If you’re thinking about taking out a student loan to help pay for college, you might be navigating the loan process for the first time and encountering a lot of questions, number one on your list being: How do student loans work?
Student loans are a very common and oftentimes necessary way to cover the costs of college. The Institute for College Access and Success has reported that nearly 70 percent of college students nationwide borrow money to help pay for school-related expenses. Student loans make it possible for many people to attend college, which can open doors and opportunities for years to come.
Whether you’re a student or the parent of a student, you’ll want to understand exactly how student loans work, so you can find the student loan that’s right for you.
What is a Student Loan?
A student loan is money that you borrow to help pay for school with the expectation that you will pay that money back in the future.
Student loans don’t differ all that much from other types of loans. However, the process of obtaining and repaying a student loan does have some unique attributes.
How Do Student Loans Work?
Your student loan might be the first loan you’ve ever pursued or received, so keep in mind that it’s not just how much you borrow it’s how much that amount costs in the long term.
Student Loan Interest Rates
One of the most important components of any loan that directly affects its long-term cost is the loan’s interest rate. An interest rate is, essentially, the cost of taking out your loan. It is calculated as a percentage of the amount you borrow and added on to your loan.
A fixed interest rate will not change for the life of a loan, while a variable interest rate can change.
Interest rates for federal student loans, which are issued by the government, are currently set once per year and are fixed. Private student loans, which are issued by banks, credit unions, private lenders, and other types of financial institutions, tend to have interest rates that are higher than federal direct student loans, and those rates can be fixed or variable.