Student Loan Types
The United States has more student loan debt than car loan and credit card debt, accounting for around $1.5 trillion in total. The vast majority of this debt is federal student loan debt, and debtors in their mid-30s have the highest share. But what are the different types of student loans, which options are best for graduates and undergraduates, and what repayment plans can help you when refinancing?
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Types of Federal Student Loan
Federal student loans are provided by the government and offer more favorable rates and terms. They are more flexible and offer a wide range of repayment options and forgiveness programs as well.
You should always apply for a federal student loan before you apply for a private one, opting only for the latter if you can’t get the former. To apply for a federal student loan, complete the Free Application for Federal Student Aid (FAFSA) form on the official Department of Education website.
It’s always best to apply early as there are limited funds and placements. Here is a selection of the types of federal student loans available:
Direct Subsidized Loans
You’re not required to pay any interest on a subsidized loan while you’re in school and the payments won’t begin until you leave. The interest rates are set every year and are much more favorable than the rates offered by private loans.
To qualify for a subsidized federal loan, you need to prove that you’re experiencing hardship, which generally means you have a household income of less than $50,000. There are limits placed on how much you can borrow as an undergraduate, freshman, and sophomore.
Direct Unsubsidized Loans
With an unsubsidized loan, you must cover all of the interest while you’re in school. However, these payments are deferred until you graduate, which means the interest will accumulate in school, but you won’t need to pay until you leave.
There are no hardships or other strict requirements with unsubsidized loans—all students can qualify for them—but there are limits on how much you can borrow. These limits are capped at $20,500 per year for graduate students and medical students can apply to borrow as much as $224,000.
Direct PLUS Loans
Direct PLUS loans are offered to graduates and their parents. They work in much the same way as unsubsidized loans but there are no limits, which means they can be used to cover additional expenses that are not covered by other types of federal student aid.
PLUS loans have higher interest rates, but at between 6% and 7%, they are still less than what you might be offered with private student loans.
The Perkins Loan program has been discontinued as of 2018. These popular loans provided a fixed interest rate of 5%, they were subsidized, and they offered a number of perks, including a long grace period. However, they were deemed surplus to requirements and were shut down by the Trump Administration.
Types of Private Student Loan
Private loans are offered by banks and credit unions, often with higher interest rates and stricter terms than federal student loans. Private loan lenders will check to make sure you can afford the monthly payments and because students rarely have the scores needed to secure big loans, they often seek help from a co-signer, such as a parent or a grandparent.
Private Student Loans for Bad Credit
You can get a private loan if you have bad credit, but it won’t be easy, you’ll probably need help from a co-signer, and you may be stuck with repaying a high-interest rate. If you have bad credit, it’s best to try for a federal loan.
Private Loans for International Students
You can’t apply for federal loans if you’re not a US citizen. You can get private student loans, however, but you generally need a US citizen to act as a co-signer.
Credit Union Private Loans
Credit unions offer private loans with and without co-signers. A co-signer increases your chances of being accepted, but if you have an existing relationship with a credit union, they may consider more than just your credit score and offer you a respectable interest rate.
A type of private student loan offered to individuals studying for the bar exam. It covers things that traditional loans may not cover, including exam application fees and living expenses, and it provides coverage for up to 20 years. However, they typically have higher interest rates and hidden terms to look out for.
Federal vs Private Student Loans
Whether you opt for federal or private student loans, you’re undertaking a massive responsibility and need to make your payments on time every month. If those payments are late, your credit score may suffer, and your repayment options will decrease.
Federal loans may be more forgiven, but just because you’ve been given student aid doesn’t mean they’ll turn a blind eye to missed payments. The government is a lender like any other—you signed an agreement and you’re obligated to stick to it.
There are a few financial aid programs and forgiveness programs you can apply for if you’re seeking to reduce your payments or your balance. These are offered to students in hardship, students who have graduated, and students working in specific sectors. You may also qualify for an extended grace period or deferment, which essentially prolongs the period in which you’re not required to make payments.
You can discuss these options and the following repayment plans with your loan servicer.
Income-Based Repayment Plans
If you’re struggling to meet your repayment schedule, you may qualify for a repayment plan. These are offered on federal loans and you can apply via the StudentLoans.gov website. It’s a process you can complete for free in a few minutes. There are for-profit companies offering to complete this process for you, but you’re better off saving your money and doing it yourself.
These plans are not available if you have defaulted on all your federal loans or you are a parent and have PLUS loans. For more information, contact your loan servicer or the financial aid office. You can also read through the federal student loan website.
Other Student Loan Repayment Plans
In addition to income-based repayment plans, there are two other options for easier repayment: Standard Repayment Plans and Extended Repayment Plans. The former will stretch your repayments over a period of 10 years, beginning small and then growing as time goes on. Extended Repayment Plans work in a similar way, but they extend your payment term to 25 years.
Student Loan Forgiveness Programs
There are no forgiveness programs offered to students with private loans. Most providers will discharge the debts if the debtor or co-signer passes away and there is also a statute of limitations to consider, but you’re pretty much tied to these debts until you repay them or die.
It’s a different story with federal loans, however. There are loan forgiveness programs aimed at individuals working in the medical and education sectors, as well as the military. These programs offer to clear most or all of your debts when you have graduated, worked in your chosen field for a fixed number of years, and met a list of criteria.
You need to jump through many hoops before you can qualify for these programs and, in most cases, you will have repaid the debts by then anyway. But it’s something that you should look into if you work in the public sector.
How to Find the Student Loan That is Right for You
You have a few options at your disposal when applying for a student loan. These offer different rates, payments, and perks, and their availability will depend on your income, expenses, and whether or not you have a co-signer.
Federal loans offer the best rates and you should apply for these first. You can use the FAFSA link to determine whether you can apply for subsidized loans and if they will cover what you need. If this fails, and you don’t have a co-signer option, then contact private lenders and see how they can help you.
If your situation improves at any point, look into refinancing, an option that is offered by private lenders. Refinancing may help to create more manageable monthly payments, with additional repayment options and improved terms.