The current higher educational institutions have very high tuition fees and on top of that there are numerous other associated expenses. This situation compels a student who doesn’t have either enough financial savings or financial backing by their parent or guardian to seek a student loan. The usual two categories for student loans are government aid or private loans. This article will discuss both types of student loans and their subcategories to help students who might find it difficult to choose an appropriate student loan plan otherwise.
Working of Student Loans in US
First thing to be clarified here is student loans are similar to any other loans available in the financial market. It comprises a lender and borrower wherein a certain amount is borrowed to be repaid, with an added interest, after a certain time usually in the form of monthly installments. The government student loans are offered by federal agencies, such as the U.S. Department of Education, or state agencies and banks whereas private loans are offered by private lenders and institutions.
The student loans can be used to make payments associated with tuition fees, boarding fees, food and groceries, transportation fees, purchase of books, computer or other academic supplies, etc. It is advised to wisely estimate the necessary expenses that will be required to complete the degree or certification course before applying for a loan. It is so because the amount for which the loan is applied affects the type of loan and consequently the terms of loan repayment.

Government Loans in the US
Here the article will primarily focus on federal loans as they are the most opted type by the students. The federal loans for higher education are further categorized into four types:
- Direct Subsidized loans – It is offered to students opting for undergrad courses. The primary benefit of this type is that it offers no interest on principal amount until six months after the completion of the associated undergrad course or half-time enrolment by the student. Therefore it allows a good amount of savings for the student while repaying the loan.
- Direct Unsubsidized loans – It is offered to undergrad and grad students both. However no subsidy on interest is offered and the student has to pay interest even on the duration of the associated course. Therefore the student has to repay the total capitalized loan amount upon completion of the course.
- Federal Direct Plus loans – It is similar to a subsidized loan but not subsidized itself as the interest is only accrued upon full disbursement of the principal loan amount rather than completion of the associated course. However the repayment commences after six months of the course completion.
- Federal Direct Consolidation Loan – It is the facility to combine various federal student loans taken by a student. It makes repayment of the loans streamlined without losing individual federal loan benefits. It doesn’t affect the interest rate of student loans combined rather allows collective repayment as one.
Private Loans in the US
The loan type usually involves student loans from a private money lender, banking institution, loan agency or any non-banking entity. It mandates a co-signer to be involved which usually is the parent or guardian of the student. It is not subsidized and the interest is accrued from the date on which the principal amount is borrowed. The interest rates are usually higher and it requires good credit ratings of the co-signer to avail lower interest rates. However no origination fee is levied on the student for private loans unlike federal loans that do.
Why is federal loan preferred over private loans?
The federal loans offer several advantages over the private that are:
- Relatively lower interest rates in federal loan;
- Usually fixed interest rates in federal loans unlike variable interest rates in private loans;
- No co-signer required in federal loan;
- Grace period of six month to repayment initiation after completion of associated undergrad or grad course;
- Option of flexible repayment of federal loans i.e. income driven or extended repayment;
- Federal loan waivers are offered for students pursuing certain professions such as public services and teaching.
How to avail a federal loan?
The availability of the federal loans is subject to qualification of the student under the FAFSA program. The acronym FAFSA refers to the Free Application for Federal Student Aid. The student has to file form before the U.S. Department of Education for qualifying under the FAFSA program. Upon qualification the student can apply for any student aid program that is run by the federal agencies which includes any scholarship, grant or loan and even student employment opportunities. It is associated with financial aid required to get enrolled and complete an undergrad or grad course from any federal or state recognized college or university in the US.
Faqs on Working of Student Loans in US
- What is a student loan?
Similar to any other loans, student loan comprises a lender and borrower wherein a certain amount is borrowed to be repaid, with an added interest, after a certain time usually in the form of monthly instalments. The student loans are primarily used to make payments for any expenses related to tuition fees, boarding fees, food and groceries, transportation fees, purchase of books, computer or other academic supplies, etc.
- What are the types of student loans?
There are broadly two categories i.e. government student loans that are offered by federal agencies, such as the U.S. Department of Education, or state agencies whereas private loans are offered by private lenders and banking or non-banking institutions.
- What is FAFSA?
The FAFSA is the Free Application for Federal Student Aid which allows any student in America to avail federal student loan, grant, or scholarship programs. It is associated with financial aid required to get enrolled and complete an undergrad or grad course from any federal or state recognized college or university in the US.
KNIT News Home | Click Here |
James Foster is a passionate writer at KnitCrate.com, specializing in finance, taxation, and public aid topics. With a knack for breaking down complex subjects, he delivers clear and insightful content for readers worldwide. When he’s not writing, James enjoys exploring economic trends and staying updated on global news.