7 Types of Student Loans

Student loans are not all created equal. Most people are aware that there are government-backed and private loans available for higher education, but there are actually many different types of student loans.

If you’re looking for funds to help pay for a college education, it’s wise to consider a wide variety of options. That way, if you don’t qualify for one type of loan or it doesn’t fully meet your needs, you can move on to one of an array of other funding possibilities.

1. Subsidized Federal Loans

Perhaps the most commonly used student loans, subsidized federal loans are available to students who demonstrate financial need. To apply for these loans, you must complete a Free Application for Federal Student Aid (also known as FAFSA).

When you get a subsidized federal loan, the U.S. Department of Education pays the interest on your loan while you’re in school at least half-time and for the first six months after you leave school. If the federal government ever passes legislation to forgive or defer some student loan debt, that would only apply to federal loans (like subsidized, unsubsidized and PLUS loans).

2. Unsubsidized Federal Loans

Not all federal loans are based on financial needs. Unsubsidized federal loans are available to students without demonstrating financial need. The college or university you attend determines the amount for which you’re eligible. You also must complete the FAFSA to apply for unsubsidized loans.

With these loans, the borrower is responsible for paying interest throughout the life of the loan. If you don’t pay interest while in school, it will accumulate and be added to the principal of the loan (meaning you will end up paying interest on the interest).

3. Parent PLUS Loans

Parents or step-parents who are willing to take on debt to help finance their children’s education can apply for Parent PLUS loans, which are also backed by the federal government.

With Parent PLUS loans, the parents are expected to make payments on the loan while their children are in school. Some parents may assume that if they take out a federal loan for their child’s education, the payments will transfer to their child after his or her graduation. However, with a Parent PLUS loan, the parent who takes out the loan is always legally responsible for repaying the loan; the loan responsibility will never transfer to the student.

However, if your parents are willing to take on a Parent PLUS loan for you, it may be a good idea to offer to take over the payments after you complete your degree.

4. Private Student Loans

The federal government isn’t the only organization providing student loans. Private student loans are available from a number of financial institutions. These loans are not backed by the government and do not have the same forbearance and deferral options as federal loans.

With private loans, interest rates and terms can vary considerably and are set by the private financial institution. If you choose to seek a private student loan, shop around to look for the best rate and payback terms that work for you.

Keep in mind that student loans, whether private or federal, cannot be cancelled in the event of a bankruptcy.

5. Unsecured Personal Loans

You can use an unsecured personal loan to pay for college expenses, but in most cases, you’ll have to pay higher rates. Unsecured loans usually require higher rates than loans that are secured by the federal government or by an asset, such as a home or car.

When you take out a student loan, the funds are sent directly to your educational institution, but with a personal loan, the money will go directly to you. That means you have a greater responsibility to use the money wisely. If the loan is intended for education, it’s important to be careful to spend the borrowed funds only on education and not to take more than you need. Otherwise, you could be repaying that loan—and high interest—for a long time.

6. Peer-to-Peer Loans

Through sites like Lending Club and Prosper, you can borrow money from individual investors to pay for your education. The practice of one individual loaning money to another individual is known as peer-to-peer (P2P) lending.

With a peer-to-peer lending site, you can request the funds you need and the interest rate and timeline you want. Then you have to wait and see if any investors are interested in funding your loan. If you and an investor (or group of investors) agree on loan terms, your loan may get funded.

Keep in mind that these investors are in the business of loaning money in order to make a profit, so you may not get an interest rate that is as low as a government-backed loan. However, P2P lending can be helpful for funding educational endeavors that don’t qualify for other loans, such as going to an unaccredited school.

7. Family and Friends Loans

This is a type of P2P loan, but the money is coming from someone you know, such as a family member or friend. Because this person or group of people may have a vested interest in your success, they may be more willing to offer agreeable terms.

If you choose to borrow from friends or family, be sure to put the terms of the agreement in writing and insist on paying interest. When friends or family members genuinely want to help you—and you’re committed to fulfilling your end of the deal and repaying the loan in a timely manner—this type of loan can work out. But if one party fails to fulfill their part of the agreement, such a loan can negatively affect personal relationships.

For people who need help funding their college education, there are plenty of loan options available. It’s wise to study the options and understand the pros and cons of each one before borrowing money for college.