Your Guide to the 8 Types of Student Loans

Student loan debt in the United States is a growing problem. The Federal Reserve estimates that in the second quarter of 2021, Americans owed a startling $1.73 trillion in student loans.

The two most common types of student loans are private and federal. Both types are meant to make higher education more accessible to people. However, there are very distinct differences between them. This includes things like when to apply, who’s eligible, and the loan terms themselves. Unfortunately, this can lead to high interest rates, difficulty repaying the loans and long-term debt. Before committing to any loans, it’s important to research the different types of student loans so that you can make an informed decision.

These are the Eight Types of Student Loans

Most people apply for student loans before they start classes or while they are still in college. Some people, though, take out student loans after leaving school. Sometimes, the student’s parents or legal guardian will take out a loan on the student’s behalf.

Whatever the case may be, here are the eight types of student loans out there:

1. Direct subsidized federal loan
2. Direct unsubsidized federal loan
3. Direct Grad PLUS loan
4. Direct Parent PLUS loan
5. Direct Consolidation Loan
6. In-school private loans for students and parents
7. Income-share agreements
8. Refinanced loans for graduates

First Steps

Nearly everybody qualifies for either federal, private, or both types of student loans. Yet, that doesn’t mean they should be the first choice.

Student loans are a long-term financial commitment. According to a recent survey, the average borrower takes 20 years to fully pay off their student loans. The biggest things that contribute to this are:

• Loan amount
• Interest rate on the loan
• Borrower’s ability to make payments
• When the borrower starts making regular, consistent payments

Everybody’s situation is different, so some people can pay back their loans earlier while others need more time. Still, any loan product is a big commitment, especially for young adults just out of college.

Before applying for any type of student loan, there are a few things you should do first. The good news is, these options do not require repayment, so there’s no risk to the student or their parents.

Fill Out the FAFSA

The FAFSA is the Free Application for Federal Student Aid. It’s an online form that prospective students use to see what types of funding they qualify for. The FAFSA includes things like student loans, work-study opportunities, grants and some scholarships.

The FAFSA opens up in October the year before students will enroll in college until the end of June. For the best financial aid package, it’s better to apply early.

Filling out the form requires a lot of information regarding the student and their parents (if they’re dependent). So, plan to have things like your social security number, income tax returns, bank statements and parents’ income before applying.

Fortunately, the steps to filling out the FAFSA are straightforward. Once you’ve filled it out, you’ll receive a Student Aid Report. This report will include all the types of aid you could receive for each college you’ve listed on the application.

After comparing the packages and accepting the best offer, the funding will be automatically applied to the cost of your education.

Apply for Grants and Scholarships

Scholarships and grants are money that goes towards the cost of college but doesn’t require repayment. Both are available through the government (FAFSA), nonprofit organizations and the college itself.

Scholarships are awarded based on the student’s merit; that is, their academics or extracurriculars. Grants are given to students based on financial need.

For most scholarships, you’ll need to fill out an application and write a personal statement. To find scholarships, check with your college’s website, consult an academic advisor or contact professional associations in your field. Or use this free tool.

Apply for Work-Study or Get a Part-Time Job

Work-study is a federal program that gives undergraduate and graduate students the chance to work part-time while in college. The money earned through work-study goes towards funding the student’s education. Depending on the college, the work-study program may be either on-campus or off-campus. Either way, the best way to apply for work-study is through the FAFSA.

Another option is to get a part-time job.

In 2017, 43% of full-time undergraduates also had part-time jobs. Many companies, especially those that pay minimum wage, will hire college students and work with their academic schedules. For juniors, seniors and graduate-level students, there are also some paid internships available. Although the pay may not be high, it can help with things like school fees, books and room and board.

