Student loans allow many people to attend college who otherwise couldn’t afford it. There are several different types of student loans available, each with their own pros and cons. Generally speaking, student loans fall into two major categories – federal student loans and private student loans. Here is an overview of the 4 main types of student loans and how they work.
Federal Student Loans
The federal government offers student loans to eligible students and parents. Federal student loans usually have lower interest rates and more flexible repayment options compared to private loans. There are 3 main types of federal student loans:
1. Direct Subsidized Loans
Direct Subsidized Loans are need-based loans for undergraduate students. To qualify, you must demonstrate financial need based on your FAFSA results.
The government pays the interest on Direct Subsidized Loans as long as you are at least half-time in school, during the six months after you graduate, and during any authorized deferment periods. Over the life of the loan, this can save you a lot of money on interest.
Direct Subsidized Loans have fixed interest rates, which are currently 4.99% for undergraduates. The maximum you can borrow depends on your year in school and dependency status.
2. Direct Unsubsidized Loans
Direct Unsubsidized Loans are available to all undergraduate and graduate students, even those who don’t need the money. The person who takes out the loan is responsible for paying all of the interest.
While you are in school, during the grace period, and during deferment periods, interest is added. You can pay the interest as it comes due, or it will be added to the principal of your loan when you start paying it back.
Interest rates are currently 4.99% for undergraduates and 6.54% for graduate students. Loan limits are the same as the Direct Subsidized Loan program.
3. Direct PLUS Loans
Direct PLUS Loans let graduate students and parents of undergraduates who depend on them borrow up to the full cost of attendance, minus any other aid they receive.
Applicants must pass a credit check to qualify. PLUS Loans have a fixed 7.54% interest rate and require payment of all interest. Loan limits are determined annually based on school costs.
Private Student Loans
Private student loans are offered by banks, credit unions, online lenders, and other private institutions. Interest rates and terms vary between lenders. Here are some key facts about private student loans:
- Require a credit check – you’ll usually need good credit to qualify for the lowest rates
- Have higher, variable interest rates compared to federal loans
- Offer less flexibility in repayment plans and forgiveness programs
- Allow you to borrow up to the full cost of attendance minus other aid
- May require a cosigner if you have little/no credit history
Private loans help bridge the gap when federal loans and grants don’t cover the full cost of your education. Be sure to maximize your federal options first before turning to private loans. Also shop around between multiple lenders to find the best rates and terms.
How To Choose the Right Student Loans
When deciding which student loans to utilize, keep these tips in mind:
- Complete the FAFSA each year to qualify for federal loans and grants
- Max out your Direct Subsidized Loan eligibility if possible
- Only borrow what you truly need for school costs each year
- Compare federal and private loan options before choosing
- Pick loans with the lowest rates and most flexibility
- Ask about forgiveness programs and repayment assistance
- Create a budget to manage loan payments after school
Choosing the right student loans for your situation can save you money on interest and help ensure positive repayment experiences after graduation. Do your research to make informed borrowing decisions.
Summary
The 4 main types of student loans are:
- Direct Subsidized Loans – need-based, undergraduate only
- Direct Unsubsidized Loans – for undergraduates and graduates
- Direct PLUS Loans – for graduate students and parents
- Private Student Loans – offered by private lenders
Federal student loans usually offer better terms compared to private loans. Be sure to exhaust your federal options first before considering private loans. Compare interest rates, fees, eligibility criteria, and repayment terms carefully before choosing loans. Pick loan types and amounts that fit comfortably within your overall education budget. Making wise borrowing decisions while in school can set you up for successful repayment and financial health in the future.
Learn more about student loan borrowing options from the federal government and private lenders.
About 65% of todayâs college students graduate with some form of debt. So if youâre planning on going to college, thereâs a chance you might need a student loan. And itâs important to understand what options are available to you.
There are multiple types of student loans available from federal and private lenders. Read on to learn about federal and private student loans and what to consider before applying for one.
Key takeaways
- Federal student loans are issued by the federal government and offer benefits such as fixed interest rates and income-driven and flexible payment plans.
- There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.
- Private student loans are issued through institutions like banks, credit unions, schools and even state agencies. Private student loans can have fixed or variable interest rates and, depending on the lender, the interest may be higher or lower than on federal student loans.
