What Types of Student Loans Are There?
You’ve submitted a dozen college applications, selected your school, and maybe even chosen your major — now you have to figure out how to pay for it all.
Student loans can be grouped into two main types: federal and private. Federal student loans are funded by the U.S. government, while private student loans are funded by commercial entities such as banks and online lenders. As you consider your options, it’s important to understand the full range of loan alternatives.
Here’s a beginner’s guide to student loans, and what the benefits and drawbacks to each type are.
Federal Student Loans
Federal student loans are funded and distributed by the federal government and their interest rates and terms are set by law. These loans offer fixed rates and most don’t require a credit check, plus they come with flexible repayment options that can help you manage your debt after graduation. There are even federal forgiveness programs that can discharge a portion of your debt if you qualify.
To receive federal funding, you must submit the FAFSA annually. There are several types of federal student loans, and each works in a unique way.
Direct Unsubsidized Loans
If you’re enrolled at least half-time in an undergraduate or graduate program, you’re likely eligible for this type of loan. The amount you can borrow is determined by your school and the fixed interest rates are low — no credit check required.
Repayment typically begins six months after graduation. However, interest starts accruing on the loan as soon as you receive the money and you’re responsible for repaying all interest that accrues.
Direct Subsidized Loans
Direct Subsidized Loans work similarly to their unsubsidized sibling, but with a few added perks. These loans are only available to undergraduate students who can prove financial need, which is determined by your FAFSA
Not only can you typically borrow more money with a subsidized loan, but the Department of Education will also help you cover interest payments. If you’re in school at least half-time, left school in the last six months, or have postponed your loan payments, Uncle Sam will pay your interest during those times.
Direct PLUS Loans
These loans are made to graduate students or parents of undergrads. The interest rates for these loans are typically higher than Direct Subsidized and Unsubsidized Loans, and you won’t qualify if you have adverse credit. However, you could add a cosigner to the loan if your credit alone isn’t strong enough.
To qualify for a grad PLUS loan, you must be enrolled at least half-time in an eligible graduate program. Repayment starts six months after you leave school, but interest begins accruing as soon as you take out the loan.
If your child is enrolled in an undergraduate program, you might be eligible for a parent PLUS loan. This is the only type of federal funding available to parents of students. You’ll typically be expected to start repayment immediately, though you can request to defer it until your child leaves school.
For both types of PLUS loans, you can borrow up to the cost of attendance at your or your child’s school.
Direct Consolidation Loans
Most students receive multiple federal student loans over the course of earning their degree. Direct Consolidation Loans enable students (and parents) to simplify the repayment process by consolidating all the loans that are in their name into one for a single monthly payment.
The fixed interest rate will be set at the average of all rates on your current loans. This option can be useful if you struggle to track your various loans with multiple servicers.
Pros and Cons of Federal Student Loans
Pros
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Cons
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Lower interest rates than most borrowers are likely to get from private lenders
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Borrowing limits may not offer you enough money to cover your costs with federal loans alone
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Fixed interest rates won’t increase in the future
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Graduate students and parents will pay higher interest rates
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Flexible repayment plans
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Those with strong credit might find a better interest rate from private lenders
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You could qualify for loan forgiveness or discharge in special circumstances
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No credit check for most federal loans
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Subsidized loans can lower the cost of borrowing
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Private Student Loans
Private student loans are available to both parents and students who can qualify. Many banks, credit unions, and online lenders offer private loans. Interest rates can be fixed or variable and are based on your creditworthiness, among other factors.
You or your child generally must be enrolled at least part-time and have good credit to be eligible. Students borrowing privately will usually need a cosigner — a person who has the income and credit rating required to be approved for the loan and agrees to pay the loan if the student can’t.
The loan’s fees, terms, and repayment plans are all determined by each specific lender. Most lenders won’t require you to start repayment until after you leave school, but interest typically begins accruing immediately.
Pros and Cons of Private Student Loans
Pros
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Cons
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Higher loan amounts allow you to borrow what you need for school
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Those with average or poor credit may get better interest rates with federal student loans
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Borrowers with strong credit are rewarded with better rates and terms
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Typically less flexible repayment options
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Helps those who aren’t eligible for federal aid
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Most private lenders don’t offer loan forgiveness or discharge plans
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The application process is usually easier and faster
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Credit checks are required, and you may need a cosigner to qualify
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No subsidized-interest options
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Bottom Line
While both federal and private student loans may have a place in your financial planning, it’s usually smart to start with federal student loans before opting for private debt. That’s because federal loans are generally easier to qualify for, offer better rates for most people, and come with more protections when it comes to paying your debt back.
Of course, federal loans may not cover the entire cost of your education or you may have strong enough credit to find a better rate with a private lender. In these cases, private loans can be a useful alternative to other types of borrowing.
No matter which type of debt you choose, make sure you fully understand the true costs of your loans and have a plan for repaying them.
