Many students are unable to pay for a full school tuition all at once. Financial aid in the form of scholarships and grants can help offset the costs of school. So can student loans.

Unlike “gift aid,” which does not have to be paid back, student loans must be paid back to the lender. There are several types of student loans:

• Federal student loans, which are provided to students and funded by the federal government.
• Federal parent loans, which are provided to parents and funded by the federal government.
• Private student loans, which are provided by lenders like credit unions, banks, state agencies and schools.

Are student loans considered financial aid? According to the Federal Student Aid office, loans are considered a form of financial aid. It’s important for students and parents to be aware that these must be repaid with interest.

“We always recommend for students to review their own situation and do what is best for them,” says Ted Groff, a financial aid director at Universal Technical Institute (UTI). “If they can complete school without borrowing a dime, that is the best possible situation, but most are not in that position. If they are like most, the UTI Financial Aid team can provide options to help pay for school, and it all starts with completing their FAFSA (Free Application for Federal Student Aid).”¹⁰ 

The FAFSA is an important form for any aspiring student to complete because applicants may be eligible for funds like scholarships and grants, which don’t need to be repaid. Upon completion of the FAFSA, students and their parents also learn about their eligibility for specific federal loans. Terms and conditions of federal loans are set by law and include benefits that private student loans might not offer.

What’s the Difference Between Private Student Loans and Federal Student Loans?

Students can apply for loans whenever there is a gap in funding their tuition or for any education-related expenses, like transportation, housing and food. The federal government reports there are some benefits that federal student loans and federal parent loans offer that private loans don’t typically include. For example:

• Federal loans have fixed interest rates. You'll pay the same amount of interest over the course of repaying the loan. The interest rate of private loans may increase over time.
• Federal loans have income-driven repayment plans, which means you can expect to pay a set percentage of your income as you repay your loans instead of paying a fixed amount even when your income fluctuates.

The federal government also states that private student loans are usually more expensive than federal student loans, which have interest rates typically much lower than those for some credit cards. Other differences may include:

• Payment schedules: Federal loans aren’t due until after graduation or an enrollment status changes. Private loans may require payments while you’re in school.
• Subsidies: Some federal student loans may be subsidized, which means the federal government pays the interest while you’re in school. Private student loans often aren’t subsidized.
• Credit check: Most federal student loans don’t require a credit check. Private student loans often do.
• Postponement options: For both federal student loans and federal parent loans, there may be temporary postponement options, as well as the ability to lower payments. Private loans may not offer these options.

The best way to compare your options is for you and your parents (if you are a dependent student) to fill out the FAFSA to see what financial aid is available. You can talk with your bank or another lender to get additional loan options to see what’s the best fit.

Things to Consider With Student Loans

While many students consider school an investment for their future, it is vital to be aware that career income is rarely guaranteed. Paying off student loans on time requires discipline and, of course, the income required to do so. Because of factors like these, Ted has some recommendations.

“Take out only what you need,” Ted says. “Sometimes families will take out every loan that they can to not only cover tuition but living expenses. If that fits their repayment budget, that is fine, but we highly recommend students work a part-time job while in school to help pay for living expenses to keep loan debt as low as possible. The work experience helps in their career job as well, so it is a win-win all the way around.”¹

If you don't repay a loan according to its terms, you may default on the loan. Defaulting on a loan can negatively impact your credit report, which can affect your ability to purchase a car or make a down payment on a home. A collection agency may become in charge of collecting your loan payment, which can also add collection fees to what you owe. The federal loan agency may also garnish a portion of your paycheck and withhold a tax refund.