# Education Loan: Definition, Types, Debt Strategies

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## What Is an Education Loan?

An education loan is a sum of money borrowed to finance a post-secondary education or higher education-related expenses. Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree.

Payments are often deferred while students are in college and, depending on the lender, for an additional six-month period after earning a degree. This deferment period is also referred to as a "grace period."

### Key Takeaways

*   An education loan, also known as a student loan, is a type of loan used to finance a post-secondary education.
*   Education loans can be used to cover the cost of tuition, books and supplies, as well as living expenses.
*   Payments are usually deferred while students are in college and sometimes for an additional six-month period after earning a degree.
*   The two basic types of education loans are federal (or government-sponsored) loans and private loans.

## How an Education Loan Works

Education loans are issued for the purpose of attending an accredited college or a university to pursue an academic degree. Education loans can be obtained from the government or through private-sector lending sources.

Federal loans often have lower interest rates, and some also offer subsidized interest (meaning the United States Department of Education pays the interest on the loan while a student is in college at least half-time). Private-sector loans generally follow more of a traditional lending process, with rates that are [typically higher](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp) than those of federal loans.

## Types of Education Loans

### Federal Student Loans

Most borrowers first seek [federal government financing](https://www.investopedia.com/articles/personal-finance/090815/quick-guide-how-fafsa-loans-work.asp) if they need to borrow funds for education expenses. The first step in seeking education loans through the federal government is to complete a [Free Application for Federal Student Aid (FAFSA)](https://www.investopedia.com/terms/f/federal-application-of-student-aid-fafsa.asp). Depending on the applicant's status, particularly in regard to their parental dependency, additional information may be required to complete the application. A credit check is not generally required as part of the application process.

The amount of principal on the loan or loans is primarily based on the cost of attendance at the school the student is planning on attending. Once a FAFSA form is completed, the schools listed on the FAFSA application work to identify the financial aid package that the student is eligible for.

Several types of federal student loans exist, including [direct subsidized, direct unsubsidized](https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/), and [direct consolidation loans](https://www.investopedia.com/terms/d/direct-consolidation-loan.asp). If offered and accepted, funds will be issued by the federal government to the specified university to cover the student's academic costs. If there are remaining funds available, they will be disbursed to the student. A student may use these funds to cover other expenses that they incur while pursuing a degree.

If a student qualifies for subsidized loans, the borrower’s interest will be covered while they're in school. If a student qualifies for unsubsidized loans, the interest on their loans will be [deferred](https://www.investopedia.com/terms/d/deferredinterest.asp) as long as they're enrolled in classes and remain in good academic standing.

### Private Student Loans

In some cases, the student loan package that a student is issued through the federal government may suggest that the borrower applies for [additional funds through private lenders](https://www.investopedia.com/private-student-loans-education-department-closes-8772254). Private student loans also include state-affiliated lending nonprofits and institutional loans provided by the schools.

These types of loans will generally follow a more standard application process for a private-sector loan. Applications for private student loans typically require a credit check.

Borrowers can apply directly to individual private-sector lenders. Similar to federal funds, the approved loan amount will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover any pending bills; the remaining amount is then sent directly to the borrower.

## Special Considerations

Accumulated debt from college can be an overwhelming burden after graduation. If a student has taken out numerous education loans, [consolidating them can be a good option](https://www.investopedia.com/better-consolidate-student-loans-8695381) for more easily managing the debt load. Multiple federal education loans can be combined into a single direct consolidation loan.

Additionally, many private lenders now allow borrowers to combine both their federal and private loans into one loan. It's important to note that in this scenario, the new loan would be a private one since it'd be issued by a private lender. Because the loan will be considered a private loan, the debt would [no longer be eligible for certain federal programs](https://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp) for [loan forgiveness](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) and repayment. There's no option for borrowers to combine private and federal loans into a new federal loan.

> **Fast Fact**
>
> A number of employers also include consolidation services and student loan repayment programs into their employee benefit package as a way of increasing the support available for managing student loan debt after college.

Students and their families should consider all of their options before signing up for more education debt than they need, as that could become a crushing burden in the future. Some alternatives to—or ways to reduce the need for—education loans include working part-time, accepting work-study offers, attending a less expensive school, finding a job that offers [tuition reimbursement](https://www.investopedia.com/tuition-reimbursement-cover-student-loans-8695133), and applying for scholarships. Once the student has graduated, it can also help to search for a job that offers student debt repayment assistance as a benefit.

