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    How Do Student Loans Work? Everything You Need to Know

    By Cait Williams

    Cait Williams is a Content Writer at Scholarships360. Cait recently graduated from Ohio University with a degree in Journalism and Strategic Communications. During her time at OU, was active in the outdoor recreation community.

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    Reviewed by Caitlyn Cole

    Caitlyn Cole is a college access professional with a decade of experience in non-profit program and project management for college readiness and access organizations.

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    Edited by Maria Geiger

    Maria Geiger is Director of Content at Scholarships360. She is a former online educational technology instructor and adjunct writing instructor. In addition to education reform, Maria’s interests include viewpoint diversity, blended/flipped learning, digital communication, and integrating media/web tools into the curriculum to better facilitate student engagement. Maria earned both a B.A. and an M.A. in English Literature from Monmouth University, an M. Ed. in Education from Monmouth University, and a Virtual Online Teaching Certificate (VOLT) from the University of Pennsylvania.

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    Updated: November 30th, 2023
    How Do Student Loans Work? Everything You Need to Know

    Student loans can be an intimidating thing to think about. You probably know the general idea of what loans do, but how do they actually work? How do you pay them back, and how long does that even take? In this article, we’ll cover all the basics of student loans and provide you with a solid base of information that you can move forward with. While it all might be a lot to comprehend at once, we hope you’ll refer back to this guide whenever you need a helping hand or have any further questions about student loans!

    A brief overview…

    Before we jump into all of the tiny details, let’s just talk briefly about the basics of student loans. Student loans are money that students take out to pay for things like tuition, room and board, books, and other educational expenses while they are in college. Most students submit the FAFSA to get access to “free money” (such as grants), and to access federal student loans. There are also some private student loans options that are available. Regardless of loan type, students will then typically repay these loans after they graduate college and begin working. 

    Terms and definitions

    Now let’s talk about some terms you will come across in your student loan research. We’ve put these terms at the beginning of our article to serve as a bit of a guide within our guide. Be sure to reference back to this if there is a term further along in the article that you are confused about, or anytime in the student loan process. 

    Subsidized loans 

    Interest does not accrue on this type of loan while you are in school or during times of deferment 

    Unsubsidized loans

    Unsubsidized loans will accrue interest during all periods that you have them

    Private loan

    A private loan is simply a loan not given to you through the federal government, but rather through a private lender

    Federal loan

    Federal loans are loans granted to you by the government after you have filed the FAFSA

    Principal loan

    Your principal loan is the amount of money that you agree to initially take out, this is a general term that you’ll find with both private and federal loans


    Refinancing is the process of changing the terms of your loan. This can mean switching your loan to another lender or agreeing to a new set of terms with your current lender


    Consolidation is the process of combining multiple federal loans to form one single loan that you can pay on

    Fixed interest rate

    A fixed interest rate means that the interest rate will not change throughout the entire life of the loan

    Variable interest rate

    A variable interest rate may change several times throughout the life of the loan

    Applying for student loans and the FAFSA

    The first thing you should know is how to apply for student loans. The only way to receive federal student loans is to fill out the FAFSA. Luckily for you, we have a whole guide about how to fill out this year’s FAFSA! Filling out the FAFSA can take time. Ask your parents to sit down with you and fill it out, as many of the key questions will focus on what your parents taxes and annual income look like. 

    You’ll be able to share your FAFSA application with the schools you are applying to. They will then be able to assess the financial aid they can offer you to attend their school. Keep in mind that the FAFSA application will not grant all students the same amount of money as every situation is different.

    Student loans you may receive 

    Let’s talk now about the type of student loan you may receive. As we mentioned above, there are two channels through which you receive your loans. If you filled out the FAFSA, those will be federal loans. If you borrow from a private lender, those are private loans. You’ll want to prioritize looking at federal loans before taking out any private loans as federal options have better terms, interest rates, and repayment plans.

    Federal loans

    There are  several types of federal loan options:

    Because all of the loans above are federal loans they will all have set interest rates and maximum amounts that you can borrow. For a detailed look at these different types of federal loans, you can check out our article about them and what the Federal Student Aid website has to say about them!

    Private loans

    Private loans are not broken down the same way that federal loans are. Many of the details about private loans are decided on an individual basis. There are lots of private loan options out there that you should look at before officially taking any out. It’s important to compare the details of different private loans to make sure you’re getting the best possible option!

    Related: What are the differences between scholarships and student loans?

    Interest rates

    Okay, the next big thing on the docket to talk about is interest rates. Interest rates are how the lenders you are borrowing from make money. Interest is basically the price you pay to borrow money.

    Federal rates

    You will not have a choice as to whether you’d like variable or fixed interest rates. All federal loans have a fixed interest rate that will be set yearly for anyone who takes out a federal loan. This means that if you take loans out during multiple years, each loan will likely have its own different interest rate. You can always view the most current interest rates for federal loans on the Federal Student Aid website.

    Private rates

    If you take out private loans, you and your lender will agree on an interest rate when you take your loan out. This interest rate may be considered fixed or variable. There can be pros and cons to both types of interest. It’s up to you to do your research and decide what you are comfortable with when you take out your loans.

    How interest accrues

    In addition to your interest rate, it will be important to understand how your interest accrues, or adds up. If you are making monthly payments on your loan, the interest may accrue daily and become part of your monthly payment. However, private loans may function differently. This is just one more point that you should talk with your lender about before taking any loans out.

