Key takeaways
The high cost of college means taking out student loans is a reality for many people.
There’s a big difference between public and private student loans.
It pays to understand how student loans work so the borrower can make a plan for how to manage that debt.
Bill Nelson is a planning excellence lead consultant at Northwestern Mutual.
We all know that college is expensive. And running the numbers makes it all the more stress inducing. According to the College Board, the price tag for tuition and fees at a public, four-year college for out-of-state students was $30,780 in the 2024-25 school year. That’s more than $123,000 spent over a four-year college career—and that’s just tuition and fees.
If you haven’t managed to put quite that much away in a college savings plan, college isn’t necessarily out of reach for your aspiring student. Fortunately, student loans can help.
Still, the decision to take on student loan debt is a big one. Before your child starts the loan application process, it’s important they know as much as possible about taking on and paying back student loans so they’re ready to handle managing debt. Here’s what to know.
How student loans work
Student loans are tools to help cover the cost of higher education. The loan involves an interest rate set by the government or private lender. The loan almost always needs to be repaid, and the first payment is often due six months after graduation.
Student loan terms to know
- Co-signer: Another person, often a parent, who is also responsible for repayment of the loan—and often on the hook if the student is unable to pay.
- Deferment: A temporary postponement of loan payments allowed under certain conditions, such as enrollment in school, unemployment, active duty military service or economic hardship.
- Grace Period: The time during which the borrower isn’t required to make payments. It usually begins once the student graduates (or stop school or fall below a half-time schedule).
- Interest Rate: The percentage charged by the lender for the use of its money.
- Principal: The original amount of money borrowed through a loan, not including interest.
- Public Loan: A loan from the federal government.
- Private Loan: A loan from a bank, credit union or similar financial institution. Terms are set by the lender rather than the federal government.
- Repayment Schedule: A plan outlining the monthly payments a borrower must make over a specified period to repay their student loans, including the amount of each payment, due dates and the total number of payments required.
What student loans can be used for
Student loan money can be used for most things related to the expense of college. Student loans are tools to help cover the costs of the following:
- Tuition
- Fees
- Living expenses, including housing and groceries/meal plan
- Books
- Computers
- Tutoring
- Disability services
While students have fairly broad discretion to use student loan money, they can’t use it for just anything. For instance, they can’t use the money for things like buying a house or car—or even clothes. The criminal penalty for using public loans in such ways could be as much as $20,000 or five years in prison.
Want more? Get financial tips, tools, and more with our monthly newsletter.
Public student loans
Interest rates
Student loans are either public or private. Public loans are also called federal student loans because the borrower is receiving funds from the federal government, and the interest rates on them are set by Congress. For loans disbursed on or after July 1, 2024, and before July 1, 2025, rates range from 6.53 percent to 9.08 percent. These depend on the type of loan and whether the applicant is an undergraduate or graduate student or a parent borrowing to help their child.
Subsidized vs. unsubsidized loans
Federal student loans can also come in two varieties: subsidized and unsubsidized.
For a subsidized loan, the borrower doesn’t pay interest while they’re in school, during a six-month grace period after leaving school or if the loan is in deferment (meaning they’ve been able to temporarily postpone loan payments). That’s because the interest during those times is being handled by the government.
Only undergrads are eligible to get subsidized loans, and the amount they get is determined by financial need.
For an unsubsidized loan, which both undergrads and graduate students can get, the borrower doesn’t get any help with the interest. This means the borrower must pay it, but they have options for how to pay. They can pay for the interest while in school or choose to let it accrue while hitting the books and then let it capitalize—that is, get added to the loan principal. (Adding it to the loan principal will ultimately increase the amount the borrower will end up owing.) The borrower does not have to demonstrate financial need to be eligible for an unsubsidized loan.
Application process
To apply for federal loans, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA), which helps determine how much financial aid they are eligible to receive—whether in the form of student loans, grants or federal work study. This information usually appears in the student’s college financial aid package.
