Types Of Student Loans

Reading time: 4 minutes

4 minutes read

Category: Loans
Posted on: 08/03/2021
A small graduation cap and tassel on top of a calculator, all on a desk near a pile of notebooks and a stack of cash.

With the rising costs of college tuition, it can be challenging to save enough to cover tuition, campus housing, books, and a meal plan, not to mention all the other costs involved. You can find yourself needing to take out a loan to cover all these costs.

How can you know what student loan is right for you? It is a good idea to familiarize yourself with the types of student loans before making the best decision to fit your needs.

Federal loans and private loans are the two major categories of students loans available to the public. Continue reading for more information on federal and private student loans.

Federal Loans

As you would expect, federal loans are loans provided to you by the federal government after filling out the FAFSA (Free Application for Federal Student Aid). It is important to note that you can only qualify for federal loans if you have completed that form.

These federal loans are broken down further by federal student loans and federal parent loans. The federal parent loans, or Direct PLUS loans for parents, benefit the student, but repayment is entirely the parent's responsibility.

Loans students can apply for through the federal government are direct subsidized loans and direct unsubsidized loans. Direct PLUS loans fall under the student loans but are geared towards graduate or professional students.

The difference between subsidized and unsubsidized loans is that the government will pay the interest with subsidized loans as long as you're in school as at least a part-time student. With unsubsidized loans, you are responsible for all of the interest throughout the life of the loan. Subsidized loans are given based on financial need.

Federal loans are the best loan option for students to pay for education as interest rates are fixed and usually lower than rates offered on private loans, and they do not require a cosigner. Federal loans also do not require a credit check to qualify, as they are strictly based on the FAFSA. The exception to that rule would be the PLUS loans.

Another reason to look into federal loans is that they offer income-based repayment plans, which can come in handy as you enter the workforce after graduation. If you choose to work in the public service sector, you may also qualify to have a portion of your loan forgiven.

If taking out a loan is the route you must take to pursue your education in college, use every opportunity to take out federal loans before you look into taking out a private loan.

Private Loans

Unlike federal loans, private loans are available through private banks, credit unions, and some state agencies. These are more of a last resort type of loan as they do not have as many of the benefits or the flexibility that the federal loans offer.

When applying for these types of loans, you will likely be required to have established a credit record or apply for the loan with a cosigner. The rates may be fixed but could have variable rates that may or may not be better than the rates on the government loans. These loans are not subsidized and, aside from loans offered through state agencies, cannot be forgiven like federal loans. Students and parents alike can apply for private loans.

Repayment may start upon graduation, but oftentimes payments are required while you are still in school.

These loans are created to benefit the lender rather than you, so definitely be sure to exhaust all efforts to get federal loans before taking out any private loans.

Direct Consolidation Loans

As you graduate college, your federal loan payments will begin, and sometimes it can be hard to pay back all that you owe when you're just starting out in the real world. With a direct consolidation loan, you would be allowed to combine all of the federal student loans you took out over the course of your tenure at college and create a single loan. This means you have one payment every month instead of multiple.

If your federal loans were taken out using different loan servicers, a consolidation loan could help to simplify your life. Instead of tracking different loans and making sure each servicer is paid, you will only have to worry about one payment and one bill every month.

They are not always the best answer. Consolidation usually increases the length of time you will be repaying. This means more payments and more interest over time. Consolidation loans also take any outstanding interest and makes that part of the principal balance on your consolidation loan. So now you will be accruing interest on a higher balance.

There are some serious downsides to a direct consolidation loan. You will need to do your homework if you think this is the route you will want to take.

The Bottom Line

Outstanding student loan debt reached a total of $1.41 trillion in 2019 in the United States. According to credit reporting agency Experian, this is a 6% increase from 2018. With so many students needing to take out loans to get a college education, it is important to understand the options available. As you explore ways to pay for education, remember to fill out your FAFSA and take out federal loans offered before turning to private loans. In the long run, federal loans offer better rates and more flexible loan repayment options.

Finance Guru

Finance Guru