How Student Loans Work

How Student Loans Work
There are generally two types of loans for college students to finance their education. These types are federal student loans and private student loans. Federal student loans are loans funded by the federal government. Private students loans are funded by lenders, such as banks, credit unions, state agencies, or schools. Both loans involve interest, additional money, on top of amount borrowed, that must be repaid in exchange for borrowing the money at a particular established percentage of amount borrowed.

Federal loans have fixed interest rates, repayment plans based on income, and are repaid upon graduation. Two kinds of federal loans are subsidized and unsubsized. Interest on subsidized loans are paid by the government while the borrower is still in school at least part-time, while interest on unsubsidized loans is paid directly by the borrower.

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