The Basics of College Loans | The Budget Mom (2024)

Did you experience sticker shock the first time you realized how much it costs to earn your degree? If so, then you’re not alone.

If you choose to attend a public university, you can expect to pay around $10,560 per year. If you’re considering attending a private college, the costs could run as high as $37,650 per year.

Of course, these costs can vary depending on a variety of factors, including your major and whether you’re an in-state or out-of-state resident. But even on the lower end of the spectrum, the total cost of attendance can quickly add up.

This is why a large percentage of college students will end up taking out a combination of federal and private student loans.

Federal Loans vs. Private Loans

If you’ve sought any advice on applying for loans, you probably heard that you should apply for federal loans first. That’s because federal loans are funded by the federal government and come with lower interest rates.

Federal loans also come with certain borrower protections that private student loan borrowers do not always receive. For instance, due to the pandemic, there is currently a freeze on federal student loan payments until Sept. 30, 2021.

The interest rate is also set at 0%, so you aren’t penalized for failing to make payments on your loans. While some private lenders have offered forbearance for up to 90 days, private loans don’t come with the same type of flexibility.

That’s because private loans are distributed by private lenders, like banks or online lenders. The lender sets the terms and conditions of these loans, and a credit check is required.

Private student loans are more expensive than federal loans, which is why they should always be your last resort. But if you still have gaps in your tuition after receiving federal aid and federal loans, then private loans can be a good option.

The Different Types of Federal Loans

When you apply for federal loans, you don’t have to worry about undergoing a credit check or finding a cosigner. If you’ve graduated from high school and are planning to attend college, you’re automatically eligible to receive federal loans.

However, there are different types of federal loans you can receive as an undergraduate. And the two main types you want to familiarize yourself with are subsidized and unsubsidized loans.

Direct Subsidized Loans

If you're an undergraduate student with financial need, you may qualify for direct subsidized loans. The main advantage to receiving subsidized loans is that the government pays the interest while you're still in school. The government determines how much you can receive in subsidized loans each year.

Direct Unsubsidized Loans

Anyone can take out unsubsidized loans, whether you have a financial need or not. With this type of loan, you’re responsible for any interest that accrues on the loan. This can add up to thousands of dollars over the life of the loan.

How to Apply for Student Loans

Now that you understand the different types of loans you can take out, it’s time to begin the application process. And you’ll want to start this process as early as possible since federal loans are given on a first-come, first-serve basis.

Applying for student loans can feel pretty overwhelming, so I’ve broken this down into three simple steps:

1. Fill Out the FAFSA

Your first step is to fill out the Free Application for Federal Student Aid (FAFSA). If you don’t fill out the FAFSA, you won’t be eligible to receive federal loans or aid.

To start, you’ll create your FAFSA account and choose your username and password. You’ll need at least an email address and your Social Security Number to set up the account.

The information you need to fill out the FAFSA is pretty extensive. You’ll need to provide your personal information and your tax returns (or your parents’ tax returns if you’re a dependent student).

You’ll also include information about any colleges you are considering attending. Don’t worry about whether or not that school has accepted you — if you’re considering attending, add it to the list. You can list up to 10 different schools on your FAFSA, and the colleges you chose will receive your FAFSA electronically.

2. Review Your Student Aid Report (SAR)

Once you’ve filled out the FAFSA, you’ll receive a Student Aid Report (SAR). The SAR is a summary of all the information you entered. You’ll want to check this report carefully to make sure everything is accurate.

At this point, the schools you included in your FAFSA may request additional information. It’s essential to provide this documentation as quickly as possible, so you don't miss out on any federal aid.

3. Review Your Financial Aid Award Letter

And finally, you should receive a financial aid award letter from the schools listed on your FAFSA. This letter will let you know the types of aid you qualify for. For instance, if you qualify for a work-study program or federal grants, this will be listed on your financial aid award letter.

It will also outline how much you qualify to receive in subsidized and unsubsidized student loans. You’re not required to accept the total amount offered to you in federal loans.

Once you’ve received your financial aid award letter, you should have a better idea of how you can pay for college. From there, you can start to determine whether you have enough federal aid and loans to pay for school or if you need to consider private loans as well.

The Bottom Line

Earning your degree can be expensive, but there are plenty of options available to you. The best thing you can do is to start this process early to maximize your odds of receiving federal aid.

And remember, while federal loans are less expensive than private loans, it’s still debt that you’re going to have to repay. So don’t take out more federal student loans than you need to pay for school.