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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 credit unions. As you consider your options, it is important to understand the full range of loan alternatives. Here are the main types of federal and private student loans you need to know about:
Federal student loans generally have the widest range of repayment plans and easiest more lenient credit standards on most loans.
Direct subsidized and unsubsidized loans are issued to both undergraduate and graduate students by the federal government. Both offer flexible repayment plans and low interest rates. The differences between the two types of loans are whether you pay interest while you are in school and have to qualify based on need.
Subsidized loans are need-based loans. The U.S. government “subsidizes” these loans by paying the interest while the student is enrolled in at least a half-time status, during the six-month grace period after graduation, and as well as also during periods of deferment (temporary breaks from payments allowed by the government for circumstances such as economic hardship or military service).
Unsubsidized loans are not need-based. No matter how much the student or parent makes, they can qualify for an unsubsidized student loan. Eligibility and amount awarded are determined by the student’s year in school, other financial aid received, and the student’s cost of attendance. Unlike with subsidized student loans, students are responsible for all interest that accumulates while they are in school, during the grace period, and during any temporary breaks from payments.
Students are not limited to just one type or the other. However, students may not exceed the program’s borrowing limits, either annually or per type of degree. For instance, there is a loan limit for professional degrees that is different than the limit for undergraduate borrowing.
Direct PLUS Loans are available to both graduate students and parents of undergraduates. They are offered to eligible borrowers through schools that participate in the Federal Direct Student Loan Program. Graduate students or parents of undergraduates may borrow an amount equivalent to the annual cost of attendance (as determined by the school) minus any other financial aid received. Direct PLUS Loans do require a credit check, but approval conditions are generally much less rigorous than what is generally required for private student 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 their loans that are in their name into one for a single monthly payment. Consolidated loans have fixed interest rates. Borrowers can choose from a variety of payment plans including income-driven repayment options.
The Health Resources and Services Administration (HRSA), an agency of the U.S. Department of Health and Human Services, sponsors loans, grants, and scholarship programs for students majoring in the health professions. This program provides four different types of loans, all of which are need-based and competitive, meaning that students must apply for acceptance into the loan program.
Private student loans are available to both parents and students. Students borrowing privately will generally need a co-signer, a person who has the income and credit rating required to be approved for the loan, who agrees to pay the loan if the student can’t. The payment history is also reported on the cosigner’s credit report. Private student loans are considered an alternative to PLUS loans because of lower interest rates offered to borrowers or borrowers with cosigners with good credit.