What You Need to Know About Student Loans Before Applying

Nearly three-quarters of college students turn to student loans to help pay for school; the average student graduates with an average student loan debt of $26,000 according to NCES. Other research suggests that graduates are postponing life milestones such as getting married, buying a home, or starting a family. In many cases, graduates are even still living with their parents, unable to support a place of their own while trying to make student loan payments.

Does this mean student loans are bad? Not at all; however, it is incredibly important to adequately prepare for taking out student loans. If you don’t understand how student loans work, then you may be in for a nasty student loan bill after graduation.

The Benefits and Drawbacks of Federal Student Loans

Federal student loans are exactly what they sound like. They’re loans backed by the federal government through the Department of Education. Because they aren’t offered by for-profit lenders or banks, federal loans come with lower, fixed interest rates and more flexibility when it comes to repayment. See also 5 ways to lower your student loan interest rate.

They’re easier to get than many other types of loans. If you completed the Free Application for Federal Student Aid (FAFSA), then you can get access to federal student loans. This means that federal loans aren’t based upon your credit report or payment history either; they’re based upon your financial need.

Perhaps the best part about federal student loans is the wide variety of repayment options available to you. You can set up an income-based plan that allows you to make smaller payments right after you graduate, and larger ones later after your employment—and salary—grows and evolves. You can also get your loan forgiven or discharged, on rare occasions and depend on the work you’re doing.

Even in a worst-case scenario, if you find yourself unable to get hired, or lose your job, with federal loans you still have options. There are forbearance and deferment options that can give you time to get back on your feet without having to make payments on your loans.

Federal loans aren’t perfect, however, and you should be aware of the drawbacks as well. Because the FAFSA determines how much total financial aid you get, you might max out your package and yet find that you still don’t have enough funding for your school year. Once you’ve hit your max, you can’t get any more federal loans. In addition, you might not qualify for the amount of aid you need if your or your parents’ income is too high—even if their income decreased significantly within the last year.

The Benefits and Drawbacks of Private Student Loans

If federal student loans aren’t getting you all the way where you need to be in order to pay for school, you can look at student loans in the private sector. Offered by banks, lending companies, and financial corporations, private student loans are just that—regular loans you take out to pay for school, that have nothing to do with the federal government.

Private student loans can bridge the gap between your federal financial award and tuition. Private loan eligibility is based on standard underwriting criteria such as credit history and income, so you aren’t barred from a private loan for falling within a financial aid threshold. If you’re an ideal candidate with high income and established credit, then you may be eligible to qualify for a competitive interest rate. However, there is a catch.

There are still some drawbacks about private student loans. First and foremost, those who aren’t sporting a stellar credit score or high income may find it hard to qualify for a private loan. Furthermore, applicants that aren’t highly-qualified may need to deal with a high-interest rate, one that is far higher than a federal interest rate.

Another concern with private student loans is that they lack the same benefits that federal loans have. In addition, you’ll be expected to begin that repayment schedule right away, just as you would with an auto or other kinds of loan. If you’re still in school, that could be problematic—and set you up for financial difficulty.

If you do find that you cannot make the payments on your private student loan, the penalties can be worse than defaulting on a federal loan. Private lenders can put your loan into collections, or even charge it off if it remains unpaid. Your paychecks may be garnished, and your credit may be significantly harmed. There are fewer rehab options compared to federal loans.


Taking on a student loan is no small thing; in fact, it’s a significant commitment. Understanding the process and what’s expected, however, can make student loans a path to success instead of a financial burden.



By guest author Andrew Rombach, a Content Associate from LendEDU – a consumer education website and financial product marketplace. Andrew learned plenty about financial aid from his own experiences with student loan debt in college. Now he covers a range of personal finance topics in general.


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