What Is an Education Loan?

An education loan is a sum of money borrowed to finance college or other school-related expenses. Payments are often deferred while students are in school and for a six-month grace period after graduation.

How an Education Loan Works

Education loans are issued for the purpose of attending an academic institution and pursuing an academic degree. Education loans can be obtained from the government or through private-sector lending sources. Federal loans often offer lower interest rates, and some also offer subsidized interest. Private-sector loans generally follow more of a traditional lending process for application, with rates typically higher than federal government loans.

Types of Education Loans

Although there are a variety of education loans, they break down into two basic types: public (federal) loans and private loans.

Federal Student Loans

Most borrowers seek federal government financing first if they need to borrow funds for education expenses. Thus, the first step in seeking education loans is completing a free application for federal student aid (FAFSA). Varying information will be required for each applicant depending on their situation and parent dependency. A credit check is not generally required and the amount of principal on the loan or loans is primarily based on the school a student will be attending. Once a FAFSA form is completed the government will work with the schools listed on the application to identify the financial aid package that the student is eligible for.

Key Takeaways

  • Federal student loans don't require credit checks and may subsidize your interest payments.
  • Students may need a private loan in addition to a federal loan.
  • If you consolidate your loans, consolidating just your federal loans lets you keep access to special federal programs for loan forgiveness and repayment.

Various types of federal student loans exist, including direct subsidized, direct unsubsidized and direct consolidation loans. If offered and accepted, funds will be issued by the federal government to the specified university to cover academic bills. The remainder of the funds will then be disbursed if available. Subsidized loans pay a borrower’s interest in school, while unsubsidized loans will have deferred interest.

Private Student Loans

In some cases, the student loan package issued following a FAFSA form completion may suggest the borrower apply for additional funds through private lenders. These types of loans will follow a more standardized application process, typical of any private sector loan, with a credit check usually required.

Borrowers can apply directly to individual private-sector lenders for funds. Similar to federal funds, the approved amount will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover pending bills with the remaining amount of principal sent directly to the borrower.

Special Considerations for Education Loans

Accumulated debt from college can be an overwhelming burden after school days are done. Upon graduation borrowers will be required to begin payments on their student loans, typically after a six-month grace period.

If a student has taken out numerous education loans, consolidating them can be a good option for more easily managing the debt load. Multiple federal education loans can be combined into a single direct consolidation loan. Also, many private lenders now allow borrowers to combine both their federal and private loans into one loan. Note: The new loan will be a private one, issued by the lender. You can't roll up private and public loans into a new federal one. For that reason, the debt will no longer be eligible for certain federal programs for loan forgiveness and repayment.

A number of employers are also beginning to integrate consolidation services and student loan payment benefits into their employee benefit programs to help increase the support available for managing student loan debt after college.

Students and their families should consider all of their options before signing up for loans that could become a crushing burden in the future. Some alternatives to—or ways to reduce the size of—loans include working part-time, accepting work-study offers, attending a less expensive school, finding a job that offers tuition reimbursement as a benefit, and applying for scholarships that help to cover the cost of tuition and room and board. When the student has graduated, it also helps to search for a job that offers help with student debt as a benefit.