A Guide to Student Loans: How Do They Work?

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Student loans have become one of the most complicated aspects of modern finance. They involve large – often high interest rate – amounts of debt, typically taken on by young people with little current earnings and typically structured along 20-year repayments. The macroeconomic impact of student debt has touched nearly every aspect of the economy, diverting consumer spending power across sectors ranging from home goods to housing, autos and even new families. Whether you are a potential borrower or just trying to understand the modern economy, student loans are essential to understand.

Main categories of student loans

Federal student loans

Federal student loans are provided through the Department of Education. Not all of the money necessarily comes from the government, although most does, but the government guarantees any loan that it does not directly extend and sets the terms for all lending.

Federal student loans come with a host of protection for borrowers. This includes, but is not limited to, income-based repayment programs, hardship deferrals and eventual loan forgiveness. Almost any student enrolled in an accredited school can apply for a federal student loan, since these loans are processed through the school’s financial aid office. Few even require a credit check. However, some circumstances such as outstanding tax debts can disqualify a borrower.