How do College Loans Work?

If your parents haven’t set aside money or maybe you just don’t have quite enough, you are going to have to take out some loans. The first question you should be thinking is how do college loans work? College loans have similarities to any loan you can get in society. There are only two main types of loans for school federal and private. We will discuss the different loans you can use to go to school.

Now obviously you’re not going to have to take out loans if scholarships, grants, and saved money actually add up to pay for your college.

The bad thing is most people will need to take out loans to pay for college because scholarships, grants or saved money is not enough.

Paying for college can be very overwhelming and stressful if you think about the overall college cost. You have probably never had to pay for something so expensive in your young life.

You definitely want to make sure that you have a good understanding of the loans that you will need before you take them out.

The loans are usually going to be very big amounts and can have a very big impact on your future with your own finances.

This is something that you will want to talk to your parents or other adults in your life about before making decisions. You also need to think about this when going to college because you need that money ready when tuition is due.

College loans are definitely something that you want to research and think a lot about before pulling the trigger. You can read tips on applying for a college scholarship to learn more about scholarships for school.

You can definitely start thinking about college costs and payments when you are in high school. Talk to your parents about the plan to pay for college.

Paying your Tuition First Semester

You will want to look at when you need to pay for the first semester of college at the end of your senior year or towards the beginning of the summer.

Most of your initial tuition fees will be due early August if you have a typical two-semester college schedule.

You may not get your statement of the account until later in the summer but it is still definitely good to think about what loans you were going to get.

You also definitely want to start adding up your grants, scholarships, and other money, in general, to make sure that you know if you will even need a loan or not.

The financial aspect of college is definitely something that takes a lot of time and effort to figure out.

Student loans or something that you may be paying off for many years in the future so you want to make sure that you take the time to think them through and do them in the best way possible for your future.

FAFSA Basics

Basically, you can’t receive either of the two loans subsidized and unsubsidized loans unless you fill out your FAFSA.

This is why it is so important to fill out FAFSA no matter what.

Even if you know your parents make a lot of money and you probably won’t receive any grants from FAFSA or your university, you still want to fill it out so that you are eligible for any loans from FAFSA.

Filling out FAFSA also helps with many other things including determining any sort of financial aid, grants, and scholarships from your university and outside sources.

No matter what, your best possible decision is to fill out your FAFSA no matter what your financial situation is.

You never know how your financial situation may change and how much more money you may end up needing for school.

The Basics of College Loans

There are really only two basic sources of student loans.

  • Federal
  • Private

The federal dominates the loan business for the amount of money available and the loan repayment programs offered.

Most of the college students that get loans received federal loans through the William D. Ford Federal Direct loan program.

The William D. Ford Federal Direct loan program includes:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • Direct Consolidation Loans

Most people who go to college will need a loan to pay for the cost. Looking at data from 2016 the average loan debt was around $37,000 to $39,000 once a college student left school.

The cost of going to college is rising plus you have the debt for college students is getting worse every year.

Stafford Loans

There are two types of federal loans the most common is the Stafford Loan. The other federal loan is the Perkins Loan. The federal government provides the money for these loans in a program they call the Federal Direct Student Loan Program (FDSLP).

With Stafford loans, there are two types that we will discuss below. The loans will be subsidized or unsubsidized.

Direct Subsidized Loans

In order to receive a subsidized loan, you first have to fill out FAFSA. FAFSA means Free Application for Federal Student Aid.

Currently, subsidized loans from FAFSA are only applicable to undergraduate students. There is one specific subsidized loan that can be used if you are a graduate student but it was very rare.

You definitely want to take advantage of these types of loans when you are an undergraduate student. Basically, a subsidized loan is a loan that does not accrue interest while you were in school.

This is a huge deal because while you are in school for four years you will not be accruing hundreds and hundreds of dollars in interest.

You definitely want to use all of the money from this type of loan before you take out any other loans.

If this is the only loan you have to take out, then that is the best-case scenario.

In order for this loan to be applicable to you, you must meet the criteria below:

  • You have to be an undergraduate student with a financial need
  • Family income has to be less than $50,000 a year
  • The college determines the amount you can borrow
  • You have to be at least a part-time or full-time student
  • Normally a part-time student consists of at least six credit hours and a full-time student consist of at least 12 credit hours
  • The credit hours are per semester
  • Freshmen, you can borrow up to $3,500
  • Sophomore maximum is $4,500
  • You go past Junior year and beyond maximum is $5,500
  • Undergraduate maximum is $23,000

Some different things that go into determining if you can get this kind of loan or how much you can get includes:

  • The cost of your university
  • Family contribution
  • Other financial aid that you are receiving

Basically, if you receive this loan, the federal government is going to be paying for your interest while you were in school.

