What Is a Student Loan?
One of the biggest barriers to higher education is cost. Fortunately, student loans offer a way to bridge the financial gap. A student loan is money borrowed to help pay for college or university expenses. These loans can come from either the federal government or private lenders, such as banks or credit unions.
Student loans are very common. In fact, over half of all students attending four-year public or private universities take out at least one student loan during their academic careers.
Types of Student Loans
There are two main categories of student loans: federal and private.
Federal Student Loans
Federal student loans are funded by the U.S. government. To apply, you must complete the Free Application for Federal Student Aid (FAFSA). A major benefit of federal loans is that they typically don’t require a credit check for student borrowers—though parent loans may.
Repayment usually begins after graduation or when you drop below half-time enrollment. Federal loans often have lower interest rates and more flexible repayment options than private loans.
Private Student Loans
Private loans are offered by banks, credit unions, and other financial institutions. These typically require a credit check, so students with limited credit history may need a cosigner. Interest rates can be fixed or variable, and they’re often higher than federal rates.
Unlike federal loans, private loans are rarely eligible for forgiveness programs. In some cases, forgiven federal loan amounts may be considered taxable income.
There are borrowing limits for both types of loans, which depend on your school and your enrollment status. For private loans, your credit score will also influence how much you can borrow and what interest rate you’re offered.
Benefits of Student Loans
Access to Your Dream School
Student loans can make it possible to attend the school of your choice. Even if you receive scholarships or grants, they might not cover all your expenses. Loans can help fill in the gaps and give you access to better educational opportunities.
Enhanced College Experience
College should be a time of growth and exploration—not just financial stress. Without enough funding, many students are forced to work long hours, which can detract from the overall experience. Student loans allow you to focus on your studies, participate in extracurricular activities, and build valuable relationships without constantly worrying about money.
Flexible Repayment Options
Worried about repaying your loans after graduation? Federal student loans offer income-based repayment plans that adjust your monthly payments based on your earnings. Even some private lenders offer flexible terms, though they may not be as accommodating as federal options.
Drawbacks of Student Loans
Graduating With Debt
Taking out loans means you’ll likely graduate with debt. The average student loan debt in the U.S. is over $38,000, and those with private loans often owe much more. This burden can delay important life milestones such as buying a home, getting married, or starting a family.
While you may be able to defer payments temporarily, interest often continues to accrue during that time, increasing your total balance.
Serious Consequences of Default
Failing to repay your student loans—or defaulting—can lead to serious financial and professional consequences. Your credit score may drop, your wages may be garnished, and your tax refunds can be seized.
Defaulting can also limit your access to future financial aid, and in some cases, may even impact your ability to obtain professional licenses or security clearances. Unlike other forms of debt, student loans are rarely discharged in bankruptcy.
Alternatives to Student Loans
While student loans can be helpful, it’s wise to explore other options before borrowing. Here are a few alternatives:
Scholarships
Scholarships are often merit-based, awarded for academic achievements, athletic abilities, or specific skills. However, many are also available based on unique qualifications, such as community service or field of interest.
It’s estimated that over $100 million in scholarships go unclaimed each year. You can find scholarships through school counselors, community organizations, religious institutions, and online databases.
Payment Plans
Some colleges offer monthly payment plans that allow you to pay tuition in smaller installments instead of one large sum. These plans are typically arranged through the school’s billing office and can help you avoid taking out loans altogether.
Grants
Grants are need-based financial aid that do not need to be repaid. You may qualify for federal, state, or institutional grants by submitting the FAFSA. Some grants are also available to students in specific fields or those pursuing certain careers.
