College is a big step whether you’ve just graduated high school or have been contemplating it for a couple of years now. We all venture on our own life journies so no matter what stage in life you’re at, congratulations! Now that you’ve made your decision to start college, you might be wondering, “how do student loans work?”

Student loan

We understand that this can be a confusing and overwhelming time for you. College is a whole new world (an expensive one at that). And you need to prepare your finances. 

Below is a break down of what student loans are and how they work. 


Student Loan Basics 

A student loan is a loan that the main purpose is to cover the cost of your college education. It’s money offered to you from your college through a provider. They often come as part of your financial aid offer after filling out your FAFSA (free application for student aid).

These loans help cover the cost of schooling that your grants and scholarships didn’t. Keep in mind that student loans are not financial aid and you will need to pay them back. Luckily, interest rates on student loans are fairly low.


Student Loan Interest Rates

The interest rate is the fee that you’re charged on the loan for borrowing the money. The interest is charged each month that the loan remains unpaid. The interest rate depends on the amount of the loan.

In many cases, student loans have a fixed interest rate. This means that the interest rate cannot change over time. A loan with a variable interest rate means that the rate can change monthly, quarterly, or yearly. 

Also, keep in mind that there are several different types of federal student loans that you can take out. 



Subsidized loans are made available to those deemed with financial need after applying for FAFSA. These loans do NOT build interest while the student is in school. This means that until you graduate, no interest will accrue.  

The government pays the interest while you’re in school and the amount of the loan is capped to only cover your financial needs determined by FAFSA. Because of this, subsidized loans are normally smaller amounts and are only available to undergrads. 



Unsubsidized loans are made available to all undergrads and grad students. The amount of this loan is dependent on the cost of your college’s tuition. With this type of loan, you’re responsible for all interest accrued starting the moment you receive it. 

These loans are normally larger amounts than the subsidized.  


PLUS Loans

PLUS loans are made available to professional or grad students. The U.S. Department of Education funds these loans to cover any expenses not covered by other financial aid. A credit check will be done so decent credit history is necessary. 

Keep this loan in mind for future college endeavors.  


Consolidation Loans

When taking out multiple federal student loans, they can all be combined into one consolidation loan. This is when there’s one single loan provider who lends you all of your student loans. The provider will normally place all of the loans together as one. 


Private Loans

Private loans are another option that you have. Private loans are not considered student loans and you won’t need to fill out a FAFSA application or speak with your school about applying for one. These loans are borrowed from lenders not affiliated with the government.

You can apply for a private loan through your bank, a state organization, or another finance company. However, these loans are usually not as flexible as student loans. You’ll need to start paying these loans, such as a payday loan back while you’re in school, which isn’t required with student loans. 

If you can’t pay payday loan back, you can always speak with the finance company about your options. 


Amount of Money Borrowed

The amount that you’re rewarded in your student loans depends on your student status and your financial needs. 



Undergrad students can borrow between $5,500-$12,500 in subsidized and unsubsidized loans per year. 


Grad Students

Grad students can borrow up to $20,500 each year in unsubsidized loans. The PLUS loan is the amount of leftover college cost not covered by your financial aid. 


Applying for Student Loans

To apply for student loans, the first thing you’ll need to do is apply for FAFSA. It’s important to pay close attention to the FAFSA deadlines as they change each year. Plan to apply for FAFSA as soon as possible. 

Don’t wait until the deadline is approaching to apply. Once your FAFSA is completed, your school will then process it. Once your school process it, you’ll be awarded any grants that you qualify for and amounts for student loans that you qualify for.

You’ll then need to either accept or decline these awards.  


Receiving the Loan

Once you’ve accepted the grants and loans of your choice, the money is then sent to the college. Your school will send the money to you via direct deposit or a check (depending on how you requested to receive it). Funds are normally dispersed after the drop/add date. 


Paying the Loan Back

Student loans aren’t made for you to pay back while in school. The college and government are aware that you’re attending classes and not in your career yet. Because of this, payments on student loans aren’t due until 6 months after your graduation date. 

This is one of the many benefits of selecting a student loan. 


How Do Student Loans Work?

Hopefully, you’ve got the gist of it after reading our guide. You should no longer be asking yourself, “how do student loans work?” Now that you understand everything there is to know about them, you can plan accordingly and choose the loan that’s right for you.

With all the expenses of college, do you need ways to earn money? Check out our Earn Money section today!