What Is Student Debt?

Student Debt Explained

A college student studies for exams
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Student debt is money you borrow to pay for college education costs such as tuition, books, and living expenses. For many borrowers, student debt is a necessary way to deal with increasing college costs.

According to the Federal Reserve, as of late 2019, 43% of individuals who attended college incurred some form of student debt. Understanding how student debt works will help you make informed decisions about financing your own college education.

Definition and Examples of Student Debt

If you don’t have the money to pay for college, you might consider taking on student debt. Student debt includes any loans you take out to pay for your college education, which you’ll repay with interest at a later date.

  • Alternate name: Student loans

For example, many borrowers apply for student loans through the U.S. Department of Education (ED). Known as federal loans, this type of student debt comes with fixed rates and flexible repayment options.

Borrowers who work in public-service jobs after graduation may be eligible for loan forgiveness after 10 years.

How Student Debt Works

To apply for student loans, you’ll start by filling out the Free Application for Federal Student Aid (FAFSA). This is a requirement if you want to receive loans from the ED, and you’ll need to submit a FAFSA form annually to receive the money you need to pay for school.

FAFSA filing season generally begins on Oct. 1 and the federal deadline for submitting FAFSA applications is June 30 for each academic year—although college and state deadlines may vary.

Depending on the state and school, FAFSA may be given out on a first-come, first-serve basis, so you want to apply as soon as possible.

Once you’ve filled out the FAFSA, you’ll receive an offer letter telling you how much you’re eligible for in federal loans.

To apply for private loans, meanwhile, you can choose a bank or online lender. You’ll need to apply directly through the lender and choose your repayment option and interest rate type. The lender will run a credit check (or check your co-signer’s credit if you have one) to determine the type of rates you qualify for.

While you’re still in school, you won’t be required to start paying back your student loans. But once you graduate, most lenders will give you a six-month grace period before you have to start making payments on the interest and principal.

Types of Student Debt

If you have any form of student debt, then you probably have federal loans, private loans, or some combination of the two. Here’s a closer look at both.

Federal Loans

Federal loans are a type of student debt offered by the ED. To apply for federal loans, you’ll start by filling out the FAFSA. 

The information you fill out in the FAFSA will determine how much you’re eligible to borrow. And for undergraduate students, it will also determine whether you qualify for direct subsidized or unsubsidized student loans.

Direct subsidized loans are available to students who can demonstrate some type of financial need. If you qualify for subsidized loans, the government will pay the interest on your loans while you’re still in school.

Unsubsidized loans, on the other hand, are available to all students regardless of their financial need. However, you’re responsible for paying the interest that accrues on your loan while you’re still in school.

Private Loans

Another type of student debt is a private loan, which is given by a bank, credit union, or alternative lender. Borrowers don’t have to fill out the FAFSA to qualify for private student loans. Instead, your lender will run a credit check to determine whether you need to apply with a co-signer.

If you’re looking for ways to pay for college, it’s generally advised you apply for federal loans first before taking out private loans.

Federal loans come with lower rates and certain borrower protections you won’t find with private loans, and certain types of federal loans will be eligible for loan forgiveness after 10 years.

But for some students, federal loans won’t cover their total cost of attendance. In this case, private loans could be a good way to fill in any gaps in financing.

Pros and Cons of Student Debt

Pros
  • Makes higher education more affordable

  • Gives you the opportunity to earn more money

  • Taking out private loans can help you build credit

Cons
  • You’ll be starting your working life with debt

  • Some borrowers take on student debt without finishing school

Pros Explained

  • Affordability: Taking out student loans can make higher education more affordable for individuals who don’t have any other way to pay for it.
  • Earn more money: As a result of attending college and earning their degree, many borrowers find they are able to earn more money and have more fulfilling careers.
  • Build credit: If you take out private loans, your lender will report your monthly loan payments to the three major credit bureaus. This can help you build good credit over time.

Cons Explained

  • Starting out with debt: When you take out student loans, you’ll start your adult life in debt. This can impact your lifestyle and get in the way of other financial goals, like buying a house or starting a family.
  • Failing to finish school: Some borrowers take on student loan debt without ever graduating from college. In this case, you still have to deal with the burden of debt but don’t have the benefits of a college degree.

Key Takeaways

  • Student debt, which is also commonly referred to as student loans, is money borrowed to pay for education expenses.
  • For many borrowers, student loans have become a necessary means of dealing with increasing college tuition costs.
  • More than 40% of college students in 2019 incurred some form of student debt to pay for their education.
  • Borrowers can either apply for loans offered by the federal government or apply for student debt through a private lender.
  • It’s recommended borrowers apply for federal student loans first due to the low interest rates and increased borrower protections.