You’re tired of that dead end job and have decided that an education is what you need. Like most Americans, simply paying the school bill when it comes in isn’t an option with the high cost of education. It looks like you’ll be joining the 44 million Americans with student loan debt. Before you sign the line, let’s ask, how do student loans work?

Where To Start:

Filling out a FAFSA

To start figuring out how student loans work, you need to first know exactly what kind of loans or aid you’re eligible for. You will need to fill out a FAFSA which stands for Free Application for Federal Student Aid. After reviewing your application, the government will determine your eligibility for financial assistance. This will include grants, work-study programs, and loans. Unlike loans, grants don’t have to be paid back. You’ll receive a letter informing you what you qualify for after your financial situation is reviewed.

Private Loans

Federal aid is not your only option. In some cases, a loan from a private financial institution, such as a bank, might be a better option. Unlike federal loans, where payments can be deferred until after graduation, private loans may require payments while you are still attending. However, they may come with a lower interest rate making them more financially feasible. They will almost always require a credit check, and possibly a cosigner. Interest will also accrue while you’re attending. Loan structures will vary as each lender sets their own terms.

Federal Loans

Federal loans are funded by the Department of Education. They are the acting lender. The type of loan for which you qualify depends on personal finances, what type of student you are, whether graduate, undergraduate, or professional, and your student loan history. Most federal loans can be deferred, which means repayment is not required until six months after graduation.


Subsidized loans are for undergraduate students who demonstrate financial need. They allow lower income students to attend school. The benefit of this type of loan is that the government will pay the accrued interest while you attend school. You will need to prove financial need. Should you, or your parents, make too much money, you may not be eligible for a subsidized loan. These loans also have lower limits. This is important to consider against the total cost of school.


Unsubsidized loans are for all types of students whether graduate, professional, or undergraduate. There is no need to prove financial need, and higher income will not disqualify you. These loans come with higher limits. The borrower will be required to pay all accrued interest, unlike subsidized loans. This makes them more expensive.  


Plus loans are given to graduate/professional students, or parents of undergraduate students. A credit check is required. Adverse credit history will most likely prevent the loan. The maximum loan amount is the total cost of education including room and board.

Paying Loans Back

School is out, and now it’s time to start repaying the loans. The best and most financially sound course of action is to make payments on time at the rate set by the lender. Paying more will manage compounded interest and the debt can be paid in full with no penalty. Should you be unable to make payments, there are options for delayed payment.


All federal loan payments can be deferred while you’re in school. Payment will not be required until six (in some cases nine) months after graduation. If you’re an undergraduate, attending graduate school will further defer the loan. Unsubsidized and PLUS loans continue to accrue interest during the deferment period. However, subsidized loans will not.


If you face financial hardship, you can request a forbearance on your loan. Payments are postponed until the determined date. Interest continues to accrue and is added to the total sum owed. Further interest is charged against the new balance. Make sure your deferment or forbearance is approved before you stop making payments. Defaulting on a loan will have negative consequences on your credit, jeopardizing future finances.

How do student loans work? Hopefully, that question is less of a mystery now. Soon you’ll be on track for a decent education and can leave that dead end job behind. Understanding how student loans work and knowing your options will lead to sound decisions and keep future opportunities open to you regardless of your financial situation.