If your savings, scholarships, and other free financial aid don’t cover your college tuition, it’s time to consider student loans. Student loans are different from other types of financial aid in that they are not free. You have to pay them back with interest. If you’re wondering “how do student loans work?” you’re not alone. For most students applying to college, taking any type of loan is a new experience.
For first-time borrowers, understanding how a student loan works is important. You need to understand the types of student loans and how to determine how much you need. Then you need to know how to choose a lender, and how to apply for a loan. You should also know how to calculate interest and how student loans are paid. Most important of all, you must understand how student loan repayments work.
Here’s everything you need to know about how student loans work. We’ve laid it out in a step-by-step manner that covers the complete student loan journey.
If your savings, scholarships, and other free financial aid don’t cover your college tuition, it’s time to consider student loans. Student loans are different from other types of financial aid in that they are not free. You have to pay them back with interest. If you’re wondering “how do student loans work?” you’re not alone. For most students applying to college, taking any type of loan is a new experience.
For first-time borrowers, understanding how a student loan works is important. You need to understand the types of student loans and how to determine how much you need. Then you need to know how to choose a lender, and how to apply for a loan. You should also know how to calculate interest and how student loans are paid. Most important of all, you must understand how student loan repayments work.
Here’s everything you need to know about how student loans work. We’ve laid it out in a step-by-step manner that covers the complete student loan journey.
1. Understand The Benefits Of Private Student Loans
There are two types of student loans you can take – federal and private student loans.
Federal student loans are offered by the federal government. They generally have lower interest rates and more flexible borrowing terms. The only requirement for qualifying is you must be enrolled in an accredited college in the United States. However, there is a limit to how much the federal government will allow you to borrow per year. Very often, this is not enough to cover your tuition for the year. If you need additional funding, you’ll have to take private student loans.
Private student loans are offered by private lenders such as banks and credit unions. These loans work very differently from federal student loans. If the interest rates are higher you will need to meet several eligibility criteria. However, if you qualify, there’s no limit to how much you can borrow. This makes personal student loans very useful for covering the gap in your tuition funding.
2. Choose a Private Student Loan Lender
Private student loans are offered by banks, credit unions, and other private financial institutions. Unlike federal student loans, interest rates and loan terms and conditions vary significantly among lenders. Moreover, not all lenders operate nationwide. A smaller, local lender might have better options for you than a larger lender. Or vice versa! It’s important to research all of your options before settling on one.
Be sure to thoroughly compare the pros and cons of each lender to determine which is the best fit for your needs. There isn’t a one-size-fits-all answer, as each student will have their unique preferences and financial situations.
The best place to start your search is by reading College Raptor’s reviews of the most reputable student loan lenders:
These are some of the things to look for when researching the best private student loan for you:
- Interest rates
- Repayment terms
- Whether or not you have the option to prepay the loan while still in school
- Origination or administration fees
- Whether or not you need a cosigner to borrow money if you haven’t built your credit history
Comparing different lenders’ rates and other loan conditions will help you shortlist a few that best fit your needs and your lifestyle. Once you’ve identified the best lender for you, the next step is to apply for the loan.
3. Apply for a Private Student Loan
You can apply for most private student loans online. You just fill in the information that they ask for in their application form and submit it.
Before you start, make sure you have this information handy to fill in the application form:
- Personal information – date of birth and Social Security number
- Contact details – phone number, email address, postal address
- College/degree details – which college you’re attending, the degree you are considering, cost of attendance, and expected graduation date
- Financial information – your bank account and routing number
- Employment details — employer and current income
- Loan information — How much money do you wish to borrow
Before accepting your application, all private lenders must show you a general disclosure document. This document advises you about student loans in general and informs you about your federal loan options. Read through the information, click ‘submit,’ and your application will get sent to be reviewed by the lender.
4. The Credit Approval Process
Every lender uses their specific criteria to determine whether you are a high or low-risk borrower. To do this, the lender will check your credit history, annual income, outstanding debts, and other factors. This step can take anywhere from a few minutes to a couple of days depending on the lender.
After reviewing your application, the lender will let you know if you are approved, denied, or eligible with a creditworthy cosigner.
