Types of Student Loans
Preparing for college is one of the most exciting times in life. Registering for classes, perusing the college bookstore, and decorating your dorm with your new roommate couldn’t be more fun.
This time can also be stressful, though, as obtaining a college education is pricey.
Scholarships and grants can help, but more often than not, they don’t cover all of the expenses that come with a degree. In those cases, student loans can be a valuable resource.
If you’re looking for a loan to help fund your education, you have plenty of options. Read on to learn which types of student loan might work best for you.
Table of Contents:
- Federal Student Loans
- Private Student Loans
- Student Loan Refinancing
- Consolidating Student Loans
What Are the Different Types of Student Loans?
There are essentially two types of student loans: federal and private. These loans operate differently in their terms, rates, and eligibility requirements.
Federal Student Loans vs. Private Student Loans
Find out which type of student loan is best for your needs
Before we walk through all the different types of federal and student loans, here’s a quick look at the main distinctions between them.
- Lender: Federal loans, as their name suggests, are issued by the U.S. government, whereas private loans are offered by banks, credit unions, and other financial institutions, some of which focus solely on providing student loans.
- Application process: You apply for a private loan just as you would with any other personal or business loan, through the lender. On the other hand, you apply for all federal student loans by submitting the FAFSA (Free Application for Federal Student Aid).
- Eligibility: Eligibility for private student loans is based on your credit score, and your approval odds and rates can be improved with a cosigner. Federal loans, however, don’t always factor in your credit. You could also qualify for additional subsidized needs-based federal aid depending on your family’s expected contributions.
- Interest: Federal loans offer fixed interest rates to borrowers, meaning the rates set at the beginning of the loan are locked in for the remainder of the agreement. Private student loan rates may be either fixed or variable, depending on the loan.
- Terms of repayment: One of the most significant benefits of federal student loans is their flexible repayment plans. You can sometimes defer payments on your federal student loans or enroll in an income-driven repayment plan. Typically, your payment plan on a private student loan can’t be altered.
Because of their accessibility, flexible terms, and low interest, federal student loans are typically the first place you should look.
But in some cases, private student loans can be an excellent supplementary source of funding.
With the main differences between private and federal student loans in mind, here’s a quick overview of all the student loans you have to choose from.
Federal Student Loans
There are a few types of federal student loans, each coming with unique terms and benefits. Knowing the differences will help you choose the right type of loan for your needs.
If you’ve come across the name Perkins Loan in your research and hope to qualify for it, you’re out of luck.
A thing of the past since September 30, 2017, the Perkins Loan was one of the most advantageous for students requiring need-based aid.
It came with low interest and a grace period of 9 months. The Perkins Loan was also subsidized, meaning that the borrower wouldn’t be responsible for any interest that built up as long as they were enrolled half-time in a degree-seeking program.
While you may not be able to get a Perkins Loan anymore, you can access a Direct Loan from the federal government.
Also referred to as Stafford Loans, these are some of the most popular federal loans for undergrad and graduate students.
There are two types of Direct Loans: Direct Subsidized Loans and Direct Unsubsidized Loans.
A Subsidized Stafford Loan, as it’s commonly referred to, does not accrue interest while the student is enrolled in school. The Unsubsidized Stafford Loan, however, does.
Eligibility for a Stafford Loan is simple: you have to complete the FAFSA and be a degree-seeking student enrolled at least half-time.
While the Direct Loan comes with an origination fee (just over 1% of the full amount of the loan), it also comes with plenty of benefits.
The Stafford Loan offers a grace period, income-driven repayment plans, competitive fixed interest rates, and terms between 10 and 25 years.
Direct Loans are an excellent option for parents and students across the board.
If you’re a student with little credit history to support your case or a parent with a low credit score, you could especially benefit from this advantageous loan.
The main alternative to the Federal Direct Loan is the PLUS Loan. PLUS Loans come with all the same great benefits of a Direct Loan, but there is a catch.
While Direct Loans don’t require a credit check, your eligibility for a PLUS Loan is based on your credit score. To qualify for one of these loans, you need to either have an endorser or a fair credit score.