Sometimes, you may still end up with [more student loan funds](https://www.investopedia.com/ask/answers/100314/it-legal-invest-my-student-loan-money.asp) than you need. Perhaps a relative unexpectedly put money toward your education, or you were awarded a scholarship that you hadn't planned to receive. It's tempting to use any excess student loan funds for [discretionary expenses](https://www.investopedia.com/terms/d/discretionary-expense.asp), but the ethical and financially sound approach is to put these funds to pay down your debt. Plus, in the case of government-subsidized loans, you could face legal repercussions if you misuse these funds.

## What Type of Debt Are Student Loans?

Student loans are considered unsecured installment debts, meaning there isn't a physical asset tied to them, and they're paid back in a set number of installments over [an agreed-upon period of time](https://www.investopedia.com/how-long-pay-off-student-loan-debt-8549844).  

## What Are the Four Major Types of Educational Loans?

There are four types of federal student loans available as part of the William D. Ford Federal Direct Loan Program:

*   **Direct subsidized loans**: Loans made to eligible undergraduate students who demonstrate a clear financial need.  
    
*   **Direct unsubsidized loans**: Loans made to eligible undergraduate, graduate, and professional students (eligibility isn't based on financial need).  
    
*   **Direct PLUS loans**: Loans made to graduate or professional students and parents of dependent undergraduate students to pay for education expenses not covered by other financial aid (eligibility isn't based on financial need, though a credit check is required). Borrowers with a poor credit history must meet additional requirements.  
    
*   **Direct consolidation loans**: Loans that allow you to combine your eligible federal student loans into a single loan with one loan servicer.

## What Are Three Effective Techniques for Managing Student Loan Debt?

There are [several ways to better manage student debt](https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp). Three particularly useful strategies include paying off loans with the highest interest rates first, paying down extra principal whenever possible, and exploring operations for debt forgiveness.

## The Bottom Line

Education loans are a vital asset for helping students afford the cost of a higher education. However, if taken out recklessly, they can burden borrowers with more debt than they can reasonably repay.

Before taking on student debt, review the full financial aid package from your school of choice and accept any available scholarships and/or work-study offers. Consider also using online search tools to [find additional scholarships](https://www.investopedia.com/how-to-find-scholarships-4782490) you may qualify for.

If you still have funding gaps, it's time to consider federal loans. Should you decide to take on student debt, don't agree to more than you need. If you require even more money after taking these steps, then applying for private loans may be a good idea.

> **Article Sources**
>
> 1.  Federal Student Aid. "[The U.S. Department of Education Offers Low-Interest Loans to Eligible Students to Help Cover the Cost of College or Career School](https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized)."
>     
> 2.  Federal Student Aid. "[2025–26 FAFSA® Form Now Available!](https://studentaid.gov/h/apply-for-aid/fafsa)"
>     
> 3.  Federal Student Aid. "[I Filled Out My FAFSA Form. When Can I Expect to Receive Information About My Financial Aid?](https://studentaid.gov/help/financial-aid-package)"
>     
> 4.  Federal Student Aid. "[Federal Student Loans for College or Career School Are an Investment In Your Future](https://studentaid.gov/understand-aid/types/loans)."
>     
> 5.  Federal Student Aid. "[Consolidating Your Federal Education Loans Can Simplify Your Payments, But It Also Can Result In the Loss of Some Benefits](https://studentaid.gov/manage-loans/consolidation)."
>     
> 6.  Consumer Financial Protection Bureau. "[Should I Consolidate or Refinance My Student Loans?](https://www.consumerfinance.gov/ask-cfpb/should-i-consolidate-refinance-student-loans-en-561/)"
>     
> 7.  Equifax. "[What Are the Different Kinds of Debt?](https://www.equifax.com/personal/education/debt-management/articles/-/learn/types-of-consumer-debts/)"
>     
> 8.  Federal Student Aid. “[William D. Ford Federal Direct Loan Program](https://studentaid.gov/help-center/answers/article/federal-direct-loan-program).”
>     
> 9.  Federal Student Aid. "[Federal Student Loans for College or Career School Are an Investment in Your Future](https://studentaid.gov/understand-aid/types/loans)."