Funding your future: how student loans work

A college degree can come with a hefty price tag. Whether you’re paying for a child’s education or your own, it’s likely you’ll need to take out a loan or two. Read on to learn how student loans work before you start applying.

Financial aid office

Your first step, whether you need a loan or not, is to reach out to the financial aid office at your preferred school. “I recommend contacting the financial aid office of the college or university you plan to attend,” says Julie Strohfus, Vice President of Consumer Lending for Cobalt Credit Union. “The first step is to fill out a FAFSA, which is the Free Application for Federal Student Aid.”

Your financial aid options will include student loans. Strohfus warns that these loans could be for more than you actually need. In order to better understand your financial needs, plan a budget for your tuition, room and board, textbooks and school supplies. This way you only take a loan for the amount you need.

Now that you understand how student loans work, you’re ready to decide which loan works best for you and your financial situation. Just remember to only borrow what you need and to take advantage of every financial aid and scholarship opportunity that comes your way.

Student loan options

There are numerous options for student loans, but there are three main types from which to choose: Federal, Private, and State.

Federal loans are divided into four categories:

Federal Perkins loans are:

  • For students with exceptional financial need
  • Offered to undergrad, graduate, and professional students
  • Loaned by the school (through about 1,700 schools)


Direct Subsidized loans are:

  • Based on financial need
  • Offered to undergraduate students who are enrolled at least half-time
  • Loaned by the Department of Education

For this type of loan, the Department of Education pays the interest while the student is enrolled at least half-time, during the six-month grace period after graduation, and during deferment periods.

Direct Unsubsidized loans are:

  • Not based on financial need
  • Offered to undergraduate and graduate students enrolled at least half-time
  • Loaned by the Department of Education

The Department of Education does not pay the interest for this type of loan.

Direct Plus loans are:

  • Based on credit scores, not financial need
  • Offered to:
    • Parents of dependent undergrad students
    • Graduate students
    • Professional students
  • Loaned by the Department of Education


Private loans are non-government loans determined by credit history, not need. Typically, private loans require a co-signer for those with little credit history and carry higher interest rates that could be variable. They also might include an origination feea one-time charge based on the amount of the loan.

State loans are non-federal government loans originating at the state level. Interest rates and details vary according to each state.

Repayment plans

Most repayment plans (Direct Plus loans are an exception) begin six months after graduation. Federal loans offer a variety of repayment plans to choose from depending on the type of loan you choose.

No matter what type of loan you take out, make sure you understand the complete list of terms for repaying your loan.

Returning to the classroom

Returning to college as an adult doesn’t have to put a huge strain on your finances.

  • Look into free job training,either from the Department of Labor or your state government.
  • Research scholarships and grants. There are scholarships designed for students returning to school after age 30.
  • Remember tax breaks; the Lifetime Learning Credit is equal to 20% of learning expenses up to $10,000, or $2,000.
  • Find out if your employer participates in employer assistance programs for tuition reimbursement.
  • Don’t forget military benefits if you qualify.