An Easy to Read Beginners Guide to Student Loans

I finished paying off my Private student loan (Thank Goodness) shortly after I graduated college. But even with the quick payoff, I was completely shocked at how much interest had accrued during the 3 short years I was finishing college.

When I had first taken the loan out I knew that it was important to exhaust all other resources before even considering a private loan. I knew the interest alone was killer. Unlike some federal loans the interest begins accumulating immediately. (Yeah they wasted zero time 🫠)

However, because of some unforeseen circumstances, I was forced to either take a semester from school, pay tuition out of pocket or take out a private loan. I excluded the first two options rather quick considering I refused to take a semester off and there was no way I had that type of cash to pay out of pocket. This left only one option— private student loans.

If you found your financial footing early enough you can avoid being in this predicament altogether since you will have all the tools to properly acquire the capital necessary for higher education. 

But for those of you without another option, here is a complete explanation of the types of student loans you can take out to get you through college. And best practices for paying it off fast. 

How Do Student Loans Work?

Student loans are, in its most basic form, money lent to you to pay for your education. You apply, you’re approved (denied —ouch), and you use the money to pay for your tuition, books, room and board, and basically anything else you would need to get through college. 

Federal vs. Private Student Loans: How Do They Differ?

The primary difference between Federal and Private Student Loans lies in their terms and sources. Federal loans, backed by the government, generally offer lower, fixed interest rates and more flexible repayment options, including income-driven plans and potential for loan forgiveness under certain conditions. On the other hand, private student loans are provided by banks, credit unions, and financial institutions. 

They may have variable or fixed interest rates, usually determined by your credit score. While private loans can offer more substantial loan amounts, they often come with higher costs and lack the protective features of federal loans. Understanding these differences is crucial in making an informed decision about financing your college education. 

Read Next: Student Loan Forgiveness Explained

Federal student loans are the go-to. They’re easier to get, easier to pay off and they cost wayyyy less (typically). Here’s the breakdown. 

What Types of Student Loans Are There?

There are three main types of student loans; federal subsidized, federal unsubsidized and private student loans? 

None are ideal but if you’re going with the less of three evils—The order is:

1. Federal subsidized
2. Federal unsubsidized
3. Private 

Here’s why…

Federal Student Loans Explained 

There are 2 major types of loans and some subcategories to each of them. The first is federal loans. These are distributed by the federal government and are usually awarded through the Federal Government or your institution. There are three subcategories to federal loans; The Stafford, Perkins or Plus loans. Let’s get into Stafford loans first. 

What is the Stafford loan?

Stafford loan is a federal subsidized or unsubsidized student loan and generally the most common. It is awarded to most students attending an accredited American institution and holds a low interest rate. Basic requirements are; be a U.S citizen, Non Resident or qualified Non resident. Check all qualifications Here, and scroll to the bottom of this post to see all the most up to date interest rate amounts. 

What is a subsidized student loan? 

This is a term that means the federal government will cover your interest while you are still attending college. You won’t start accruing interest until your payments begin, usually 6 months post graduation.

What is an unsubsidized student loan? 

Unsubsidized is the exact opposite, the interest on the loan begins accruing immediately and even though your payments don’t begin until 6 months post graduation, your interest increases your loan payoff amount while you are still attending college

You can see how these loans can add up fairly quickly! You take a loan out for say $3,800 and by the time you graduate you’ve accrued $1000 in interest = $4,800 Total!

Now let’s talk other loans, the Perkins is up first. 

What is the Perkins loan?

 The Perkins loan is another subsidized student loan, your school is the lender for this loan and usually holds a 5% interest rate. To qualify you must be in good standing with your institution, attending as a graduate or undergraduate, and be enrolled at least half time 

(6 credit hours for most universities). 

Stafford versus Perkins loan: What’s the difference? 

The major difference between the Stafford and Perkins is that the Stafford is offered to any student, the Perkins requires you prove financial need. This is usually done by your parents tax bracket and income tax returns.

Now let’s talk about the PLUS loan 

What is the PLUS loan?

The PLUS loan translates into- Parent loan for undergraduate students. Pretty self explanatory, this is not actually a loan that you yourself can take out but it is through your parents. Meaning your parents accept responsibility for repayment, it is their credit and their name.

