A Guide to the Different Types of College Student Loans.
Last Updated on March 8, 2024 by Jill Schwitzgebel
With the high cost of college, families frequently need the additional funding offered by student loans. But too often, families don’t have a clear understanding of the various loan options or how student loans really work. Understanding the different types of student loans is crucial to be able to make informed decisions.
Before you get started with loans, I recommend reading How Much Does College Really Cost so that you can be sure you understand how loans fit into your student’s financial aid package. After that, you’re ready to explore the different types of student loans and their features.
Federal Student Loans
These are the best types of student loans to use, but students are limited in how much they can borrow. Students qualify for these by completing the FAFSA. These loans are provided by the US Dept of Education and include borrower protection. There are two types:
1. Direct Subsidized Loans: These are based on financial need determined by the FAFSA. The government will pay the interest while the undergraduate student borrower is in school and during deferment periods.
2. Direct Unsubsidized Loans: Available to graduates and undergraduate students. These loans are NOT need-based, and interest begins accruing while the student is still in school (though does not need to be paid until after a student is no longer in school).
3. Perkins Loans: These were low-interest loans for student that have exceptional financial need. They have not been offered since 2017.
4. Parent PLUS loans: These loans are available to parents of undergraduate students, as long as they claim that student as a dependent. There are also Graduate and PLUS loans for graduate students. These are intended to help with expenses not covered by the college’s financial aid package or Direct student loans.
States or Institutional Loans
Many states and educational institutions offer their own loan programs to supplement federal aid. These loans may have unique terms and eligibility criteria, including residency requirements or enrollment in specific schools. They often require completion of the FAFSA.
Private Student Loans
These are offered by banks, credit unions and other financial institutions. In general, people use these to help fill any funding gap left by the college’s financial aid package. Often, families don’t have the cash on hand to pay the share that the college says that they are responsible for paying, so they turn to private loans. Depending on the lending institution, they may also require completion of the FAFSA. It’s essential to compare multiple private loan offers before making a decision.
Before making the decision to take out any private loans to cover the costs of your student’s education, consider:
- Interest Rates and Terms: Private loans have variable interest rates and may require a credit check (likely) or a co-signer.
- Repayment Flexibility: Private loans may offer different repayment plans and options, such as deferred payments or income-driven repayment, depending on the lender.
- Borrower Benefits: Some private lenders provide benefits like interest rate reductions for on-time payments or automatic payment discounts. Consider these additional perks when evaluating private loan options.
Conclusion
Before taking out ANY loans at all, students need to consider future earning potential, repayment obligations, and FIRST, take advantage of scholarships, grants and work-study, if offered. The goal should be to minimize debt upon graduation. Families also need to become familiar with various repayment options to help manage repayment after graduation. This is likely the largest financial commitment that any teen has ever made, and it is crucial that parents help to explain their future responsibilities and obligations.
There is absolutely nothing wrong with taking out loans to allow students to fund their education. However, it is also crucial that you and your student are making informed decisions about loans. My recommendation is that families should always begin with federal student loans, before turning to private loan sources. Federal loans will offer the most favorable terms and borrower protections, sometimes not even accruing interest during the undergraduate years. I caution families to hesitate before turning to private loan sources to be certain that repayment will be affordable.