‘Eligible with a creditworthy cosigner’ means you aren’t approved to borrow money on your credit history. But you can get approved if you have a creditworthy cosigner who agrees to be responsible for the loan if you (the borrower) can’t pay it back. A creditworthy cosigner is any individual who meets the lender’s borrowing criteria. Before taking a loan with a cosigner, you must take the time to understand how cosigning a student loan works.
5. It’s Time Now To Choose Your Loan Options
After you’re approved, it’s time to specify the type of loan you wish to take. Some choices you will have to make regarding:
- Interest rate type – You can choose between a variable or fixed interest rate loan. Make sure to understand the pros and cons of each option.
- Loan repayment options – Take time to understand the implications of each option.
- The term length of the loan – The longer the loan term, the lower the monthly repayments will be. On the downside, you’ll pay much more accrued over the longer term.
- Option to make in-school payments – This is a great way to lower the cost of your student loans.
This is an important step in understanding how student loans work. Your choices will determine your monthly loan payments and the total cost of the loan.
Making the right choices is crucial so give yourself plenty of time to do this. It’s advisable to check the lender’s website, explore your options and do your calculations in advance. This will empower you to make the right decision when your approval comes through.
6. Accept Your Loan Terms & Sign the Agreement
After you’ve chosen your loan options, the lender will draw up an agreement for you to sign. Signing this agreement implies that you have understood the terms of the loan and agree to them. Once you sign the document, you cannot get out of it without consequences. Before you sign the agreement, make sure you read through it and understand what you are agreeing to. Most importantly, read the fine print and make sure there are no hidden fees buried in there.
Don’t understand something? Ask the lender to clarify what that means.
Don’t feel comfortable agreeing to a certain term? Ask the lender if there are any other options.
Most lenders allow borrowers to sign their loan documents electronically so there’s no need to print and mail anything.
7. Wait for School Certification
Many schools (but not all) will require a student loan to be certified. After you’ve signed and submitted your loan documents, the lender will send the details to your school as part of the certification process. This is to verify the details you’ve provided regarding your enrollment status, anticipated graduation date, and the school’s calculated cost of attendance.
This process takes on average about 7 to 10 days. Your school will certify the loan after checking that all the details are right. On the other hand, they will not certify the loan if there is even the smallest inaccuracy. They could also certify the loan with a lower loan amount if the current amount exceeds the maximum cost of attendance.
If any changes are made to the loan amount, you will need to sign a new agreement with the corrected loan amount.
8. The Loan Is Disbursed to Your School
Different schools have different policies on how funds are transferred. Most schools will accept the loan funds directly into their account and deduct what they need for tuition and fees. They will then send the balance to you, the student. They may either transfer it directly to your bank account or give you a check for the amount.
If you’ve taken a loan for multiple semesters, the lender will only disburse the amount you need for the immediate semester. The remaining amount will then be disbursed only when you’re ready to start the next semester. This is good for you as interest starts to accrue as soon as the funds are disbursed. Transferring only what you need at the time helps to lower the overall cost of the loan.
As a rule, when you have the option, always choose the one that will save you the most money.
9. The Loan Is Disbursed: Now What?
This is one area that most students overlook when looking for an explanation of how do student loans work. However, your student loan journey doesn’t end with receiving the loan funds. Receiving the funds marks the beginning of the next phase. Once the loan is disbursed, you are responsible for keeping track of it and making your payments on time.
Unlike most other types of loans, student loan repayments do not begin immediately after receiving the funds. Your loan repayments will kick in about 6 months after your graduation date. This is to give you enough time to start earning and building your savings.
However, interest starts accruing from the day the funds are disbursed right until the time the debt is completely cleared. That means interest will be accruing throughout your years in college. By the time you start repayments, your total loan amount will be much higher than the amount you borrowed. It’s really important to understand this so you can explore ways to lower the cost of your loan.
One way to lower the cost of your loan is to start making payments while you’re still in college. Maybe take up a part-time job and use your earnings to pay back your loan in small installments. Paying back even $50 or $25 a month every month in college can make a big difference.
If, after graduating, you find you are having problems making the payments, don’t try to duck the issue. It won’t help. Instead, speak to your lender and be honest about what the problem is. Your lender will help you find the best solution for your circumstances. Refinancing to lower your monthly payments is usually the best way to make your loan payments more manageable.
You can compare your personalized rates with our lending partners and potentially lower your monthly student loan payments and save money.