    Refinancing and consolidation

    Refinancing and consolidation aren’t things that you will need to deal with when you first take out your loan, but they certainly may be things you deal with in the future when you are paying back your loans. So, let’s just make a few things clear right now.

    • Federal loans are able to be consolidated, meaning that if you have multiple federal loans, you may be eligible to combine them. Doing so may lead to a lower overall interest rate
    • Federal loans can only be refinanced through a private lender. This means that your loan will move from a federal loan to a private loan, which has its pros and cons
    • Refinancing and consolidation with private loans is something that you should discuss with your lender before taking any loans out as various lenders may have different rules 

    What you use student loans for

    Knowing what to use student loans for can be a huge help in determining if you need to take them out in the first place. The main things student loans are used for are:

    Take a close look at your budget and what aid you may already have, such as scholarships and grants. Then speak to your parents, school counselor, or financial aid counselor about the leftover total you may have that still needs to be covered. In some cases, if your total is low enough, your parents may be willing to loan you money. You may be able to work while you are in school to cover the remaining balance instead of having to take out federal or private loans. 

    Timeline for repaying student loans 

    Let’s talk for a minute about how long it generally takes to pay off student loans, what happens if you don’t pay student loans back, and what it looks like if you don’t finish your degree. 

    Repayment timeline

    Paying back student loans can take between 10 -30 years, but as we said, there are many options for repayment, which may affect how long your payments last.

    Missed student loan payments

    You are responsible for keeping track of your repayment responsibilities and should set up a consistent reminder for yourself to pay your loans. However, if you’re paying student loans off over a long period of time, it’s possible that you may miss a payment. If you are beginning to consistently miss payments, that may be something you should speak to someone about. If you miss too many student loan payments you will enter something called default, which can have serious consequences. 

    Dropping out or taking time off

    Unfortunately, even if you don’t finish your degree or you take time off, you will still be responsible for repaying your student loans. Before taking out loans, it’s a good idea to ask what these situations would look like if either were to happen to you.

    Student loan repayment programs 

    Going over every type of repayment plan available is a lot and we have a whole other article available for you on our website about that topic. So, for now, we will just give you the brief list of repayment options available to you to give you a place to start.

    You should also look into things like the Public Service loan forgiveness program and other loan forgiveness programs to help pay off your loans!

    Borrowing as an independent student

    Unfortunately borrowing as an independent student is a rare occurrence for students under the age of 24. There are some ways that you can be classified as an independent student, but it can be a tricky process. If you think you may qualify to file as an independent student, be sure to look into it in more depth, as filing as an independent student can greatly impact the aid you receive. We know it can be difficult to complete the FAFSA, especially if you have parents who haven’t filed their income tax returns, or if you are mostly supporting yourself. This is why we highly encourage you to start the process early and be on top of things as best you can! 

    Student loan scams

    Before we wrap up this article, we can’t leave without saying a quick word about student loan scams because unfortunately, they do exist. It should go without saying, but never give your information to any parties that you’re unsure about. You can rely on the FAFSA application to be a secure site to enter sensitive information, but you shouldn’t inherently trust any others. 

    In addition to scams that apply to taking out student loans, you should be on the lookout for any student loan forgiveness scams. If you’re looking for more information on student loan forgiveness, that information is free and readily available to you through your loan provider. You should not need to contact any third parties or pay anyone to receive that information. 
    Other than that, be wise when looking for ways to take loans out and pay them back. Seek help when you need it from your schools financial aid office or trusted websites like the Federal Student Aid website.

    Wrapping up

    We know this article was a lot. So, before we close, just know that you are not alone in the student loan process, every student has questions about student loans and that’s okay! Pursuing a higher degree of any sort is something you should be proud of yourself for doing! Keep going and feel free to come back to this guide whenever you need it! While you are planning on how to fund your education, don’t forget to apply for all the scholarships you qualify for!

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    Next Steps

    Next Steps

    • Whether you’re applying for student loans or not, your first step when thinking about help with paying for school should be to fill out the FAFSA
    • Your next step should be to evaluate any of the grants that you’re eligible for as well as any scholarships. Be sure to exhaust all the resources you won’t need to pay back  before taking out loans that will need to be repaid 
    • Once you know the remaining cost of school that you can’t cover with scholarships, grants, or other funding, carefully explore what your loan options are
    • We know that student loans can be a lot, so don’t forget to also take a breath and give yourself a break throughout the process
    Next Steps

    Frequently asked questions about how student loans work

    Is it worth it to take out student loans?

    Whether it’s worth it or not to take out student loans depends on each individual situation. You should first exhaust all your other options for aid that don’t need to be paid back; think scholarships, grants, or even an income share agreement. Then, take a look back at the list above that goes over what student loans are meant to pay for. Assess what areas you may need extra financial help in and speak with your parents or someone who knows your financial situation about what their thoughts are.

    Why is it hard to pay off student loans?

    Student loans can be difficult to pay off for many different reasons. You may have a large loan amount to pay back, maybe you can only make minimum monthly payments because you are making less than expected, or maybe your interest rates are making it difficult. However, paying off your student loans is possible and you shouldn’t become overwhelmed thinking about how long it might take you. Do your best to be on top of your monthly payments, and when possible, make larger payments to help lower the overall amount faster.

    Do student loans affect credit scores?

    Yes, it is possible for student loans to affect your credit score. Usually a student loan that you take out and then pay monthly should not have any negative effect on you. In fact, making on time payments slightly above your minimum payment amount consistently actually has a positive effect on your credit score. When a loan can negatively affect credit score is when you begin to miss payments or enter something that is called default.

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