What Is an Education Loan?

An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses. Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree. Payments are often deferred while students are in college and, depending on the lender, sometimes they are deferred for an additional six-month period after earning a degree. This period is sometimes referred to as a "grace period."

Key Takeaways

  • An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses.
  • Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree.
  • Payments are often deferred while students are in college and, depending on the lender, sometimes they are deferred for an additional six-month period after earning a degree.
  • Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans sponsored by the federal government and private loans.

How an Education Loan Works

Education loans are issued for the purpose of attending an accredited college or a university 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 that are typically higher than federal government loans.

Types of Education Loans

Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans sponsored by the federal government and private loans.

Federal Student Loans

Most borrowers first seek federal government financing if they need to borrow funds for education expenses. The first step in seeking education loans through the federal government is to complete a free application for federal student aid (FAFSA). Depending on the applicant's status, particularly in regard to their parental dependency, different information may be required to complete the application. A credit check is not generally required as part of the application process. The amount of principal on the loan or loans is primarily based on the cost of attendance at the school the student is planning on attending. Once a FAFSA form is completed, the schools listed on the FAFSA application work to identify the financial aid package that the student is eligible for.

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 the student's academic costs. If there are remaining funds available, they will be disbursed to the student. A student may use these funds to cover other expenses that they incur while pursuing a degree. If a student qualifies for subsidized loans, the borrower’s interest will be covered while they are in school. If a student qualifies for unsubsidized loans, the interest on their loans will be deferred as long as they are enrolled in classes and remain in good academic standing.

Private Student Loans

In some cases, the student loan package that a student is issued through the federal government may suggest that the borrower applies for additional funds through private lenders. Private student loans also include state-affiliated lending nonprofits and institutional loans provided by the schools. These types of loans will generally follow a more standard application process (like what is typical of any private-sector loan). Applications for private student loans typically require a credit check.

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 any pending bills; the remaining amount is then sent directly to the borrower.

Special Considerations

Accumulated debt from college can be an overwhelming burden after graduation.

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. It's important to note that in this scenario, the new loan will be a private one because it will be issued by a private lender. Because the loan will be considered a private loan, the debt will no longer be eligible for certain federal programs for loan forgiveness and repayment. There is no option for borrowers to combine private and public loans into a new public loan.

A number of employers are also beginning to integrate consolidation services and student loan payment benefits into their employee benefit programs as a way of helping to 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 higher education 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.