For the 2024-25 school year, the federal deadline to apply for financial aid is June 30, 2025. But colleges often have earlier due dates, and certain forms of funding are paid out on a first-come, first-served basis. That means that it can pay—literally—to be early.
Private student loans
Interest rates
Private student loans are those issued by banks and other lenders. Private loans typically carry higher interest rates compared to federal loans—potentially much higher.
Additionally, an interest rate on a private student loan could be fixed or variable. With a fixed rate loan, the interest rate will remain steady. But the interest rate on a variable loan can change over the life of the loan. It could be an advantage if the rate goes down or a disadvantage if the rate increases.
Application process
Students can apply for private student loans similar to the way they apply for any other type of personal loan. They fill out an application with a private lender, who will determine how much to offer them and at what interest rate based on their creditworthiness (how likely the lender believes it is that the student will pay back the loan). A private student loan lender will determine this based on a borrower’s credit score and the information in their credit report. If the borrower doesn’t have much of a credit history, then the lender may require a co-signer.
Public student loans tend to be preferable to private student loans because the federal government offers more flexibility when it comes to borrowing and repayment. And, as mentioned above, interest rates for private student loans tend to be higher than for public ones. But private loans can be a good secondary option if a student doesn’t get enough financial aid to cover college costs.
Plan for life’s big moments.
Your advisor can get to know you and help build a financial plan for you and your family.
Let’s get startedPaying back student loans
When it comes to paying back student loans, the federal government provides more flexibility compared to private lenders, as well as the possibility of public-service loan forgiveness This program erases some of a borrower’s balances if they have the right type of loan, can show a long history of paying on time and work in a qualifying public-service job for a certain amount of time.
Some private lenders may offer public loan types of features, including the ability to reduce or defer payments because of financial hardship. However, a borrower will generally have more repayment options with federal loans—which is helpful for someone who ends up in a tough financial situation.
Just keep in mind that some of these plans could increase the total amount a borrower ultimately owes because they’re still accruing interest on the overall balance—even if the actual payment due has been lowered.
These options can include:
- Graduated repayment, which starts with a lower payment earlier in the payment timeline and then gradually gets larger.
- Extended repayment, which extends the timeline beyond the typical 10-year repayment period to as long as 25 years.
- Income-driven repayment plans, which set a monthly payment amount based on how much the borrower makes.
Note that federal loan borrowers may also be eligible for deferment or forbearance—temporarily suspending payments—if they meet certain eligibility requirements. The primary difference between the two is whether interest accrues during the time the payments are halted. In deferment, subsidized loans don’t accrue interest, but unsubsidized loans do. In forbearance, both subsidized and unsubsidized loans accrue interest.
Go to studentaid.gov for the most up-to-date information about federal loan repayment programs such as Saving on a Valuable Education (SAVE) and Revised Pay as You Earn (REPAYE).
Student loan refinancing and consolidation
In the future a college grad may think they can lower the interest rate on their federal loans by refinancing them. That involves taking out a new loan with a lower interest rate to pay off existing student loans—which can reduce monthly payments and make it easier to manage debt. The lower rate can be to their advantage, but moving a public loan to a private lender may mean losing the protections and flexibility mentioned above.
Another option: If a borrower has multiple federal loans, they can consolidate them into one and make a single monthly payment. That won’t lower the interest rate, as the new interest rate will be a weighted average of the interest rates on all the loans. Plus, consolidating takes away the ability to strategically pay down student debt more aggressively by prioritizing those loans with the highest interest rates and balances. But it can make it a little easier to stay on top of repayment compared to juggling multiple loans.
The bottom line on student loans
Student loans can be powerful tools, helping someone pay for a college education that they otherwise might not be able to afford. But they also come at a cost, and not all student loans are created equally. Before borrowing—whether from the government or a private lender—it’s important to know how student loans work.
If you’re still thinking of ways to help your child pay for college with fewer student loans, your Northwestern Mutual financial advisor may be able to help. They can take a broad look at your family’s financial picture to find blind spots and opportunities that might otherwise be overlooked.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
