans offer 6 months as a grace period.

When repaying federal loans the students may introduce payment plans. Let’s see some of the payment plans that the students can follow.

·         Standard payment plan- Students should pay back the loan from equal monthly installments. Normally this plan is for 10 years.

·         Graduated repayment plan- this is also for 10 years. The monthly installment is not a fixed amount. Instead of that, they started the monthly installment in a lower amount and it will increase once every year or two.

·         Income-based repayment plans- this plan is based on your income. The installment will be 10%-15% of your income after tax and personal expenses.

There are more payment plans such as the income-contingent repayment plan, income-sensitive repayment plan, etc.

The loan agreements between borrower and the lender will be applicable when repaying loans provided by a private lender. If there are any negotiations you have to discuss with the lender indeed.


Not being able to repay the loans

You have to think of a way of repaying the loan once graduated, as a loan program is an obligation you agreed to pay. As above mentioned most of the lenders give borrowers a grace period of 6 months.  if the borrower was not able to pay back the installment on or before the due date, the borrower will be considered as delinquent. Lenders will add late fees to the repayment of delinquent borrowers.

If the borrower will be considered as default if he is very late repaying the installments. In federal loan, the borrower will be considered as default if he was not able to repay within 360 days, and when considering the private sector that period is limited to 120 days.

A defaulting borrower indeed has to face some bad experiences regarding making the repayment. In federal loans, lenders deduct 20% of the installment as the collection cost. In the private sector, they will be work according to the agreement they made with the borrower at the inception of the loan program.



It seems like borrowing a student loan is the easiest way to complete your education. But some people do not prefer this way. Because once they completed their education they have to rush to a job to repay the loans they borrowed. And besides, students have to pay a considerable amount of interest also. So, most of the students try other ways of making money rather than staying stick to a traditional loan program. Some students prefer choosing a college they can simply afford, without borrowing a student loan. Some students do part-time jobs while continuing their studies. And also students can find scholarships and grants as they do not have to pay the money back. That is how student loans work. So, the choice is always yours.



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