How Do Student Loans Work?

Student loans are typically offered by lenders such as Discover or by the federal government. Unlike scholarships, they have to be paid back once you graduate, with interest.

Federal loans between July 1, 2020 and June 30, 2021 feature record-low interest rates, the lowest since 2005, with just 2.75% on undergraduate Stafford loans compared to 4.53% the previous year.

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In this article

    What you need to know before getting a student loan

    Current student loan interest rates

    Current student loan rates apply to loans first disbursed on or after July 1, 2020, and before July 1, 2021, at the following rates, which fluctuate based on good and fair credit loans.

    Type of LoanBorrower TypeFixed Interest RateLoan fee
    Direct Subsidized Loans, Direct Unsubsidized LoansUndergraduate2.75%1.059%
    Direct Unsubsidized LoansGraduate or Professional Borrowers4.30%1.059%
    Direct PLUS LoansParents and Graduate or Professional Students5.30%4.236%

    Private student loan rates

    LenderFixed APRVariable APRLoan AmountTerm
    College Ave2.99%–12.99%.99%–11.98%$1,000–$150,0005–20 years
    SoFi2.99%–10.90%0.99%–11.33%$5,000–up to full cost of attendance5–15 years
    Earnestas low as 3.34%as low as 1.04%$1,000–up to full cost of attendanceVaries
    Sallie Mae3.50%–12.60%1.13%–11.23%$1,000–up to full cost of attendance5–15 years
    Ascent5.63%–12.46%4.07%–11.32%$1,000–$200,0005–20 years
    Wells FargoVariesVaries$1,000–$250,000Up to 15 years

    *Rates accurate as of September 2021 and exclude autopay discounts.

    Check Your Student Loan Rates

    View our top-rated lenders and find the best rates today. It’s quick and easy.

    How is a student loan different from a scholarship?

    A scholarship is one way to obtain the funds you need to pay for college. Scholarships are typically merit-based, giving financial rewards to those with outstanding academic, athletic or artistic achievements.

    [ More: Student Loan Fact Sheet 2021 ]

    “Unlike student loans, scholarships are free money that does not need to be repaid. Every dollar you win in scholarships is a dollar less you’ll have to borrow,” says Mark Kantrowitz, five-time author and publisher of the FinAid, Fastweb, Edvisors, Cappex and sites.

    However, they can also be extremely difficult to obtain. Of students in bachelor’s degree programs, only one in eight receive a private scholarship, and only for an average amount of $4,200 — a figure that’s woefully inadequate for today’s tuition rates. It’s why scholarships cannot be relied upon to foot the entire bill, but they can absolutely provide an excellent head start.

    Plus, there are many scholarships that could pay for your whole education, but these are much rarer and harder to obtain.

    “So, scholarships are part of the plan for paying for college, but not the entire plan,” says Kantrowitz. “To find private scholarships, use a free scholarship matching service, such as and the College Board’s Big Future.”

    There are other ways to find help. Parents or family members may be able to extend a helping hand with either a financial donation or loan toward your tuition. If you are a member of a local group or organization, it’s possible that that could be an additional outlet for funding. Churches, employers, nonprofits and credit unions are all ways to gain extra private funds for college.

    While there are many options for scholarships, these are some of the most popular moving into 2021.

    Scholarship ProgramOrganizationAmountDeadline to ApplyDetails
    Amazon Future Engineer Scholarship ProgramAmazon$10,000 and paid Amazon summer internship12/21/ 2021High school seniors
    Intended major in computer science, software engineering, computer engineering, or other computer-related fields.Completion of advanced placement computer science course or test
    Davidson Fellow ScholarshipDavidson Institute1st prize: $50,0002nd prize: $25,0003rd prize: $10,00002/10/2021Demonstrate extraordinary accomplishments in a specific field
    The Dream National ScholarshipTheDream.UsUp to $33,00002/25/2021Exceptional DREAMers with significant financial need and demonstrated community service
    Foot Locker Scholar AthletesFoot Locker$20,00001/08/2021High school athletes with demonstrated leadership
    McDonald’s HACER National ScholarshipMcDonald’s$25,000 per year for 4 years02/03/2021High school seniors of Hispanic descent Demonstrated excellence in educational and community leadership
    GE-Reagan Foundation Scholarship ProgramGE-Reagan Foundation$10,000 per year for up to 3 years01/05/2021Students with demonstrated excellence in leadership, drive and integrityRenewable scholarship up to 3 years
    College Board Opportunity ScholarshipsCollege BoardUp to $40,00002/28/2021High school students 
    Ron Brown ScholarshipRon Brown Scholar Program$10,000 per year, for up to 4 years01/09/2021African American high school seniorsDemonstrated commitment to academic excellence, public service and entrepreneurship
    State Farm Companies Foundation ScholarshipState Farm$5,000 per year for 4 years03/31/2021Legal dependents of State Farm employees100 student awards given

    Discover® student loan scholarships 

    When you sign up for emails to get college tips and resources over at Discover, you are given the chance to get a scholarship. If you are eligible, you could be one of 12 students or parents to get a $5,000 scholarship that can be put toward paying for college expenses.

