Types of Student Loans

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If you’re like me, today’s student loan marketplace probably feels completely full of refinancing offers.

And that’s great – giving graduates the ability to refinance costly student loans goes a long way in promoting financial independence for recent graduates and working professionals.

But, what about securing that initial student loan?

Understanding your educational needs and financial goals upfront will save you money in the long run, and put you in a position where refinancing isn’t as necessary five or ten years down the road.

Whether you are thinking about going to college, want to go back for a graduate degree, or are simply new to student loans, this article will explain everything you need to know to get started.

Federal vs. Private Student Loan Options for 2020

The first thing to understand is that there are two broad types of student loans:

  1. Federal Loans: These are available through the government, specifically Federal Student Aid, an office of the U.S. Department of Education.
  2. Private Loans: These are available through private lenders, such as Sallie Mae or other banks.

As a rule of thumb, federal loans should be your first source of funding due to their advantaged repayment options and loan forgiveness programs.

But, there are several different types of federal loans (depending on the borrower type and need), and they may not cover your total cost once you factor in housing, dining and supplies.

Private student loans can bridge the gap between what’s available from federal programs, and they can sometimes offer lower rates than federal loans if you have excellent credit.

Let’s dive deeper into both of these, starting with federal first.

Federal Student Loans

What are federal student loans? To put it simply, federal loans are provided by the government. While there are several different types of federal loans, most offer meaningful benefits compared to private loans – such as income-based repayment plans, loan forgiveness programs, in-school payment deferment and low fixed interest rates.

Federal loans don’t require a co-signer or good credit. Instead, to qualify for these, you simply fill out the Free Application for Federal Student Aid (FAFSA) each year.

You also must be attending a four-year university, community college, career or technical school.

Federal Loan Programs

Current and discontinued Federal student loan programs include:

Direct Subsidized Loans

Undergraduates who demonstrate need qualify for subsidized loans (up to a certain amount), and unsubsidized versions are available to the rest.

Subsidized means that the U.S. Department of Education will pay the interest of your loans while you are in school (at least half-time), for the first six months after you graduate (“grace period”), and during any periods of deferment.

Do you qualify?

  • Undergraduate student
  • Enrolled in school at least half-time
  • Demonstrate financial need
  •  Enrolled in a program that leads to a degree or certificate

Direct Unsubsidized Loans

You don’t need to demostrate need to qualify for unsubsidized loans, and they are available to both undergrads and graduate students.

With unsubsidized loans, borrowers are always responsible for the interest. You can make interest payments while you are in school, during the grace period, and during any deferments; otherwise, the interest capitalizes and is added to the loan’s principal.

PLUS Loans

PLUS loans are available both to graduate students and parents. They have higher interest rates and fees, and require a credit check.

If you’re an undergraduate student whose parents don’t qualify for a PLUS loan because of bad credit, you may be able to receive additional Direct Unsubsidized Loan funds.

Perkins Loans

Until 2017, Perkins loans were available to all undergraduates and to graduate students who demonstrated a higher level of financial need.

With Perkins loans, your school was the lender- meaning you borrowed from and repaid the debt to your school or to the school’s servicer. Heartland ECSI was a large servicer of Perkins Loans across the country.

However, these are no longer available.

Federal Family Education Loan Program (FFEL)

The Federal Family Education Loan Program officially ended in March 2010 and previously was the second largest federal loan program. Through the FFEL Program, private lenders were able to make loans guaranteed by the federal government.

As you can imagine, this program provided a substantial benefit to private lenders by insuring private lenders against default. The federal government also partially subsidized the loans by paying fees the private lender would otherwise need to cover.

Since this program is now defunct, it’s important to know how carrying an FFEL loan impacts your ability to pay it down. FFEL loans are not eligible for all federal repayment programs.

In order to make yours eligible, you’ll have to consolidate them into a Direct Consolidation Loan. This effectively converts your FFEL loan to a direct loan, thus making it eligible.

Current Interest Rates for Federal Loans

Federal loan interest rates are set by Congress each year, using a formula involving the rates of 10-year treasury notes from the previous period plus an add-on percentage that varies depending on the loan type.

Once your loan is disbursed, the rate is fixed for the life of the loan.

Rates for loans disbursed before July 1, 2021 are:

Rates last updated: July 14, 2020
Type of Federal LoanBorrower TypeFixed Interest Rate
Direct Subsidized OR Direct UnsubsidizedUndergraduate2.75%
Direct UnsubsidizedGraduate4.30%
Direct PLUSGraduate or Parent5.30%
PerkinsUndergraduate or Graduate5.00%

Private Student Loans

Undergraduate and graduate students can also borrow from private lenders, like Credible or SallieMae.

These can sometimes offer lower rates for borrowers with excellent credit, and can help supplement federal funding (which doesn’t always cover the total cost of attending school).

Graduate students, for example, are often more likely to need private loans in addition to any federal loans to cover the expenses and restrictions tied to getting a master’s, MBA, law or even Ph.D.

However, as I mentioned earlier, private loans lack many of the “perks” offered by federal loans, so be sure to fully understand the implications before choosing a private loan over a federal one.

Disadvantages of Private Student Loans

Some of the limitations of private loans include:

01. Repayment. Private loans don’t usually offer the same flexibility in repayment terms compared to federal loans. In case you face financial hardships in the future, it’s helpful to have forbearance, deferment and income-driven payments available to you.

If you’re considering a private loan, call up prospective lenders and ask directly about what options you will have after graduation.

02. Creditworthiness. Private loans require creditworthiness (or a cosigner), and any dings in your credit will cost you quite a bit in terms of what interest rate will be available to you. Other than PLUS loans, federal programs, on the other hand, don’t require a credit check and offer a fixed rate for all borrowers.

If you’re considering a private loan, be sure to understand the terms: interest rate, annual percentage rate (APR), total cost of the loan, and length of repayment.

03. Loan Forgiveness. There are several federal programs available for student loan forgiveness, but these don’t apply to private loans. If you qualify or potentially qualify for any of the programs, you definitely want to look at federal loans first.

How to Choose a Private Student Loan

I wish there was a one-size-fits-all solution here. But as you can imagine, everyone’s situation is unique.

You have to factor in the loan amount, the type of degree you’re working towards, your credit history, whether you have a cosigner, and more.

Before deciding on any lender, be sure to shop around with different private student loan lenders to see who can offer the best rate. Knowing the difference between fixed and variable rates will help you strategize long-term when it comes to loan repayment.

Different Types of Student Loans for Different Needs

Now, you should have all of the information you need to decide which type of student loan is best for your needs.

We also have some additional great resources to check out if you are interested in more information about student loans.

I have already mentioned our student loan refinancing guide, and once you have your loan, our post on the 7 simple ways to get out of student loan debt will help you pay that student loan off even faster!

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