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, for an additional six-month period after earning a degree. This deferment period is also referred to as a “grace period.”

How an Education Loan Works

Education loans are issued for the purpose of attending an accredited college or a university to pursue 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 (meaning the United States Department of Education pays the interest on the loan while a student is in college at least half-time).1 Private-sector loans generally follow more of a traditional lending process for applications, 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).

2 Depending on the applicant’s status, particularly in regard to their parental dependency, additional 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.

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.

What type of debt are student loans?

Student loans are considered unsecured installment debts, meaning there isn’t a physical asset tied to them, and they’re paid back in a set number of installments over an agreed-upon period of time.

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