    Work-study programs

    A Federal Work-Study is another way that students can find the funds for tuition. This is a way to earn money with a part-time job on campus. It helps students find guaranteed work placement so they don’t have to arrive at school with the extra headache of having to find a job during classes.

    [ See: Should You Bank on Student Loan Forgiveness in 2021? ]

    Not only does it give you extra money while enrolled, but a work-study could prepare you for your career, too. Many university professors run work-study programs, giving participating students an extra edge on their classmates as they gain hands-on experience and build new, lasting relationships.

    “If you are looking for experience in a particular field to give you a leg up once you graduate, then a work-study is better for that because it will put you in touch with the professors running the programs,” says Josh Simpson of Lake Advisory Group.

    The Work Colleges Consortium is also a comprehensive resource to find schools that offer free or discounted tuition for work-study programs.

    To be eligible for work-study, you must report an income that is below a certain threshold. This amount can vary by school and FAFSA requirements, but too often, a parent’s income can rule out a student’s eligibility.

    The National Association of Student Aid Financial Administrators 2020 report shows that more than half a million students use the Federal Work-Study Program. However, coronavirus has stunted normal program availability and enrollment. Today, work-study students face more limited positions given COVID-related factors, including budget constraints, virtual learning and safety issues.

    Use the FAFSA

    There’s a reason why the FAFSA is always on the tip of a high school student’s tongue.

    There are several benefits to the FAFSA and federal student loans that private student loans cannot offer:

    • Low, fixed interest rates
    • The payment pause and interest waiver
    • Longer deferments and forbearances
    • Income-driven repayment plans
    • Death and disability discharges
    • Loan forgiveness options

    The FAFSA is an application that must be completed in order for a student to be eligible for federal financial aid. Some specific states and schools also use the FAFSA as an official measurement of income for each student.

    There are specific FAFSA deadlines that you will need to honor if you want to apply. These will vary depending on where you live and the school to which you are applying, but there are some general deadlines that students can plan on each year. Still, it’s important to check with each school for specific dates and eligibility details.

    [ Read More: How to Apply for a Student Loan ]

    As the author of an entire book dedicated to the FAFSA, Kantrowitz says the most important thing that you need to know are the deadlines. “The FAFSA application period is 21 months long, starting on October 1 and ending on June 30 (the end of the award year). It is important to file the FAFSA as soon as possible on or after October 1, since some states and colleges have very early deadlines.”

    Many families use the Thanksgiving holiday as an opportunity to get a headstart and complete the forms together, because there is little time to waste — 13 states offer statewide grants on a first-come, first-serve basis.

    “Students who file the FAFSA in the first three months tend to get twice as many grants, on average, as compared with students who file the FAFSA later,” adds Kantrowitz.

    FAFSA Application Dates

    October 1Start of FAFSA enrollment
    June 30End of FAFSA award year

    Understanding repayment options 

    Just as there are multiple ways to fund your college education, there are also several ways to pay it back. The repayment terms for your funding depend on the type of funding you are awarded.

    There are four main repayment plans for your federal student loan:

    • Standard repayment of 10 years
    • Graduated repayment, where payments start small but become larger over time
    • Extended repayment of 10 to 30 years
    • Income-driven repayment, where the more you make, the more you pay for your loan.

    [ Next: 10 Tips for Paying Back a Student Loan ]

    For example, while a private student loan typically carries repayment terms of five to 20 years.

    income-driven repayment plans offer payments based on your monthly income, never taking more than 10%–20% of your monthly discretionary income. Income-driven plans also forgive your balance after 20–25 years of payments on your loan, with the additional options of full and partial forbearances, which may suspend loan payments or require only interest payments.

    Some private lenders, on the other hand, offer repayment terms based on how early you want to start making payments. For example, you can start paying your loan off immediately once funds are disbursed to your school or wait until six to nine months after you graduate when the deferment period ends.

    Here are some typical private loan repayments options, depending on your lender:

    • Pay after graduation, which includes making no payments during school
    • Pay a flat monthly payment, like $25, while in school, then full principal and interest after graduation
    • Pay interest while in school then full principal and interest after graduation.

    If you’re able to make payments while in school, you will save on interest and greatly reduce the amount you’ll pay over the life of your student loan.

    Affordable community college

    In addition to traditional public and private universities, there are also local community colleges that offer a more affordable way to complete those General Education courses.

    The National Society of High School Scholars reports a staggering difference in college tuition; while community college costs around $3,500 per year, out-of-state students can easily pay $35,000 per year when attending a public university. It’s a major reason why many experts recommend community college for your general studies.

