Your Guide to Understanding Every Type of Student Loan Available Today

types of student loans

With so many types of student loans, how do you pick the right one?

Even when narrowing your focus to federal student loan options, there are a half-dozen different options with varying eligibility requirements, interest rates, and maximum borrowing amounts.

To help you find the best option, here’s an overview of the types of student loans available, both federal and private.

Federal student loans

Filling out the FAFSA, applying for grants and scholarships, and lining up work-study or part-time job opportunities are all important precursors to taking out a student loan. Unlike those steps, taking out a loan will require repaying what you borrow, plus interest.

It’s important to clarify what makes federal student loans unique to private options.

  • Interest rates are generally lower and always fixed.
  • Credit checks and cosigners are mostly unnecessary.
  • Flexible payment plans and loan forgiveness programs may be available.
  • Consolidating multiple federal loans can lower a monthly payment if the repayment plan is extended.

Three more important considerations about these government-funded loans:

  • Maximum borrowing amounts depend on grade level and dependency status, plus the cost of attendance.
  • Loan servicers are chosen by the federal government or school, which serves as the lender.
  • Paid interest might be more easily tax-deductible (though private loan interest can also be eligible).

The federal loan program is robust and offers many different types of student loans. Though specific eligibility requirements vary, you could qualify for one or more of the following types of federal student loans.

1. Federal Perkins Loans (no longer available)

Before it expired on Sept. 30, this school-based program was designed for undergraduate, graduate, and professional students who could demonstrate extreme financial need. In other words, students who come from low-income families or who are completely independent.

The advantage of taking out a Perkins Loan was that your school would pay the interest that accrued while you were enrolled. Not all schools offered Perkins Loans, and those that did might have had limited funds to spread around. This sometimes resulted in needy students not receiving the maximum amount or not getting any support at all.

Interest rate: 5%
Max borrowed: $5,500 for undergraduates, $8,000 for graduates
Loan fee: n/a

2. Direct subsidized federal loans

Also known as Stafford loans, direct subsidized and unsubsidized loans have one significant difference. With subsidized debt, the Department of Education will cover the interest that accrues on your loans while you’re enrolled at least half-time in school.

For example, one year of interest on a $5,500 loan would be $206.80 for a Class of 2016 college freshman. If you qualify for a subsidized loan, the government will foot that bill for you.

Eligible undergraduate students must demonstrate a financial need to benefit from this. The schools to which you’ve been accepted will then detail the amount you can borrow in your college award letter.

Interest rate: 3.76% for undergraduates, 5.31% for postgraduates (for loans disbursed July 1, 2016, to July 1, 2017)
Max borrowed: $5,500 to $12,500 for undergraduates, $20,500 for graduates.
Loan fee: 1.069% (for loans disbursed Oct. 1, 2016, and Oct. 1, 2017)
Terms: 10 to 25 years

3. Direct unsubsidized federal loans

Unlike subsidized federal loans, the unsubsidized version is also accessible to graduate and professional students, and awarding of the loan is not based on financial need or merit. In other words, almost everyone is eligible for this loan, as long as they’re enrolled at least half-time in school.

With unsubsidized loans, you’re on the hook for accruing interest while you’re enrolled, as well as during a grace period or while in deferment or forbearance. What’s more, the interest capitalizes when it goes unpaid, meaning that it will be added to the principal of the original loan amount.

Interest rate: 3.76% for undergraduates, 5.31% for postgraduates (for loans disbursed July 1, 2016, to July 1, 2017)
Max borrowed: $5,500 to $12,500 for undergraduates, $20,500 for graduates
Loan fee: 1.069% (for loans disbursed Oct. 1, 2016, and Oct. 1, 2017)
Terms: 10 to 25 years

4. Direct PLUS loans

PLUS loans, whether they’re for students or parents (see No. 5, below) are unique in that they require the applicant to undergo a credit check. The Direct PLUS loan, specifically, was built for graduate and professional students who have had more time to improve their credit score (unlike undergraduates entering college, who might have never held a credit card).

To qualify for PLUS loans, a bad (or limited) credit history can be helped by an endorser who has strong marks on a credit report.

Direct PLUS loans also give their borrowers until six months after they finish or leave school to begin making payments.

