Student Loans 101: Understanding the Types of Student Loans

4 minute read

Understanding Student Loans

Paying for college involves many questions, and for most students, the biggest concern is affordability. A common strategy involves a mix of working, financial aid, scholarships, and student loans.

Remember to always use all available "free money" first, such as grants and scholarships. Then, student loans can help cover the gap between your financial aid and the total cost of college.

To ensure you can repay your loans, it’s essential to research and borrow wisely. So, how do you find the right loan? This Paying for College 101 Guide has everything you need to know.

Student loans are divided into a few categories, but the two main types are private and federal. Private student loans are offered by banks, credit unions, state agencies, non-profit lenders, and other private organizations, with terms and conditions set by the lender.

As the name suggests, federal student loans are offered by the U.S. government and have specific, legally defined terms and conditions. Because they are backed by the government, some types—such as subsidized and unsubsidized loans—may offer lower interest rates.

What is the Difference Between Federal Subsidized and Unsubsidized Loans?

Subsidized federal student loans (also known as Direct Subsidized Loans) are available to undergraduate students who demonstrate financial need through the Free Application for Federal Student Aid (FAFSA). The federal government pays the interest on the loan while the student is enrolled at least half-time. A six-month grace period also applies after a student leaves school before repayment begins.

Unsubsidized Student Loans:

In contrast, unsubsidized loans (Direct Unsubsidized Loans) are available to both undergraduate and graduate students, regardless of financial need. Borrowers are responsible for all accrued interest, including while in school. Repayment begins after the six-month grace period.

How Do Student Loans Work?

Whether from a private or federal lender, a student loan is money borrowed to help pay for school. The funds are sent directly to your school to cover costs. Over time, you must repay the borrowed money with interest. The interest you pay is a percentage of the money you borrowed. This fee is added to your payments and compensates the lender for their services and financial risk.

How Do Federal Student Loans Work?

After submitting the FAFSA, your college or university will send you a financial aid offer that includes federal student loans you may be eligible for, along with grants, scholarships, and work-study options. Contact your school's financial aid office for more information but remember you are not obligated to accept the entire loan amount offered.

How Do Private Student Loans Work?

Private loans can be valuable tools in helping students and families bridge the gap between their financial aid and the cost of attendance at their school. Private student loans are based on the cost of attendance at your school, minus any other financial aid (including any federal student loans you may have received). Given the federal loan limits, many students find that they need to supplement with private loans to cover the full cost of college. You will need to apply for each student loan individually through the provider.

Many private student loans are available, and they are not all created equal. For example, the NC Assist Loan offers competitive fixed rates and does not charge fees. Compare carefully to find the loan that works best for you. 

FAQs About Student Loans

Do You Have to Pay Back Student Loans?

Like a car or home loan, student loans must be repaid. Defaulting can negatively impact your credit history and your ability to secure future loans. Scholarships and grants, however, do not need to be paid back.

How Is Interest Calculated on Student Loans?

Interest begins to accrue on the day the loan is disbursed to you. Interest accrues daily at the agreed-upon interest rate and is added to the principal balance. Use our student loan calculators to estimate what monthly payments could be based on your borrowing needs.

Apply for Your NC Assist Loan to Bridge the Gap for College

While student loans can feel daunting, having a clear plan can help alleviate stress. NC Assist Loans are provided by the College Foundation, a North Carolina non-profit lender dedicated to helping students afford and succeed at college. With competitive fixed rates and no fees, NC Assist offers a strong option for bridging the gap in college costs.