In addition to requiring a credit check, these loans come with a higher origination fee, which is over 4% of the total amount of the loan, and higher interest rates.
Grad PLUS Loans
Grad PLUS Loans are designed to help graduate and professional degree-seekers who need more aid to supplement their financial aid package. Grad Plus borrowers don’t start making payments until after graduation.
Parent PLUS Loans
Parent PLUS Loans, on the other hand, help parents pay for their dependents’ education. These loans are expected to be repaid while the student is still in school, but they can be deferred upon request.
While PLUS Loans come with steeper origination fees and higher interest rates than Direct Loans, they do come with the same beneficial repayment options.
Direct Loans are the best choice for most students. However, if you have a high credit score and find yourself in need of additional funding, a Direct Loan could be worth considering.
Private Student Loans
If you’ve utilized all the federal aid you’re eligible for and still need help, there are plenty of private student loans on the market.
If you’ve ever applied for a personal, business, home, or auto loan, you may notice that the process of getting a private student loan is similar.
The lender will check your credit report, and based on your score, income, and credit factors, will offer you a set borrowing limit, terms, and interest rate.
Keep in mind that these loans are unsubsidized, so you’ll be footing the bill on interest accrued while you’re in school. And they tend to have higher interest rates, which are sometimes variable, than federal loans.
You’ll also find far fewer options for changing your repayment plan or deferring payments. With that in mind, you should be sure to read the fine print and choose your loan carefully.
While you’ll typically find federal loans to be the most beneficial option, if you have a good credit score, you could find that the interest rates for a private loan are more competitive than PLUS loans of the same amount.
To get the most out of a private student loan, work to improve your credit score and lock in a low fixed rate.
While you can access private student loans from most financial institutions, both local and national, you could benefit from working with one of the best student loan companies. That way, you can get advice, quotes, competitive rates, and a specialized plan for your financial needs.
Student Loan Refinancing
When the time comes to pay back your student loans, you may want to consider refinancing or consolidating your loans.
Refinancing your student loans could help to reduce your interest rates and allow you to pay off your loans more quickly.
When you refinance a student loan, you apply for a new loan from a private lender to total the amount of your current loans.
The lender will pay off all your student loans, replacing them with a single loan. You then enter an agreement with the lender, with new interest rates and terms, and proceed to make your payments to them.
Refinancing can be a great solution for borrowers looking to pay less each month, but it does have its downfalls. You should keep in mind that refinancing your federal student loans means losing access to benefits like income-driven repayment, forgiveness, and deferment.
But if you or your cosigner have a high credit score ranging from the upper 600s to mid-700s, you could get significantly lower interest rates by refinancing.
If you plan to refinance, be sure to shop around for the best rates. You may even be able to find flexible repayment plans with some refinanced loans.
Consolidating a Student Loan
Last but not least, you always have the option of consolidating your student loans. Whether your credit score is on the lower end of the spectrum or you don’t want to relinquish the benefits of federal loans, you might want to look into consolidation.
The Department of Education’s Direct Consolidation Loan Program allows you to merge multiple federal loans into one, making all your payments to the same servicer, at the same time.
You may even be able to lock in a new fixed interest rate while maintaining flexibility in your repayment schedule.
Consolidating may lengthen the term of your loan, meaning you pay more in interest over time. However, it can ease your financial burden by lowering your monthly payments…
If you’re mainly looking to decrease your monthly payments and streamline the repayment process, even if it costs more over time, consolidating could be a good strategy.
Just be sure to read the terms carefully and compare the terms of the consolidated loan to your current ones to decide if it’s the best call.
Student Loans Make College Tuition Manageable
Don’t let the cost of college attendance get you down.
While tuition is expensive, there are plenty of scholarships, grants, and loans to help make your dreams a reality.
You can’t change the cost of tuition, but you can take steps to make it more affordable.
Make smart financial moves to boost and maintain a solid credit score, and shop around to compare student loan rates. These moves will ensure you get the most out of your student loans.