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How Do Student Loans Work?
How Do Student Loans Work?
July 01, 2021 / Nadav Shemer
How Do Student Loans Work?
July 01, 2021 / Nadav Shemer

A new academic year is about to begin. You’ve calculated the total cost of tuition, fees, and other costs, and you’ve worked out how much you can cover from income, savings, and other sources. Now all that’s left to do is get a loan to cover the remaining amount. But like every new student, you’re wondering: how do student loans work?

In this article, we’ll explain the difference between private and federal student loans. Then, we’ll tell you everything you need to know about how to apply for student loans from private lenders and the federal government.

How to distinguish between private and federal student loans

Private student loans are offered by private lenders such as banks, credit unions, and online lenders. They cover up to the full cost of admission, including tuition and fees, room and board, books and supplies, and transportation. Interest ranges from 1.04% to 12.40% for variable-rate loans and 3.49% to 12.99% for fixed-rate loans. A credit check is required, and it is generally recommended to bring a cosigner with good credit.

Federal student loans are student loans funded by the federal government. They can be broken down into these categories:

  • Direct subsidized loans. For undergraduate students with financial need. Interest rate of 3.73% (in 2021-22). Annual amount of up to $5,500 depending on grade level and dependency status.
  • Direct unsubsidized loans. For undergraduate, graduate, and professional degree students; financial need isn’t required. Interest rate of 3.73% for loans made to undergraduate students and 5.28% for loans made to graduate or professional degree students. Annual amount of up to $20,500 (minus any subsidized loans) depending on grade level and dependency status.
  • Direct PLUS Loans. For parents who are borrowing money to pay for their dependent undergraduate child’s education, and for graduate or professional degree students; financial need isn’t required. Interest rate is 6.28%. The borrower must demonstrate good credit. Maximum amount is the cost of attendance minus any other financial aid the student receives.

How to apply for a student loan from a private lender

The most important factor in getting approved for a student loan is your (or your cosigner’s) credit score. Virtually all private student loan providers allow cosigners. If you have no credit or poor credit, then bringing a cosigner is essential to getting a private student loan with a good interest rate.

Applying for a private student loan is similar to applying for any other type of unsecured private loan, such as a personal loan. We recommend beginning the process by comparing multiple lenders and finding the one with the best rates, terms, and conditions for your needs.

So, where to apply for student loans from private lenders? The simple answer is online, although some lenders also accept applications over the phone. The initial application process typically takes 10-15 minutes, after which you’ll receive conditional approval for your loan.

To be eligible for a private student loan, you usually must be:

  • Enrolled at least half-time (or sometimes part-time) in a degree program at an eligible school;
  • A U.S. citizen or permanent resident (international students may be accepted with a cosigner who is a U.S. citizen or permanent resident);
  • The age of majority in your state of residence; and
  • Making satisfactory academic progress, according to your school’s definition.

During the process, you’ll need to provide information about yourself and your cosigner, as well as details about your school and degree. This will include:

  • Addresses
  • Social security numbers
  • Employment information
  • Financial information, including bank statements and pay slips
  • School of attendance, e.g. degree, year of enrollment
  • Any additional financial aid you expect to receive

Finally, the lender will ask your school to certify your loan, which can take up to 30 days to complete. The lender may also contact you for additional supporting documentation during this period. For these reasons, most lenders recommend applying at least one month before the start of the academic year.

Our Top 3 Student Loans Services

View Rates
  • Personalized pre-qualified rates
  • Credible handles the entire process on your behalf
  • No impact to credit score when checking rates
  • Not a direct lender
  • -Works with some but not all top lenders
With so many student loan refinance companies on the internet, it’s hard to know where to begin your search. Credible exploits this situation to your advantage, forcing top lenders to compete to offer you the best refinancing rates. The bottom line: Credible can help you obtain great offers from some of America’s best student refinance providers, in minutes, at no cost.
View Rates
  • Matches you with best rates
  • Friend referral bonuses
  • Some lenders allow cosigner and cosigner release
  • Website lacks key information about refinancing
  • Some partnering lenders don’t allow a cosigner
If you’re just starting out your search for a student loan refinance, then Splash is a good place to start. Rather than go out and apply for multiple lenders one-by-one, Splash allows you to apply for multiple lenders with one form. The Splash platform is free to use, it won’t affect your credit score (until you move forward with a formal application), and you can apply as many times as you want.
View Rates
  • Low interest rates
  • Borrower chooses payment and loan term
  • Option to skip a payment once per year¹
  • Not available in Delaware, Kentucky, or Nevada
  • No cosigner option
Earnest stands out from its competitors in the student loan refinance market for two reasons: its seamless application process and the flexibility it gives borrowers. When you use Earnest to refinance your old student loans, you really do get the power to customize the loan the way you want. If low monthly payments are priority, good for you; and if paying less interest over the life of the loan is more important, good for you too. Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

How to apply for a student loan from the federal government

Applying for federal loans is very different from applying for private student loans. The process is also highly dependent on the type of federal loan you’re applying for. For example, if you’re applying for a direct subsidized or unsubsidized loan, then credit isn’t a consideration, although you will need to show financial need for a subsidized loan. If a parent is applying for a PLUS loan, then they will need to show good credit.

To apply for a federal loan, you must fill out a Free Application for Federal Student Aid (FAFSA). Only the person submitting the FAFSA form (the student, in the case of most federal loans, or the parent, in the case of a PLUS loan), may create the ID. Next, select the form for the year your degree begins/began. To complete the form, you or a parent will need to provide the following information:

  • Social Security Number (or Alien Registration Number for non-U.S. citizens);
  • Federal income tax returns, W-2s, and other records of money earned;
  • Bank statements and records of investments (if applicable); and
  • Records of untaxed income (if applicable)


We hope this guide has helped you understand how student loans work and how to apply for student loans.

Before going ahead and applying for a loan, we recommend the following:

1. Calculate your required loan amount (cost of tuition, fees, and other costs minus the amount of money you have from other sources).

2. Based on the above, work out whether you need federal loans or a combination of private and federal loans.

3. Finally, compare private lenders to find the best rates and loan types.

By Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. Nadav writes for He enjoys writing about the latest innovations in financial services and products.
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