Federal Student Loan Options

Around 30% of undergraduate students take out federal student loans at some point while in college. Federal student loans have quite a few advantages that private loans don’t. This includes:

• Fixed rates that are typically lower than interest rates on private loans
• Easy application that (usually) doesn’t require a cosigner or credit check
• More flexible repayment options
• Some loan forgiveness programs
• Option to consolidate several federal loans for a single, lower monthly payment and longer repayment plan

The U.S. Department of Education’s federal student loan program is known as the William D. Ford Federal Direct Loan Program. Under this program, the U.S. Department of Education, or the college, is the borrower’s lender.

Unlike private loans, the college or federal government will determine who the federal loan servicer will be. The loan servicer is the middleman between the government and the borrower.

When taking out a federal student loan, here are a few other things to consider:

• The maximum amount borrowed depends on the student’s grade level, the cost of college, and whether they’re a dependent student.
• Interest paid into government-backed loans has a higher chance of being tax-deductible. That said, some private loans are tax-deductible, too.
• There are a lot of options for student borrowers in the federal loan program.
• Eligibility for federal loans varies, but it’s possible to qualify for more than one loan at a time.

Four Types of Federal Student Loans

There are four different types of federal student loans available. Each type has its own eligibility requirements, maximum loan amounts, repayment terms and interest rates. Some of these student loans also come with certain limitations or special qualifications. Here’s what you need to know before applying.

Direct Unsubsidized Federal Loan

Undergraduate and graduate-level students who are enrolled at least part-time may qualify for a direct unsubsidized federal loan like the Stafford loan. Independent students and dependent students whose parents cannot get a Direct PLUS loan may also be eligible.

These loans are not based on financial need, but the amount offered does depend on:

• The student’s year in school
• The student’s status as dependent or independent (claimed on their parents’ taxes or not)
• The cost of education

Here’s what to expect with a direct unsubsidized federal loan:

• Interest starts to accrue from the date of funds disbursement and continues to accrue until the loan is fully repaid.
• A borrower may take out up to $31,000 in total across all their academic years.
• The school determines how much you can borrow based on the cost of attendance and other financial aid.
• For undergraduates, the interest rate is 3.73%; for graduates, it’s 5.28%.
• The loans have an origination fee that’s currently 1.057% with a standard repayment plan of 10 to 25 years.
• Borrowers may cancel all or part of the loan before the money is disbursed.
• There are some options for loan forgiveness.

Just like with other federal loans, students can use the funds from the direct unsubsidized loan for anything academic-related. This includes tuition, room and board, school fees and health insurance.

Direct Subsidized Federal Loan

Any eligible undergraduate student with demonstrated financial need can qualify for a direct subsidized federal loan. Financial need is determined by the information provided on the FAFSA. Eligibility is also based on the student’s status as a dependent or independent and their grade in school. There is no need for a credit check.

Here’s what to expect with a direct subsidized federal loan:

• Slightly better interest rate than other loan options.
• The federal government pays for any interest on the loan while the student borrower is enrolled at least half-time. The government also pays the interest during the six-month grace period after leaving school and during deferment periods.
• Students may borrow between $3,500 and $5,500 per academic year (depending on independent or dependent status and year in school). The maximum aggregate borrowing limit is $23,000.
• Those pursuing a 4-year degree can borrow for up to six years. Those in a 2-year program can borrow up to three years.
• Currently, these loans have a 3.73% fixed interest rate, 1.057% origination fee, and 10 to 15-year repayment plans.
• As with other federal student loans, the borrower may use the funds for any school-related reason.

As a federal loan, the direct subsidized student loan is also eligible for certain loan forgiveness programs. Those impacted by COVID-19 may also benefit from suspended interest and loan payments.