Direct Unsubsidized Loans

The main difference between a subsidized loan and an unsubsidized loan is that if you have an unsubsidized loan you are going to be paying the interest as soon as the loan is taken out.

Obviously, it is much more convenient to have a subsidized loan where you are not paying for the interest while in college.

However, if you have no other option but to have an unsubsidized loan, It is still definitely better than many other loans out on the market.

You definitely still want to accept it and just deal with the fact that you have to pay for the interest.

You have to pay for the interest on all other loans except for a direct subsidized loan from FAFSA.

The requirements unsubsidized loans are as follows:

  • You do not need to show financial need to get this loan
  • Undergraduate and graduate students can apply
  • Once again the school determines the amount of money you can borrow based on the cost to go to school and if you are receiving other financial aid
  • We discussed earlier you are responsible for the interest while in school
  • You can choose not to pay the interest while in school but your interest will accrue and be added to the principal (You do not want to do this if you can avoid it)

This means that you have to be at least a full time or part-time student.

Plus Loans

These loans are funded by the federal government. There are no maximum amounts and this can be used to cover all other education costs not covered by other loans. The loans usually have a fixed interest rate.

  • The loans are available for graduate students
  • The loan is also available for parents

Parent Plus Loans

  • This loan is available for parents of dependent undergraduate students

Grad Plus Loans

  • This loan is available for just graduate students

Private Education Loans

Do not go this route unless last resort.

If you do not receive any offers for FAFSA loans or you are not interested in using them, you definitely want to look for local loans or loans through your bank.

Many cities, towns, townships, counties, etc. will offer great student loan deals for students who graduated from high schools in those specific places.

These are definitely things that you want to research and look into as they may have great offers and lower interest rates.

Definitely talk to the representative at your bank and do some research to find out where you can get the best student loans.

I know credit unions have really helped me in the past for many different loans.

Don’t be afraid to ask others for help with this matter because it is serious and dealing with a lot of money that you may be paying off for a long time after your college years.

This is definitely something that you want to think about and, make sure you are going about in the right way.


Another thing that you want to remember is that some loans may require a cosigner. Basically, a cosigner is someone who is going to be the second signature on your loan who will take the financial burden if you do not pay back the loan.

The problem is that your cosigner is definitely going to need to be someone who has good credit. Basically, the reason that you were going to be able to get these types of loans is that you have this cosigner.

So, if your parents do not have good credit you may want to look into other family members who you are very close to and see if they can do this for you.

Not all student loans require this.

So you may go about getting your loans and not have to deal with this problem at all.

Just make sure that you think about it and think about who you would choose to be your cosigner on a student loan. That’s definitely something that you want to ask about and figure out before you go into actually getting a loan.

Direct Consolidation Loan

When you graduate school and you have a couple of different school loans. Instead of making five separate payments to the different loan institutions you can consolidate the loan so you only have to make one payment a month.

There should be no fee but you can only consolidate your loans once. You should be able to get a good fixed rate with flexible options.

This will probably lower your payments but may increase the time it takes for you to pay off your loans.

I suggest you get a low payment that works for you once you graduate and get a job. When you start to increase take-home pay after working a few years then you can add extra money every month to pay the school loan off faster.

You’d Rather be Safe than Sorry

When it comes to getting loans you rather be safe than sorry, Especially when it comes to student loans.

I would rather take out a little bit more than I need than not enough. Because, if you do not have enough to pay for your tuition then you will not be able to attend classes.

You really have to think this through and make sure that you actually have enough money to be able to attend the university. They normally are not very lenient with late payments and not many schools offer payment plans.

This is also something that you want to look into and research before you attend the university that you have picked.

If your university offers a payment plan you maybe go about your finances in a different way than a school that doesn’t.

If you have to have all of your money at one time it is very different than paying a monthly or quarterly payment.

Loan Servicers

The following are loan servicers for federally held loans made through the William D. Ford Federal Direct Loan Program.

Provided by

CornerStone 1-800-663-1662
FedLoan Servicing (PHEAA) 1-800-699-2908
Granite State – GSMR 1-888-556-0022
Great Lakes Educational Loan Services, Inc. 1-800-236-4300
HESC/Edfinancial 1-855-337-6884
MOHELA 1-888-866-4352
Navient 1-800-722-1300
Nelnet 1-888-486-4722
OSLA Servicing 1-866-264-9762

Loan Providers

  • The Federal Government
  • Sallie Mae – Now Navient
  • Nelnet
  • Citizens Bank
  • Social Finance (SoFi)
  • LendKey
  • CommonBond
  • Wells Fargo
  • SimpleTuition


Overall, it is just important that you understand the difference in loans and how loans work before you go about getting one. This is definitely something that you want to research and figure out very well before you do it.

I’ve said it once but I’ll say it again, these types of loans are going to be something you’re paying off for a very long time. So you want to make sure that you’re going to be paying as little as you possibly can.

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