How Do College Loans Work?
Updated By Staff Writer on May 13, 2020
Is there anything more fun than learning? We’re not saying that just because we’re a school. It’s actually true that learning is one of the key foundations of all real fun in life.
Think about it. When you’re getting acquainted with a new person at a party, what is the most fun part about it? You really feel it from everything you’re learning about him or her—about another life, another history.
When you’re playing a long, involved game, a lot of the fun is from memorizing all the new terms and game mechanics and understanding the connections between them. It’s the same when you’re learning a new sport or hobby. New connections are physically forming in your brain, and you feel the excitement of growing beyond your old limits.
And it can be extremely fun to learn a new skill in college, knowing that it will improve your career, finances, and the satisfaction you’ll get from your work every day. Learning can be very exciting.
How Can You Pay for College?
But many people worry that college is too expensive for them. College is one of the learning experiences that can create the greatest benefits, yet it could cost too much for the people who need it the most, who don’t have the finances to pay for it.
Even though tuition and fees at Independence University are lower than they are at other colleges, we understand this concern. It’s a significant investment to pay for college classes. And you may already be working at a job and just keeping up with your bills.
How is it possible to pay for college costs? College loans may be the answer for you if you’re really motivated to get a degree and improve your career. But how do college loans work?
What Is a Student Loan and How Does It Work?
A student loan is usually a loan created solely to help fund a college education. It often has a low interest rate compared to other types of loans. And you should only have to repay it once you earn your degree: student loans usually don’t require any payments until after graduation, making it easier to focus on your education.
Of course, besides the amount you borrow, you’ll have to pay interest on the loan eventually. Interest, which is like a fee for using borrowed money, is most often added to a loan balance every month. One advantage of student loans is that your interest rate should stay at a very competitive, low rate until you pay off the loan. Another advantage is that if you are eligible for a subsidized loan, you won’t pay any of the interest that builds up while you are in school.
Which Loans Are Best for College?
There are a few different types of student loans you can pursue. But don’t worry. You can just ask your college financial planner, “How do college loans work?” and he or she can go over them and help you identify the ones that best fit your needs.
The types of college loans available include private student loans, which are offered by private lenders like credit unions and banks, and federal student loans, which are subsidized by the government. Federal student loans are also divided into these types:
- Direct Subsidized Loans: These are perfect if you don’t have a degree yet and if you can show that you have a certain level of financial need.
- Direct Unsubsidized Loans: You could qualify for these if you are working on any type of degree—including an advanced degree—and you don’t need to prove financial need.
- Direct PLUS Loans: This type of loan is focused on graduate students and on parents who are supporting their undergraduate dependents.
- Direct Consolidation Loans: Use this type of loan to combine two or more federal student loans into a single loan.
Each of these loan types has its uses. Even private loans can be helpful to some students. Your advisor should help you apply for the right type(s) for you. How Do You Take Out a College Loan?
To answer the question, “How do college loans work?” we need to discuss the different application methods for federal loans and private loans.
We recommend that you pursue federal loans first, because they carry lower interest rates, offer flexible repayment plans, and are easy to apply for.
Your college financial aid department can give you a Free Application for Federal Student Aid (FAFSA), which you should be able to fill out quickly—and before the deadline for the upcoming school year. Your results will tell you which federal student loans you qualify for (if any).
Many of our students are independent of parents and therefore can use their own financial details on the FAFSA. Dependent students, though, must use their parents’ or guardians’ financial information instead.
The financial information you’ll need for the FAFSA includes:
- Federal tax information
- Details about your employment
- Pay stubs
- Bank statements
If you get approved, you’ll have to receive financial counseling to learn about the responsibilities and rights associated with the loan. Finally, you’ll sign a loan contract detailing all its terms and conditions. The contract is also your promise to repay the loan.
How do private college loans work? First, get in touch with private lenders and go through their application processes. They’ll usually examine your credit history and request your credit score to determine your eligibility. If you don’t qualify based on your own credit, you could enlist a co-signer, who will become responsible for the debt if you don’t repay it.
If your private loan application is approved, you’ll have to sign a loan contract. Make sure you read the details of the loan. Only sign if you’re willing to stick to the terms of the agreement because you could be carrying this debt for many years.
How Do You Repay a Student Loan?
One of the exciting aspects of how college loans work is that you don’t have to start repaying them until you graduate or you fall below a certain number of credits per quarter or semester. You may also enjoy a grace period—such as six months—after graduation in which you don’t yet have to start repaying.
Federal student loans are often structured to be paid off over 10 years in equal monthly payments. However, they’re flexible. You could qualify for alternate terms, including:
- Extended Repayment: This gives you extra time to repay your loan.
- Income-Dependent Repayment: This can give you a lower monthly payment amount if your discretionary income falls below certain levels.
Under those options, you could pay more interest in the long run, because you’ll have more months in which the interest is building up. But that can be better than the consequences of missing payments and falling behind.
Once you’re ready to repay, how do college loans work? It’s pretty simple. You’ll be contacted by your loan servicer or lender with details about exactly how to send in monthly payments. They should offer you an automatic payment option, which can prevent you from accidentally missing a payment, and they might even give you an incentive to sign up for it, such as a lower interest rate.
When repaying private student loans, all of the details above are often the same. The exception is that private lenders can’t guarantee any flexibility in your repayment terms.
Finally, you may be able to enjoy a tax deduction based on your student loan payments to either federal or private loans. Get your form 1098-E from your lender, and use it while preparing your federal tax return.
How Much Money Can You Get with a College Loan?
It’s smart to be cautious about the amount you borrow. Just because you are able to borrow a certain amount doesn’t mean you should. Your loan or loans will look a lot different once you have to start repaying them—and must honor your contract even if you don’t get the job or salary you hoped for.
How do you decide how much to take out? One idea is to borrow only the amount you could earn in your first year after college. Another method is to add up all your minimum anticipated college costs and borrow only that sum.
Some student loans won’t give you the full amount you want, anyway. They may impose limits for each year and for the total amount you can borrow, or others may pay out the entire tuition needed to get your degree, minus other student aid you receive.
You won’t know for sure how much you qualify for until you turn in your FAFSA and/or apply for other types of loans. Just remember that you can make your own decisions about the amount you borrow, based on how much debt you’re willing to carry in the future.
What If You Can’t Repay Your College Loan?
One reason we say you should only borrow the amount you truly need is that the consequences of defaulting (not paying) on your student loans are very negative. They can include:
- Fees added to every late payment
- High collection charges if a loan is sent to a collection agency, which can happen after several months of missed payments
- A percentage of your wages taken by the government
- Some or all of your tax refunds taken by the government
Once you’re repaying your loans, do everything possible to pay on time. You can sign up for automatic payments, for example. Also, if your payments are too high, you should immediately apply for lower payments. It’s much better than missing payments.
Find Out Which Loans and Other Aid You Qualify For
If you’re committed to improving your education and career, you can do it! And we can help you apply for federal loans, walk you through our admissions process, and answer your other questions. Contact us today for help starting on the exciting new learning opportunity of college.