If you’re thinking about taking out a student loan to help pay for college, you might be navigating the loan process for the first time and encountering a lot of questions, number one on your list being: How do student loans work?
Student loans are a very common and oftentimes necessary way to cover the costs of college. In a 2025 survey, College Ave found at least 54% of college students have some form of student loans. Student loans make it possible for many people to attend college, which can open doors and opportunities for years to come.
Whether you’re a student or the parent of a student, you’ll want to understand exactly how student loans work, so you can find the student loan that’s right for you. We’ll cover a few of the student loan basics here.
What is a Student Loan?
A student loan is money that you borrow to help pay for school with the expectation that you will pay that money back in the future. Student loans are used to help bridge the gap between different types of financing for college. Student loans don’t differ all that much from other types of loans. The basics are the same – you will be required to pay back what you borrowed plus interest. However, the process of obtaining and repaying a student loan does have some unique attributes and requirements, like enrollment, that other loans do not have
The Types of Student Loans
Students have two main options when it comes to student loans: federal student loans, which are issued by the government, and private student loans, which are issued by non-government entities, like banks and other financial institutions.
Federal Loans
Federal loan options include Direct Subsidized, Direct Unsubsidized Loans, and Direct PLUS loans.
- Federal Direct Subsidized Loans are available to undergraduate students whose families demonstrate financial need. These are the only federal student loans in which interest does not accrue while the student is enrolled in school at least half-time (or during the student loan grace period following graduation – typically six months).
- Federal Direct Unsubsidized Loans are not awarded based on financial need and they are available to most undergraduate and graduate students. Interest will begin accruing at the time of loan disbursement.
- Federal Direct PLUS Loans are available to graduates and parents of students. Interest begins accruing at the time of loan disbursement.
There are annual and lifetime limits for Direct Subsidized and Unsubsidized loans, however, so students might not be able to cover the full cost of college with these federal loan options.
Once a student reaches the limit on Direct Subsidized and Unsubsidized Loans, in most cases they can access Direct Grad PLUS.
Direct PLUS Loans have higher interest rates and higher origination fees than Direct Unsubsidized and Subsidized Loans. Parent PLUS loans are loans parents can take out to help pay for their child’s college.
Important Tip: Recent changes to federal loans have impacted PLUS loans. Direct Grad PLUS loans will be ending in July 2026 and new annual and lifetime limits will be added to Parent PLUS loans. Read more about these changes and how they may affect your college funding here.
Private Student Loans
Private student loans have different terms depending on the lender. Unlike federal student loans, private student loans typically require applicants to pass a credit and income review to qualify.
Because most students don’t yet have enough credit history or steady income to qualify on their own, private student loans are often cosigned by someone like a parent or guardian who can meet the criteria and take equal responsibility for repayment. The loan will appear on the credit bureau report for both parties – the student and the cosigner.
Our credit pre-qualification tool allows borrowers or cosigners to find out if their credit qualifies them for a loan, and what interest rates they can expect.
- Learn more about the difference between federal vs. private student loans.
- Learn more about cosigners for private student loans.
How Do Student Loans Work?
Your student loan might be the first loan you’ve ever pursued or received, so keep in mind that it’s not just how much you borrow – it’s how much that amount costs overall.
Student Loan Interest Rates
One of the most important components of any loan that directly affects its long-term cost is the loan’s interest rate. An interest rate is, essentially, the cost of taking out your loan. It is calculated as a percentage of the amount you borrow and added on to your loan.
A student loan can have one of two types of interest rates, A fixed interest rate will not change for the life of a loan, while a variable interest rate can change with the market.
Interest rates for federal student loans are fixed. Private student loans, usually offer a choice of a fixed or variable interest rate. Interest rates will differ depending upon the lender and your creditworthiness, so ensure you compare different lenders as you shop around for private student loans.
It is also important to understand how interest accrues throughout the life of the loan. Student loan interest is typically calculated using simple daily interest—which means interest accrues on your loan every single day based on your outstanding principal balance.
Interest on loans also gets capitalized, which is when unpaid interest gets added to your loan’s principal balance — meaning you’ll eventually pay interest on a larger amount. This typically happens after your grace period ends, after a deferment or forbearance, or on unsubsidized federal loans if you don’t make payments while in school. This is one of the reasons it is helpful to exhaust your subsidized loan options before considering other loans.
Student Loan Origination Fees
You’ll also want to be aware of loan origination fees, which are one-time fees charged when you initially take out your loan. The percentage will vary based on the type of student loan and lender. For federal student loans, the origination fee ranges from 1.057% to 4.228% of the amount you’re borrowing and can change from year to year. Many private student loans, including those offered through College Ave, don’t have origination fees, but that’s not a hard and fast rule.
When charged, an origination fee is usually subtracted from the loan amount before the funds disburse, so you typically pay the fee as part of the loan.
Student Loan Repayment Term
Your student loan repayment term is the amount of time you will take to repay the loan. It can vary greatly depending on what type of student loan you take out. The standard repayment term for federal loans is 10 years. Typical repayment terms for private loans range from 5 years to 15 years. Be sure you understand what your loan term is before taking out a student loan.
When Do I Start Paying Back My Student Loan?
How and when you repay your student loan depends on the type you take out. . Repayment terms on student loans vary based on the type of loan. Federal student loans are often designed to be paid off within 10 years, whereas private student loans might differ based on the lender’s terms.
Students usually won’t have to begin making their federal student loan payments until six months after graduation (or if they drop below half-time status). That said, you always have the option to begin making payments while you’re still enrolled in school.
Many private lenders also offer the option to delay payments until after school, and some, like College Ave, offer in-school repayment plans, too. If you can begin making payments during school — even small ones — you’ll usually save money in the long run because you’ll pay less in interest charges.
How Much Will I Owe on My Student Loan Each Month?
Monthly student loan payments vary from borrower to borrower. They’re typically based on how much you borrow, the interest rate you receive, and how long your repayment period lasts. If you’d like to estimate your monthly payments, a student loan calculator can help you run the numbers based on your specific situation.
Once it’s time to begin making monthly payments, lenders commonly offer the option to enroll in automatic payments, which allows your monthly payment to be regularly debited from your bank account. This can be a convenient option since you’ll never have to worry about missing a payment. As a bonus, you’ll often get a reduction on your interest rate for setting up auto-pay.
If you’re looking to cut down on interest costs, you can always make more than the minimum required payment each month. Even if you’re unable to pay off your loan in full before the repayment period is up, any little bit beyond the minimum can help – especially when you’re talking long-term.
Just be sure your lender won’t charge you a penalty fee if you pay your loan off early. While that type of fee is not common with student loans, it’s always a good idea to confirm.
Choose the Right Student Loan for You
Navigating student loans for the first time can feel overwhelming—but it doesn’t have to be. By understanding how borrowing, interest, and repayment work, you can take control of your college finances with confidence. Whether you’re just starting to research or are ready to apply, the right information can help you make the best decision for your future.
Ready to take the next step? Explore College Ave’s student loans and find the loan option that fits your budget and goals.
About the Survey
The College Ave survey was conducted by Barnes & Noble College Insights™. The national online survey of undergraduate students who attend a 4-year college or university at one of the campuses served by Barnes & Noble College had 1,060 respondents and was fielded in February – March 2025. Last year, Barnes & Noble College Insights conducted more than 50 research studies and 100+ survey polls of students, faculty and parents that interact with one of its more than 770+ campus bookstores across the nation.
