Student loans are a form of financial aid designed to help students pay for college or other post-secondary education. Here’s a breakdown of how they work:

Types of student loans

Federal student loans
  • Offered by the government
  • Generally have lower interest rates and more flexible repayment options
  • Types include:
    • Direct Subsidized Loans (for undergrads with financial need; interest is paid by the government while you’re in school)
    • Direct Unsubsidized Loans (interest accrues while you’re in school)
    • PLUS Loans (for grad students or parents)
    • Perkins Loans (older program, mostly phased out)
Private student loans
  • Offered by banks, credit unions, or other lenders
  • Interest rates and terms vary
  • Usually require a credit check or co-signer
  • Less flexible repayment and forgiveness options

Getting the loan

  • Federal loans: Apply by filling out the FAFSA form each year.
  • Private loans: Apply directly through the lender, usually with a credit check.

While you’re in school

  • Subsidized loans: No interest while enrolled at least half-time
  • Unsubsidized/private loans: Interest accrues
  • You usually don’t have to start repaying until after you graduate or drop below half-time enrollment.

After graduation (repayment)

  • Grace period: Usually 6 months after graduation before repayment begins
  • Federal loan repayment options:
    • Standard (10 years)
    • Graduated (payments increase over time)
    • Income-driven (payments based on your income)
    • Public Service Loan Forgiveness if you work in public service
  • Private loans: Repayment terms vary, often less flexible

Interest and capitalization

  • Interest accrues over time.
  • Capitalization: Unpaid interest may be added to the principal, making your loan more expensive over time.

Default and consequences

  • Federal loans default after 270 days of missed payments
  • Consequences: damaged credit score, wage garnishment, loss of eligibility for further aid
  • Private loans may default sooner and have harsher consequences

Repayment tips

  • Start paying interest while in school if you can
  • Consider making extra payments to reduce interest
  • Refinance only if you’re sure you’ll get better terms

Student loans are meant to be used for education-related expenses, but there’s some flexibility. Here’s a breakdown of what you can and cannot use student loan money for:

What you can use them for

Direct education costs
  • Tuition and fees
  • Room and board (on-campus or off-campus housing, rent, meal plans, groceries)
  • Books and supplies (textbooks, notebooks, lab materials)
Technology
  • Laptop, software, internet access (if required for school)
Transportation
  • Public transportation, gas, car maintenance (if needed to commute to school)
  • Not for buying a new car, though.
Personal and health expenses
  • Health insurance (if required by your school)
  • Dependent care (if you have kids and need childcare to attend class)
What you can’t use them for
  • Vacations or travel unrelated to school
  • Shopping, clothes (unless required for school, like uniforms)
  • Dining out or entertainment
  • Buying a car
  • Investing or paying off other debt (like credit cards)

How it works in practice

When your loan is disbursed:

  1. The school takes what’s needed for tuition and fees.
  2. The leftover amount (“refund”) is sent to you, usually by direct deposit or check.
  3. You’re expected to use the refund for eligible expenses.

Even though it’s hard to track exactly how you spend the refund, misusing it can get you in trouble. That’s especially true with private loans or if you get audited for federal aid compliance.

Pros of student loans

Access to higher education
  • Without loans, many students couldn’t afford college
  • Allows you to invest in your future earning potential
Flexible repayment (for federal loans)
  • Income-driven repayment plans based on what you earn
  • Options to defer or pause payments during hardship
Credit building
  • Paying on time builds your credit history, which helps with renting, buying a car, or getting a mortgage later
Loan forgiveness options
  • Federal loans offer programs like:
    • Public Service Loan Forgiveness
    • Teacher Loan Forgiveness
    • Income-Driven Repayment Forgiveness after 20–25 years
Lower interest rates (federal loans)
  • Fixed, relatively low interest compared to credit cards or personal loans
  • No credit check for most federal loans

Cons of student loans

Debt burden
  • Monthly payments after graduation can be large and stressful
  • May limit life choices (like buying a house or starting a business)
Interest adds up
  • You often end up paying much more than you borrowed, especially with unsubsidized or private loans
Long-term commitment
  • Repayment can take 10 to 25 years, depending on your plan and loan size
Not easily discharged in bankruptcy
  • Student loan debt is very hard to erase in bankruptcy, unlike most other debt.
Risk of default
  • Missing payments can wreck your credit and lead to wage garnishment or tax refund seizure.

Bottom Line

Good choice if:
Not a good fit if:
  • You need help to afford school
  • You can cover costs with grants, scholarships, or savings
  • You’re confident in your degree’s earning potential
  • You’re unsure about finishing school or the job market in your field
  • You qualify for federal loans (especially with subsidies)
  • You’re relying heavily on private loans with high interest rates

Check out other money tips for college students here and how to teach kids about money here.