Types of federal student loans
As the name suggests, federal student loans are issued by the federal government. Theyâre part of the Department of Educationâs William D. Ford Federal Direct Loan Program.
Federal student loans are broken down into four categories: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans. Within those categories, there are loan options for undergraduate students, graduate students, professional students and even parents.
These loans all share a few things in common, especially when it comes to interest rates. Interest rates on federal student loans are set each spring by the federal government and are all fixed. Federal student loan interest rates arenât based on the credit of individual borrowers, and they stay the same over the course of the loan.
Hereâs how each type of federal loan works:
Federal direct subsidized loans
Direct subsidized loans are available to undergraduate students of a college or career school who demonstrate financial need. The borrowerâs eligibility is determined by comparing how much it costs to attend a school with how much the studentâs family can contribute.
Because subsidized student loans are based on need, they often have better terms than other types of loans.
For example, the government will pay for the interest on subsidized loans as long as the borrower is enrolled in school at least half the time. It will also cover interest payments for six months after graduationâknown as a grace period. The same goes for a loan deferment, a period when payments are postponed.
If a subsidized loan isnât enough, an unsubsidized loan may be an option too. But how much an undergraduate can borrow across both types of loans depends on a variety of factors, including financial need and how far along in school they are.
Federal direct unsubsidized loans
Direct unsubsidized loans are available to undergraduates, graduate students and professional students. There are two major differences between unsubsidized and subsidized loans:
- Unsubsidized loans donât require borrowers to demonstrate financial need.
- Borrowers, not the federal government, are typically responsible for paying interest that accrues during school, grace periods and deferments. This is in part because of a process called capitalization.
Although borrowers are responsible for paying interest, the rate undergraduates pay for unsubsidized loans is the same as the rate for subsidized loans. Rates are generally a little higher for graduate and professional students.
Federal direct PLUS loans
Direct PLUS Loans are federal student loans specifically for graduate students and professional studentsâGrad PLUS Loansâor the parents of dependent undergraduate studentsâParent PLUS Loans. Direct PLUS Loan amounts are based on attendance costs and other financial aid the borrowers receive.
Eligibility for PLUS loans isnât based on financial need, but it does require a credit check. According to the Department of Education, an adverse credit history may negatively affect PLUS loan applications. Adverse circumstances include being at least 90 days past due on more than $2,085 on accounts, having debt in collections or having any of the following on credit reports within the previous five years:
- Default determination
- Bankruptcy
- Repossession
- Foreclosure
- Charge-off or write-off of federal student aid debt
- Wage garnishment
- Tax lien
Having an adverse credit history doesnât instantly disqualify borrowers from securing PLUS loans. But there may be additional requirements, such as having a co-signer.
Federal direct consolidation loans
Direct consolidation loans allow borrowers to combine multiple federal student loans into one loan with a fixed interest rate. The new rate is based on the average of all the loans being consolidated.
As the Department of Education says, thereâs no cost for this process. And consolidation can allow borrowers to roll multiple loans into one easier-to-remember payment.
But there are potential downsides to consolidation loans. For instance, borrowers may end up paying more in interest than they would have otherwise. Consolidating loans might also take away benefits, such as interest rate discounts, principal rebates, and eligibility for loan forgiveness or cancellation.
Other federal student loan programs
You may have come across information regarding other types of federal loans, such as Perkins Loans, the Federal Family Education Loan (FFEL) Program and the Health Education Assistance Loan (HEAL) Program. But those programs are no longer offered.
Types Of Student Loans Explained | 90 Second Finance
FAQ
What are the 4 types of federal student loans?
Federal student loans are broken down into four categories: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.
What is a type 4 student loan?
Older loans (from England or Wales) and loans taken out in Northern Ireland, are called plan 1 loans. Loans taken out in Scotland are called plan 4 loans. Another new type of student loan is called plan 5. This type of loan covers most loans taken out in England after August 2023.
What’s the difference between subsidized and unsubsidized loans?
Who pays the interest on subsidized and unsubsidized student loans while you’re in school and during grace or deferment periods is the main difference between the two. For subsidized loans, the government pays the interest during these periods.
What is a type 3 student loan?
Plan 3 is for English or Welsh students who got a postgraduate master’s loan on or after August 1, 2016, or who got a postgraduate doctoral loan on or after August 1, 2018. Plan 3 is also for EU students who started a postgraduate course on or after August 1, 2016.