Types of Student Loans
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 a student loan in the first place?
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 & Private Student Loan Options for 2020
It’s super important to understand which types of financing are available for the type of degree you’re after and at a particular university.
You should also know the difference between private and federal loans in order to find the best option for your situation.
Let’s cover federal first.
Federal Student Loans
What are federal student loans? To put it simply, federal student loans are funded and provided by the Federal Government. While there are different types of federal loans, they often offer specific benefits over private loans, such as income-based repayment plans and fixed interest rates.
In addition to being fixed, these interest rates are often lower than those you will find with private loans. These benefits alone often make federal loans more appealing to borrowers, in addition to being backed by the government. If you have a federal student loan and want to figure out how much you owe, check out the federal government’s website to search for your loans at StudentLoans.gov.
Federal loans also allow many borrowers to defer loan repayment for current students. This means you probably won’t have to start repayment until graduation, or you become a student enrolled at less than half-time. If you find yourself having difficulty covering your monthly loan payments, you will probably have more flexibility in finding a repayment solution that fits your current financial situation.
Federal student loan programs include:
- Direct Subsidized Loans
- Unsubsidized Loans
Direct Federal Student Loan Program
Subsidized and unsubsidized loans are often known as Stafford Loans and Direct Stafford Loans. They are available through the U.S. Department of Education and allow borrowers to attend four-year universities and colleges, community college, career or technical schools. Subsidized loans are available to undergraduates who demonstrate the need for financial aid, while unsubsidized loans are available to both undergraduate and graduate students who are not required to show the need for financial aid.
What’s the difference between direct subsidized and unsubsidized loans?
The U.S. Department of Education will pay the interest of your subsidized loans while you are in school (at least half-time), for the first six months after you graduate, and during a period of deferment. With unsubsidized loans, borrowers are responsible for paying interest during school, the six-month grace period, and periods of deferment. Otherwise, the interest capitalizes and is added to the principal balance of the loan.
- Interest accrues after school.
- 6 month grace period following graduation or program completion.
- Interest not capitalized.
- Gov’t covers interest during periods of deferment.
- Grad students are ineligible.
Do you qualify?
Enrolled in school at least half-time
Demonstrate Financial Need
Enrolled in a program that leads to a degree or certificate
- Interest accrues during school.
- 6-month grace period following graduation or program completion.
- Interest is capitalized and accrues during deferment.
- Higher interest rates for graduate students.
Federal Perkins Loan Program
Federal Perkins Loans, also known as Perkins Loans, are available to undergraduates, graduate students who have demonstrated a higher level of financial need.
Perkins Loans also have a low interest rate at 5%. Your school is the lender with Perkins Loans, so all of your payments will be made directly to the school or the school servicer. Heartland ECSI is one large servicer of Perkins Loans across the country.
Keep in mind though that not all schools participate in the Perkins Loan Program, so be sure to check with your school’s (or prospective school’s) financial aid office to see if this type of student loan is available to you.
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 effective converts your FFEL loan to a direct loan, thus making it eligible.
Interest Rates for Federal Loans Disbursed Between 2017 & 2018
|Loan Type||Borrower||Interest Rate|
*Data provided by Federal Student Aid, an office of the U.S. Department of Education
Before we dive into private student loan lenders, you should always see which federal loans and grants you are qualified for first. Do this by filling out the FAFSA Application for Student Aid, run by U.S. Department of Education.
Federal loans often have low fixed rates and are guaranteed by the Federal Government.
Private Student Loans
Before going any further, I want to be clear that this section covers private loans offered to students while attending a college or university.
For those who need a private loan or are looking to supplement other federal lending options, the rest of this post will guide you through other private loan options that give you the power you need.
In addition to loan options offered by the Federal Government, undergraduate and graduate loans are also available through private lenders, like Credible. Though not as commonly used by students at first, private loans are available through commercial lenders, state-based programs, and sometimes directly through colleges and universities.
While your initial thought might be “that’s great to have a loan option OTHER than the Federal Government,” there are some potential pitfalls that borrowers should be aware of.
Disadvantages of Private Student Loans
First, private student loans don’t usually offer the same number of repayment options as federal loans. In addition, since your ability to obtain a private loan depends largely on a student’s (and often their parents’) creditworthiness, interest rates can vary quite a bit and can potentially be significantly higher than those available through one of the federal options we discussed earlier.
A huge element of borrowing from a private lender for school is the frequent need for a cosigner
Anyone considering a private loan should take a close look at a number of different factors, including interest rate, total cost of the loan, Annual Percentage Rate (APR) and length of repayment.
Private Loan Options
While federal options may provide many students with the best initial option in taking out a student loan, they don’t always cover the full cost, especially when you consider housing and food needs while getting your degree. Graduate students are often more likely to need private loans in addition to any federal loans to cover the additional expenses and restrictions tied to getting a master’s, MBA, law or even Ph.D.
We have listed five private lenders below to help you get familiar with the different rates currently offered. We do our best to update our posts to reflect current interest rates, but always confirm the loan terms with a lender before taking out a loan!
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.
If repayment flexibility is a priority for your loans, call up prospective lenders and ask directly about what options you will have after graduation.
Private loans tend to have stricter repayment terms than federal loans. When faced with financial difficulties, it’s helpful to have forbearance, deferment and loan modifications.
Loan refinancing is another option for those who qualify. If things are going well financially, you might be able to snag a lower interest rate refinancing your student loans.
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!