Student Loans: 6 Facts You Must Know Before Taking Them

2 out of 3 students graduate with a loan in hand due to their bad financial condition. Don't worry! Borrowing student loans is quite common in the United States and where 5% of them carried a burden of $100,000, 65% with $25,000 and 36% of them with $10,000 on average. It is best to plan for college while still in high school since more time is acquired to research the right college, financial aid, etc. Filing an FAFSA with all the necessary details will give you eligibility for federal financial aid such as grants, scholarships and work-study. The last option you choose should be a student loan as you have to repay them back.

Student loans concept image

Before applying for a loan, you must understand that it comes with certain terms and conditions regarding the repayment, interest rate and period. Understanding student loans completely before applying for one is necessary. Here are some facts you must know before borrowing one.

Federal vs. Private Student Loans

Students can borrow two types of loans - federal loans lent by the government and private loans are lent by the banks, lenders and financial companies.

Borrow a federal student loan after completing the FAFSA which usually does not require your credit history to qualify. Federal loan holders are also eligible for federal programs such as income-driven repayment plans and loan forgiveness. 

Private student loan holders are not eligible for federal programs but can contact their loan servicer to get options for easy repayment. The interest rates offered are quite high compared to federal loans. However, here are some of the best private student loans you can borrow from with attractive interest and repayment options. We recommend choosing private loans after maxing out federal aid.

Avoid Overborrowing

Students struggle to manage their finance and end up borrowing extra. This can cause a backfire while you repay the loan. Hence borrowing the necessary amount is ideal. The limit for an undergraduate student to borrow annually is $12,500 and $57,500 as an overall federal loan. Private loan borrowers are lent money based on the credit history and cost of attendance, which includes tuition, fees, housing, board, books, transportation and personal expenses. You can also approach your financial aid office to provide instructions on acceptance and rejection of your financial aid. 

Recommended reading: How to Identify a Student Loan Scam?

Fees and Interest Accrued on the Loan

Usually, fees and interest are added to the amount you borrow which increases the overall amount that is to be repaid. Interest rates are specified when you sign up for a loan, however, they can vary as you choose plans such as consolidating or refinancing your student loan. Presently, loan fees for undergraduates are at 1.062% and 5.05% as fixed interest. Private lenders usually consider you or your cosigner’s credit history to determine your rates. Look for the best interest rates offered by loan providers to eliminate the extra amount to be paid on interest during the repayment phase. It is better to go through the private lender's site to understand the potential risks of borrowing from banks and credit unions. 

Loan borrowed is sent to the Financial aid office

After qualifying for a loan, you are required to sign a master promissory note that contains all the terms related to the loan. They include the interest, time period, monthly payments to make, the amount lent and other terms. Signing this will also ensure that you understand all the conditions and agree to repay the loan. The loan amount is then received by your college’s financial aid office to cover your education expenses. Once the amount covers your tuition, students are returned the leftovers to manage other related expenses.

Use the Loan on Specific things

Money refunded by your financial aid office cannot be used on anything else. You must spend the money easily to manage the education-related expenses such as books, transport, clothing, house, rent, stationary or save for the future. Also spending the loan amount for unnecessary things and luxury is a waste. Rather you could spend it on study abroad costs, personal supplies, or off-campus housing to manage your finances better.

Determine your Loan Servicer

Once you complete your education, you are offered a grace period of 6 months to settle your finances and loans on a job. Find out who your loan servicer is during this period. If you have a federal loan, your loan is handed over to a student loan servicer contracted by the federal government to manage monthly payments. If you have a private loan, your lender may be your servicer or a servicer from another company to make payments. Connect with your servicer sooner to clear any queries before your payments start.


Student loans have helped many students manage their tuition fees and continue education. By choosing the right loan based on your requirements and opting for various relief options offered, you can ease the repayment phase. Use the loan wisely as it is borrowed to invest in yourself by getting educated. Landing on your dream job lifts you up by increasing your earning potential and in turn paying to eliminate loans. Having a loan on current will make it break your financial situation. Hence, it is better to plan and understand the student's plan carefully than regretting later.