Direct PLUS Loans

Direct PLUS loans are a type of student loan available to graduate and professional students. They’re also available to the parents or legal guardians of dependent undergraduate students. There are two types of Direct PLUS loans:

• Direct Grad PLUS loans. With these loans, borrowers don’t need to make payments while enrolled in college at least half-time. They also don’t need to pay for six months after graduation. Borrowers may also be eligible for a repayment plan based on their income after graduation. They may also be eligible for certain loan forgiveness programs. Interest does start to accrue from the moment the funds are disbursed, however.
• Direct Parent PLUS loans. These loans are available to the parents of dependent undergraduates. Once the funds are disbursed, the borrower must start making payments immediately unless they qualify for financial-based deferment. There are no income-driven repayment plans or loan forgiveness programs. However, borrowers may be able to get an extension on their existing loan to lower their monthly payments. It’s also possible to consolidate a Direct Parent PLUS loan through a federal direct consolidation loan.

In general, Direct PLUS loans are designed to supplement other funding like scholarships, grants, and subsidized or unsubsidized loans. They can help cover things like tuition, room and board, school fees, books and more.

Currently, Direct PLUS loans have a fixed interest rate of 5.3% and a 4.228% origination fee. They do require a minimum credit score or a cosigner to qualify.

Direct Consolidation Loan

With a direct consolidation loan, you can combine other federal student loans into one loan with a fixed repayment plan. Here are a few things to note:

• Borrowers may only be eligible for loan consolidation after leaving school. If their federal loans are sent to collections, they may be able to retrieve them through a debt consolidation loan.
• These loans are typically eligible for loan forgiveness programs and income-driven repayment plans.
• The new interest rate for the direct consolidation loan is based on the loans being consolidated.

While consolidating existing federal student loans has its advantages, it does have a few downsides. For one thing, consolidation means a longer repayment term, which means paying more in interest over time. For another, if you consolidate your federal loans, it could take longer to qualify for Public Service Loan Forgiveness.

Can I Cancel a Loan if I Don’t Need It or If I Need Less Than the Amount Offered?

Yes, but you must cancel the loan before the money is disbursed. If you choose to cancel the loan, you must also inform the school’s financial aid office.

If the funds have already been put towards your education, it may still be possible to cancel them. Typically, borrowers have up to 120 days from the date of disbursement to do this without any interest or fees.

The specifics should be in the promissory note that came with the student loan itself. Check the note for more information about how canceling the loan works.

What’s the Difference Between Direct Subsidized Loans and Direct Unsubsidized Loans?

In a nutshell, Direct Subsidized loans typically have slightly better terms than Direct Unsubsidized loans.

Who Can Get Direct Subsidized Loans?

Any undergraduate student with demonstrated financial need can qualify for a Direct Subsidized loan. The college will determine how much the student can borrow based on their family’s income, the cost of education and other qualifying factors. As of 2021, the maximum borrowing amount is $23,000 across all years in college.

Who Pays the Interest?

The U.S. Department of Education pays the interest while the borrower is enrolled half-time or full-time in college. The department also pays during the grace period (first six months) after the borrower leaves school. Further, they pay during periods of deferment, which can last up to three years. In all other cases, the borrower is responsible for paying the interest and principal balance on the loan.

Who Can Get Direct Unsubsidized Loans?

Undergraduate, graduate and professional-level students can qualify for Direct Unsubsidized Loans. It is not necessary to show any financial need to receive one. However, the student must be enrolled at least half-time in a college that participates in the program.

How Much Can You Borrow?

This depends on several factors, including the cost of attendance, the borrower’s status as a dependent or independent, their year in school and how much other financial aid they receive. The total amount an individual can borrow is $31,000.

Who Will Pay the Interest?

Unlike with Direct Subsidized loans, the borrower is responsible for paying the interest the moment the funds are disbursed. However, those who are enrolled at least half-time can postpone paying until after leaving the school. They can also postpone any interest during deferment, forbearance and the six-month grace period. The interest will continue to accrue during these periods and will be added to the principal balance once they’re over.

Private Student Loans

With federal student loans, there are more protections available to the borrower such as student loan forgiveness and deferment. That’s why it’s a good idea to exhaust your federal loan options before turning to private loans.

