How Student Loans Work

by Gigi Starr
How Student Loans Work

What is a Student Loan?

A student loan is a sum of money that is borrowed to pay for higher education costs. There are several different types of student loans to suit various need and income levels, and each loan type has a yearly maximum borrower amount. Many students get a mix of federal and private student loans, although some are able to cover all expenses under the government program.

How to Apply for Government Loans

It's free for students to apply for government loans. The student, along with the parents, guardian or spouse, fills out a form called the Free Application for Student Aid, or FAFSA. Students must fill out a new FAFSA every year they attend school. The government compiles the information into the SAR, or Student Aid Report, and sends this financial aid information to the desired schools. This document lists the FAFSA information and all loan types the student qualifies for.

The Financial Aid Package

After the college receives the SAR, it compiles a package using the information. The college figures out the minimum family contribution as well as whether the student is eligible for college-run loan programs. The package will include all types of loans the student qualifies for, plus the amount available. This amount may be lower than the maximum allowed by law; the student may take out a loan up to the government's top amount to cover books, housing and living expenses. After school starts, the loan is wired to the school and deposited into the student's account to pay his tuition costs. Any excess is issued in the form of a check.

Loan Types

Most students are offered the Stafford loan, which is a direct, low-interest loan from the government to the student. Stafford loans are also available through private lenders. The Perkins loan is for students who demonstrate severe financial need and is usually accompanied by government grant money because of the low-income threshold. These loans must be repaid, with terms that stretch over 20 years, if necessary.

Repayment

Student loan repayment begins from 6 (for Stafford) to 9 months (for Perkins) after a university confers a degree. If the student hasn't found work by that time, she may receive a forbearance or deferment to a later date. Additionally, if a student exits a program or reduces class hours to below half-time, he must begin repayment. Loans that go late or fall into default are referred to collection agencies. However, government loans that default may be fixed and redeemed once during the course of repayment.

About the Author

Gigi Starr is a freelance fashion writer. She previously served as the blog editor for a major online fashion blog and has more than a decade of backstage experience in the beauty and high fashion industries. She has worked for businesses like an internationally renowned theatrical touring company and events such as the Mercedes-Benz N.Y.C. Fashion Week.

Photo Credits

  • 2007 ajschwegler / Creative Commons