    • More cost-effective than most public and private colleges
    • Often smaller classes with more one-on-one time with professors
    • Same coursework and textbooks as many of the bigger schools
    • Same professors in some cases
    • Ability to live at home without additional room and board costs
    • Can even take courses while in high school

    “Think of it this way,” says Simpson of Lake Advisory Group. “Would you pay three or four times the price for a box of cereal because you buy it from Publix instead of going to Wal-Mart?”

    As someone who paid for law school herself, Ashley Morgan takes a personal approach as a debt and bankruptcy attorney in northern Virginia. “Going to a community college and then transferring later can very much help people limit debt and get a degree from a bigger name school. Having less debt gives you more flexibility later in life,” she says.

    Even if community college doesn’t have the classes you want to take, you can start enrollment at your four-year university but instead of living on-campus, you could attend classes at a satellite campus. Not only can you take these courses during high school, but you could also remain at home after graduation while you take classes nearby.

    Check Your Student Loan Rates

    View our top-rated lenders and find the best rates today. It’s quick and easy.

    The true cost of student loans

    To fully illustrate what a student loan could cost you in fees and interest, we ran some sample calculations.

    $40,000 Student Loan Calculations

    Type of LoanInterest RateLoan FeeMonthly PaymentTotal Interest PaidTotal Payments
    Undergraduate Federal Stafford Loan2.75%1.06%$385.73$5,859.46$46,288.00
    Federal PLUS Loan5.3%4.3%$449.48$12,140.22$53,937.50
    Perkins Loan5%0%$424.26$10,911.52$50.911.52
    Private Loan9%20%$507.30$20,804.60$60,804.60

    *Assumes 10-year loan term with 120 payments via

    There are several factors that will impact your approval for a loan and the interest rate that you receive. The FAFSA will help determine your income eligibility, while other details like the size of your family and financial goals could affect repayment terms. Be sure to run the numbers of each offer in order to find the loan that offers the lowest monthly payment with terms you can afford.

    [ See: You Don’t Have to Pay Federal Student Loans Until 2021 — But You Should ]

    Refinancing student loans

    For college students already committed to student loans, COVID has presented an unexpected but, nonetheless, lucrative opportunity. With interest rates at record lows, it is a great time for borrowers with existing federal loans to consider refinancing. In addition to a lower monthly payment, it also means less interest paid at the end of the loan.

    “Borrowers with private student loans should refinance if they can qualify for a lower interest rate,” says Kantrowitz. “There are no prepayment penalties on student loans, so there isn’t really any drawback to refinancing a private student loan into a new private student loan with a lower interest rate.”

    If you have a federal loan, refinancing means that your loan will become a private one. Any benefits that were formerly carried by your federal loan, such as loan forgiveness and income-based payments, will disappear when you convert your loan.

    Consolidation student loans

    Another popular option is to consolidate your student loans, which carries its own set of benefits. This is when you group several loans into one big loan, but when it comes to your student loans, your options depend on whether you own federal or private student loans.

    [ More: Student Loan Refinance Guide ]

    The Direct Loan Consolidation program refinances federal student loans, but you can only consolidate federal loans. Most students have a combination of private and federal student loans, and those private loans are ineligible for the Direct Loan Consolidation program. In this case, you would need to find a private lender for your consolidation or refinance private student loans.

    Either way, consolidating your student loans can carry a few different benefits.

    • One loan to track and pay instead of several
    • Could lower your monthly payment
    • Can receive a lower interest rate
    • Ability to change from a fixed rate to a variable rate, or vice versa

    However, when you consolidate your loans, you are still taking out a new loan, so it is likely to carry a longer repayment period than you originally had. Additionally, consolidating your federal loans means your new interest rate will be a weighted average of all your interest rates, so you may not be getting the best rate in the end. Regardless of which option you use, you should always consider the long-term implications of your choice.

    Student loan FAQs

    There are two main ways to get your student loan debt forgiven: through public service loan forgiveness on direct loans and teacher loan forgiveness, which is available for direct loans and Federal Family Education Loans.

    There are three kinds of student loans. Federal loans are loans supplied by the government, while private loans and refinance loans are loans that you can take out from banks, credit unions and other lenders.

    There are many banks that offer student loans, but we found Wells Fargo to offer some of the best rates, such as just 4.78% for fixed loans or less than 3% for a variable APR.

    When you need to pay for college costs, such as tuition and room and board, a student loan is money you can borrow from the federal government or another type of lender at an additional fee.

    We welcome your feedback on this article. Contact us at with comments or questions.

    Lena Borrelli

    Contributing Writer

    Lena Borrelli is a Tampa-based freelance writer who has worked with leading industry titans, such as Morgan Stanley, Wells Fargo, and Simon Corporation. Her work has most recently been published on sites like TIME, ADT, Fiscal Tiger, Bankrate and Home Advisor, as well as many other websites and blogs around the world.

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to,, and elsewhere.