Student Loans 101: What to Know Before Your Kids Borrow

We all know that college is expensive. And running the numbers makes it seem overwhelming. According to the College Board, the price tag for tuition and fees at a public, four-year college for out-of-state students was $31,880 in the 2025-26 school year. That’s more than $127,500 spent over a four-year college career. Add food and room and board, and the average for the same students rises to $45,780 for the school year or $183,120 over four years—and that doesn’t include other expenses such as textbooks or software.

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 a student loan 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 manage debt. Here’s what you need 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 and almost always needs to be repaid. 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 generally on the hook if the student is unable to pay. Also sometimes called a co-borrower.
• Default: The status of a student loan when the borrower fails to make payments according to the terms. Federal student loans typically default after 270 days of nonpayment, while private student loans often default after 120 days of nonpayment.
• Deferment: A temporary postponement of loan payments allowed under certain conditions, such as enrollment in school, unemployment, active-duty military service or economic hardship.
• Forbearance: A temporary pause in student loan payments due to financial hardship, like a medical emergency or job loss. Loans continue to accrue interest during this period.
• Forgiveness: The full or partial cancellation of a student loan once certain conditions are met, such as making a specified number of payments or working in a particular industry for a set period.
• Grace Period: The time during which the borrower isn’t required to make payments. It usually begins once the student graduates (or stops school or falls below a half-time schedule).
• Interest rate: The percentage charged by the lender for the use of its money.
• Loan servicer: The company that administers your federal student loan—including issuing bills and statements, collecting payments and processing deferment and forbearance applications—on behalf of the U.S. Department of Education or a private lender.
• Master promissory note (MPN): A legal contract between the Department of Education and a borrower, which outlines the terms of a student loan.
• Origination fee: A fee charged by a student loan lender to cover some of the costs associated with creating a loan.
• 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. This includes the amount of each payment, due dates and the total number of payments required.
• Subsidized loan: A type of need-based federal student loan that does not accrue interest while a student is enrolled at least half-time, or during the student’s grace period or deferment.
• Unsubsidized loan: All other federal student loans, which begin accruing interest immediately upon issuance, including when a student is enrolled and during periods of deferment.

What student loans can be used for

Student loan money can be used for most college-related expenses. This includes helping cover the costs of the following:

• Tuition
• Fees
• Living expenses, including housing and groceries/meal plans
• Books
• Computers
• Tutoring
• Disability services
• Commuting expenses, including gas, parking fees and public transit
• Gaining professional licenses or certifications
• Child care expenses or adult dependent care expenses, but only for the days and times a student is attending classes

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.

Public student loans

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

Interest rates

The interest rates on federal student loans are set by Congress. Per StudentAid.gov, the interest rate on loans disbursed on or after July 1, 2025, and before July 1, 2026, ranges from 6.39 percent to 8.94 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 versus 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.

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.

The federal deadline to apply for financial aid is always on June 30 of the year prior to when funds are needed. For the 2026-27 school year, this means that the deadline is June 30, 2027. However, states and colleges often have earlier due dates, and certain types 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.

An interest rate on a private student loan could also 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 during the loan’s life. This 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.

Paying 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, according to StudentAid.gov. 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 period.

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.

Types of student loan repayment plans

• Standard repayment, which sets a fixed payment for 10 years.
• Graduated repayment, which starts with a lower payment earlier on that 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.

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.

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 protection and flexibility mentioned above.

If a borrower has multiple federal loans, they can also consolidate them into one and make a single monthly payment. That won’t lower the interest rate, because the new interest rate will be a weighted average of the interest rates on all the loans. Consolidating also 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.