Interest rate: 6.31% (for loans disbursed July 1, 2016, to July 1, 2017)
Max borrowed: The cost of attendance minus any other financial aid
Loan fee: 4.276% (for loans disbursed Oct. 1, 2016, and Oct. 1, 2017)
Terms: 10 to 25 years

5. Parent PLUS loans

This loan type is for biological, adoptive, and stepparents to support their dependent undergraduates. A key difference between Parent PLUS loans and other types of loans is that parents are expected to make payments while their children are in school, though they may request deferment during the loan application process.

The government does not offer a way for parents to transfer a PLUS loan to their children, but some private lenders do allow you to refinance a Parent PLUS Loan in a child’s name.

Interest rate: 6.31% (for loans disbursed July 1, 2016, to July 1, 2017)
Max borrowed: The cost of attendance minus any other financial aid
Loan fee: 4.276% (for loans disbursed Oct. 1, 2016, and Oct. 1, 2017)
Terms: 10 to 25 years

6. Direct Consolidation Loans

Consolidating any of the federal loan types above allows graduates (or dropouts) to pool multiple loans into a single loan with a single loan servicer. This means you can make a single monthly payment, too.

That payment would also likely be lower than your past loans, as the repayment period can be extended up to 20 years.

Although consolidation is convenient, it’s not right for everyone. It might give one borrower access to income-driven repayment options, but it might erase another’s progress toward Public Service Loan Forgiveness.

Before deciding to consolidate, it’s important to consider your own situation.

Interest rate: The weighted average of the interest rates on your existing loans
Loan fee: n/a
Terms: Up to 30 years

Private student loans

Even some private lenders will tell you to consider taking out federal loans before weighing their own products. This is because of the protections mentioned above that the government affords its borrowers.

Those same private lenders, however, will present their student loan options as customizable to your financial situation, while positioning the federal government’s as one-size-fits-all.

The private loan details that can be personalized:

  • Variable interest rates are offered, in addition to fixed rates.
  • While cosigners are almost always required, a strong credit history can lower your interest rate.
  • Repayment options, from deferment programs to in-school payments, can make your monthly bill more manageable.

When comparing private lenders to federal loan options, ensure that the little details important to you aren’t lost. For one borrower, this might be asking about prepayment penalties; for another, repayment protections like forbearance might be crucial.

1. In-school loans for students and parents

The beauty of in-school student loans in the private marketplace is that there are many to choose from. Whether you’re a college freshman, a scholar seeking a doctoral degree, or are the parent of one — there’s something for everyone. Sallie Mae, for example, offers 11 different education loans, from paying for the private kindergarten of your toddler to financing your study for the bar exam.

But with varying loan types come more choices. Take repayment as one example: College Ave, one of Sallie Mae’s competitors, offers undergraduates four options while they’re in school:

  • Defer payments entirely
  • $25 monthly payments
  • Interest-only payments
  • Full principal-and-interest payments

With this greater degree of decision-making, it’s important to put private lenders to the test as you’re shopping around. Don’t rely on them to provide every bit of information you need to make a good choice.

2. Refinanced loans for graduates

Whereas the federal government’s Direct Consolidation Loan allows borrowers to combine multiple federal loans into one, private lenders offer the option of refinancing federal and private loans into one new loan.

The key difference here is that consolidating federal loans doesn’t directly save you money; it might actually cost you more, as the repayment term could lengthen.

Refinancing, however, could award you a lower interest rate and help you save on the total cost of your debt. A solid credit score and steady income can help you qualify for the lowest interest rates.

Private lenders aren’t shy about promoting their average customer’s savings by refinancing. Although that number is important, consider whether you’re the type of borrower who is likely to match that success. It’s especially important to proceed with caution if you’re refinancing federal loans and would lose their associated protections and forgiveness programs.

Here’s what to consider before you refinance any of your student loans.

The right student loan for you

Part of why private loan companies have enjoyed success in lending to students, graduates, and parents alike is that they’re able to offer customized loans to creditworthy borrowers. Federal loans, on the other hand, were established to help cash-poor or credit-risky borrowers afford the rising costs of college.

Review all of these student loan types before deciding what’s best for you — and only you.

Want more help comparing your options? Check out some more key differences between federal and private student loans.

Need a student loan?

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1 = Citizens Disclaimer.

2 = CollegeAve Autopay Disclaimer: The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

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