Education loan

An education loan is a sum of money borrowed to finance a 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."

Key Takeaways

An education loan, also known as a student loan, is a type of loan used to finance a post-secondary education.

Education loans can be used to cover the cost of tuition, books and supplies, as well as living expenses.

Payments are usually deferred while students are in college and sometimes for an additional six-month period after earning a degree.

The two basic types of education loans are federal (or government-sponsored) loans and private loans.

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 have 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, with rates that are typically higher than those of federal loans.

Types of Education 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.

3 Several types of federal student loans exist, including direct subsidized, direct unsubsidized, and direct consolidation loans. If offered and accepted, funds will be issued by the federal government to the specified university to cover the student's academic costs. If there are remaining funds available, they will be disbursed to the student. A student may use these funds to cover other expenses that they incur while pursuing a degree.