What's a student loan and how does it work?
These loans can cover the cost of tuition, housing and textbooks — but they must eventually be repaid, plus interest


The average cost of college easily tips into tens of thousands of dollars, which is not an amount that is easy to come by for most people. That is where student loans enter the equation.
Put simply, student loans are funds that cover the costs of higher education, from tuition and fees to room and board to necessary textbooks and technology. However, this is money that is borrowed — meaning it must sooner or later be repaid, plus interest.
What is a student loan?
A student loan is a type of debt, similar to a personal loan or auto loan. Except with a student loan, the money borrowed is earmarked for the costs of education, including college and graduate school.
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What counts as a qualifying expense to be covered by a student loan is "relatively broad," so think about it this way: "If the expense is essential to your educational success — as in, it supports your living arrangements, basic daily needs or attendance at school — it's likely a permissible use of student loan funds," said U.S. News & World Report. Qualifying expenses may include tuition, meal plans or groceries, transportation to and from school, housing-related costs like rent and utilities, textbooks and computers.
How do student loans work?
Once you have applied for and been approved for a student loan, the funds are then disbursed accordingly, covering your costs. From there, you usually do not have to worry about student loan repayment "until after you graduate, leave school or decide to take classes less than half-time (depending on your loan terms)," said Credit Karma.
Once you are out of school, you will owe monthly payments for the length of your loan's term — the amount of time until your loan is paid off in full. "With federal loans, the standard repayment plan is 10 years" but "could be as long as 25 years," said Money, while," private loans give you the option of choosing a term between five and 20 years."
Keep in mind that with student loans, "you're not just paying back the amount you borrow, you're paying back interest," said Saving for College. "Depending on the rate and loan term, you could pay thousands more than your initial loan balance over the life of the loan," said Money.
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Are there different types of student loans?
Yes. The two main types of student loans are federal and private.
Federal student loans, accessible by filling out the FAFSA, are offered by the U.S. Department of Education. These "tend to be the primary starting point for students who need to borrow money" and "are appealing because they typically have lower interest rates than private loans, and they have more repayment options and protections for student loan borrowers experiencing financial difficulties," said Money. Further, "most federal loans are available without a credit check, and there are no minimum income requirements."
Private student loans, on the other hand, are "issued by banks, credit unions and other financial institutions," and "are usually credit-based, meaning the student needs to meet certain credit score and income requirements," said Money. While federal student loans are exclusively fixed-rate — meaning their interest rate remains the same over time — private loan rates can be fixed or variable, in which case the rate may shift.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.
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