If you’ve already weighed your options, here are some key things worth mentioning about private student loans:

• Many types of private loans exist, each with its own eligibility requirements, terms, and interest rates.
• Private loans can often be customized in terms of things like amount and repayment.
• Depending on the lender, you may be looking at either a fixed or variable interest rate.
• These loans usually require a credit check, a reliable income, or a cosigner.
• If you have good credit (670+), you may qualify for better rates and terms.
• Some private lenders will lend money to borrowers with poor credit. These loans usually come with higher interest and other fees.
• A few lenders will use the borrower’s earning potential when determining their eligibility.
• Private student loans may be eligible for deferment and forbearance, income-based payment plans and in-school payment plans.
• Most private student loans are available through banks, credit unions, or online lenders.
• Private student loans do not qualify for Public Service Loan Forgiveness.

Whatever else, never choose the first lender you find. Compare different loan options from different lenders first. Consider things like interest rates, prepayment penalties, repayment programs and other terms or fees.

Three Types of Private Student Loans

There are quite a few private student loans out there, but here are the main ones.

In-School Private Loans for Students and Parents

In-school private loans are loans that students or their parents can get while the student is enrolled in a college program. Each private lender has its own eligibility requirements, interest rates and repayment terms.

Here are a couple of good in-school private loan lenders.

• Sallie Mae Private Student Loan. Sallie Mae’s student loans come with variable interest rates ranging from 1.13% to 11.23%. They have no origination fees and have a fixed APR of 3.50% to 12.60%. These loans can cover up to 100% of education-related expenses. They’re best for undergraduate students with good credit.
• SoFi Private Student Loan. SoFi offers private loans to undergraduates, graduates, professional-level students, and parents. SoFi can cover up to 100% of the cost of college. Loans have either a fixed APR (2.99% to 10.66%) or a variable APR (0.95% to 11.18%). For borrowers who don’t have good credit, it’s still possible to qualify with a cosigner. SoFi also offers unemployment protection in select cases.
• Advantage Education Loan Parent Loan. Advantage Education offers two types of private loans to parents and students. The lender offers an Advantage Education Loan to graduates, professional students, and undergraduates. They also offer the Advantage Parent Loan, which is for parents and has better rates than Direct PLUS loans. Both types of private loans have a fixed APR ranging from 2.84% to 6.23%, but no origination fees. The lender itself also offers refinancing and student loan consolidation.

Income-Share Agreements

Income-share agreements (ISAs) are a unique type of student loan. With an ISA, the lender pays for part of the borrower’s education in exchange for a portion of their future salary. The borrower must comply with this agreement until they’ve repaid the lender in full. ISAs are available through specific colleges, certain private organizations and some private lenders.

ISAs can be risky, depending on the lender. In some cases, they have a higher interest rate than both federal and certain types of private loans. The payment amount can also fluctuate based on the borrower’s current income.

Ultimately, ISAs are best for those who need help covering small gaps in their college funding. That said, it’s better to exhaust all other options before going this route.

Refinanced Loans for Graduates

Current graduate students can refinance student loans from their undergraduate years. Doing this can lower monthly payments and make the loans easier to manage.

On the other hand, refinancing loans will disqualify the previous loans from most student loan forgiveness programs. Refinanced loans may also not be eligible for income-driven repayment plans.

Still, some private lenders (like SoFi and PenFed Credit Union) offer decent rates to those with good credit. Check with potential lenders for their eligibility requirements, loan terms, and interest rates before applying.

Still want to know more about student loans? Check this out:

The Bottom Line

When it comes to student loans, weigh your options carefully. In most cases, federal student loans are better since they offer the most protection and usually have the best rates. That said, some private lenders also offer competitive rates, flexible repayment plans and more loan customization.

Consider your financial situation, status as a dependent or independent student, and cost of education before choosing any loans. If you decide to go with a private lender, do your research to make sure you’re getting the best rates.

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