Student loans: what are they and how do you apply

1 min read by Rachel Carey Last updated February 8, 2024

This guide to student loans takes you through what to expect when figuring out how to pay for higher education.


  • A student loan is an installment loan that pays for college and its related costs.

  • The average cost of college in the US is over $35,000 per year.

  • 92.8 million Americans have had student loan debt at some point.

  • A financial advisor can help you create a plan to reach your financial goals and better manage your money.

What is a student loan? 

A student loan is an installment loan that pays for college and its related costs, including tuition, fees, books, and living expenses. You’ll eventually repay the borrowed money, alongside any interest and fees associated with them added on top. 

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Like other loans, this interest, in the majority of cases, starts accruing as soon as you receive the money. So, while you’re in college, working on your degree, your loan will build interest in the background.  

Student loans are extremely common. This is mainly due to the high price of college tuition, which has rocketed over the last number of years – more than doubling since 2000.

Today, according to the Education Data Initiative, the average cost of college in the US is over $35,000 per year, including books, supplies, and living expenses. 

To combat these prices, most college attendees, or sometimes their parents, will take out a student loan.  

While parents can start saving for college from an early age – some parents start saving straight after they’ve left the delivery room through plans such as a 529 Savings Plan, a tax-free plan that lets you put aside money regularly and invest it to help grow the tuition pot – the majority of students will need a loan. 

According to Education Data Initiative, 92.8 million Americans have had student loan debt at some point, while Forbes states that 55% of students from public four-year institutions had student loans, and 57% of students from private non-profit four-year institutions took on education debt.  

Are there different types of student loans? 

Not all student loans are the same. There are two different types– a federal loan and a private loan.  

As the names suggest, federal student loans are from the government, whereas private student loans come from private entities such as banks, credit unions, online lenders, or other financial institutions. 

There are some key differences between federal and private student loans: 

Federal student loans             

  • Fixed interest rate         

  • Based on financial need           

  • Flexible repayment plans         

  • Deferred interest payments while in college and for six months after graduation        

Private student loans

  • Fixed or variable interest rates

  • Not based on financial need

  • Less flexible repayment plans

  • Usually, there’s no grace period and no option for deferment

Federal loans are available through the U.S. Department of Education. They are the largest provider of student aid. According to Federal Student Aid, the federal student loan portfolio totals over $1.6 trillion, owed by about 43 million borrowers.  

What are the 4 types of student loans?

There are four different federal loan options available depending on your financial need: 

  • Direct subsidized loans: These are available to undergraduate students who demonstrate financial need. The amount you receive will depend on your school year and whether or not you are financially independent of your parents. You do not accrue any interest on a direct subsidized loan while you’re in school or during periods of deferment. You will start replaying the loan and be charged interest six months after graduation.  

  • Direct unsubsidized loans: These are available to undergraduate, graduate, and professional students regardless of financial need. Students start accruing interest as soon as they receive the loan, and the loan must begin to be repaid six months after graduation.  

  • Direct PLUS loans: These are available to graduate and professional students and parents of dependent undergraduate students. It covers the costs other financial aid doesn’t, accommodation, for example. A credit check is required if you want a PLUS loan. Interest starts to accrue as soon as they receive the loan, and the loan must begin to be repaid six months after graduation. 

  • Direct consolidation loans: This option lets you combine multiple federal student loans into one loan with a single loan provider and interest rate. You pay one monthly amount and have the option of numerous different repayment plans.  

How much can you borrow with a student loan?

The amount you can borrow in federal student loans varies depending on your standing. 

According to Federal Student Aid, if you are an undergraduate student, the maximum amount you can borrow each year in Direct Subsidized Loans and Direct Unsubsidized Loans ranges from $5,500 to $12,500 per year. 

If you are a graduate or professional student, you can borrow up to $20,500 yearly in Direct Unsubsidized Loans. You can also use Direct PLUS loans for the remainder of your college costs. 

If you are a parent, you can receive a Direct PLUS Loan for the rest of your child’s college costs not covered by other financial aid. 

Private loans are typically more expensive than federal loans. Their terms are to the chosen provider, meaning interest rates and repayment plans vary.  

A good credit score will go a long way in securing the best terms. However, to secure a private loan, undergraduates generally need a co-signer.  

How do you apply for a student loan? 

When applying for a federal student loan, you start with the FAFSA. The Free Application for Federal Student Aid (FAFSA) is a series of questions and documents you must fill out to see if you qualify for student aid and how much you qualify for.  

With the information you provide, the FAFSA determines your Expected Family Contribution (EFC), which details how much student aid you are eligible to receive. It’s important to note that by the 2024-2025 school year, the EFC will be renamed to the Student Aid Index (SAI). 

Once you are accepted to colleges, the financial aid office at your college will send you an award letter detailing how much student aid you will receive. 

This is done by subtracting your EFC from their cost of attendance (COA), including tuition, fees, on-campus accommodation, and other expenses. You can then respond to your letter and accept or reject your offer.  

Private loan applications vary by your provider. However, most require your financial and school information, intended graduation date, and how much money you need.   

Get expert financial advice

Whether you’re wondering how to take out or repay your student loans, it’s wise to seek expert advice. 

Financial advisors are on hand to provide advice and guidance by taking the time to learn all about your situation and create a tailored plan to meet your financial goals.  

We can connect you to a trusted financial advisor tailored to your needs.

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Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.

Need help with your finances?

A financial advisor can help you create a financial plan to reach your goals.