How do I get a PLUS loan as a student? 

You apply for this the same way you would other loans, using FAFSA. These tend to hold higher rates than the other federal loan options mentioned above and a private loan may be a better option for a parent wanting a better rate. 

Private loan options explained 

The second option for funding your tuition is through private loans. These are NOT federally funded. Instead a private lender, such as a bank,  will be loaning you the money. 

Maybe you've heard of some popular institutions such as Sally Mae or Wells Fargo. 

To apply for Private loans you contact the institution directly. 

A Word of caution: The private loan option tends to be better for parents than students because of your lack of credit. To a lender we are high risk. (This is why I took out one and only one. )

Since I didn’t have a family member that could take it out for me I had to put it in my name, which at the time didn't have a history of credit utilization. This isn’t a bad thing it’s actually expected when you’re under 25. You haven’t been in the working world long enough to have a long credit history. But it stinks when you need a student loan and have no option for federal aid. 

So what do banks do to “high risk” lenders?…. They tack you with higher interest and variable rates.

Variable interest rates, is a fancy way of saying it will start at this rate (ex: 8.65%) but “can” raise up to a high rate (ex:12% +) depending on the market.. Assume it will rise because 99.9999% of the time it does.

Why is this a bad thing?  

Well one year you may pay $200 in interest and the next you pay $500...It’s not fun and it gets pricey.

Example of variable interest on private student loans gone bad

I took my private loan out for $3,865 and the payoff after 3 years was $5,002.21 (excuse me while I cry).

 That was because my interest rate was going up on top of interest accruing on the principal balance. 

This would've ended up costing me close to $9,000 in repayment had I waited until the 5-year payoff date and paid on it monthly like it’s so conveniently set up.

That’s almost triple my original loan amount. Thankfully I paid a lump sum and was done with it. 😮‍💨

How to payoff student loans fast

Ready to pay off those loans with quickness? It’s possible—not easy— but definitely possible. It all comes down to one thing.

How bad do you want it? --Seriously, that's it. Are you wanting to live under a crushing amount of debt that you spend the next ten years (or more) slowly crawling your way through the payoff? Not to mention you’ll be paying way more in interest. 

Sound like a bad idea? Yeah it did to me too. 

Then here’s how to get it done. 

4 steps to pay off your student loans super quick

1. Keep acting as a broke student
2. Don’t buy that car
3. Automate
4. Save, save, save 

Step one: keep acting as a broke college student

You’ve been living as a broke college student for this long right? Just keep it going for another year. 

Stay renting that cheap bedroom, move back in with your parents, couch surf. (Sucks, but hear me out). One of the biggest expenses that comes with adulting is living expenses. 

So just keep it cheap. Live like you’re broke. I don’t care if you graduated and you got a great paying job right out of college— that money will go so much further if you don’t have an apartment or condo or house payment. 

Suck it up and live broke. 

Step two: Don’t buy the car

One of the biggest money pits I’ve seen my generation throw themselves into is that of an overpriced auto loan. 

It’s tempting, I know. You’ve spend the last 3-4 years struggling to pay for school, balancing your studies and finally you get your first adult job with adult pay and you soooo badly want to give in. 

But fight the urge. Cars are liabilities. Plain and simple. If you’re not putting a considerable amount down when financing a car, then you drive off the lot with a vehicle that is worth less than the loan you paid for it. 

Step three: Automate

Automate your savings. Both for your retirement and your emergency savings. 

I’d your employer offers a 401-k plan, opt in. If they offer a match (even better) take advantage and match it to the max. 

For emergency savings (or savings of any kind), have that amount drafted from your account automatically every month or pay period to prevent temptation. . 

Out of sight, out of mind. 

Step four: Save

Speaking of automating your savings— save as much as possible. If you’re willing to commit to steps 1-3 then saving should be a breeze. 

But the quicker you save, the quicker you can unload debt and give yourself the breathing room you need to achieve financial freedom. 

Take this with a grain of salt— the term “money doesn’t buy happiness”, is a fat lie. 

Money very much buys happiness if happiness is health, freedom, security, and peace of mind. Anyone who thinks otherwise is likely supplemented by someone else’s money. 

That being said the quicker you get a handle on yours the happier you’ll be.