As the cost of higher education slowly but steadily increases year over year, securing the funds to pay for college is a top priority for students and their families. Data gathered by the National Center for Education Statistics shows that 86 percent of students received financial aid during the 2017-2018 academic year. (This included grants and federal and private loans.)
If you’re headed to college and weighing your student loan options, a question you might ask is, “Private or federal?” The short answer is: it depends. There are several different types of student loans available to help pay for college, and the ones you choose will be based on a number of factors, including your financial need and credit standing. To help you make an informed decision, here are the different types of student loans and what to know about each one before you sign on the dotted line.
Federal vs. Private Loans
Federal loans are backed by the government, and often come with the most flexibility when it comes to repayment. You won’t be required to repay loans until six months after the end of your enrollment at an eligible institution. In addition, federal loans come with forbearance and deferment options if you face financial difficulties at any point and are unable to make your regular payments. It is also generally easier to get approval for federal loans, as strong credit history is not required. This can be helpful for recent high school graduates who have not yet built their credit up to qualify for private loans. Another benefit of federal loans is that they typically come with fixed interest rates over the life of the loan.
If you still need help to cover college expenses after you’ve received federal student loans, another option is a private loan. Private student loans are credit-based and unlike federal student loans, may require a cosigner if you don’t have a solid credit history. The interest rate and total amount you’re approved to borrow will depend on the lender’s review of your (or your cosigner’s) creditworthiness and ability to repay. Private loans also offer several different repayment options, and you can choose to make payments while you’re still in school, which helps reduce the total loan amount and interest. Another note about private loans: you are required to repay them even if you don’t graduate. Keep this in mind and make sure to only borrow what you can afford to pay back.
Different Types of Federal Loans
Direct Subsidized Loans
These loans are for students with a demonstrated financial need, typically based on information provided through the Free Application for Federal Student Aid (FAFSA). Interest on federal subsidized loans does not accrue as long as you’re in school at least part-time. You also won’t be required to pay interest during any deferments or the six-month grace period after you graduate or leave school. The interest rate for direct subsidized loans disbursed after July 1, 2020 and before July 1, 2021, is 2.75 percent and is fixed over the life of the loan.
Direct Unsubsidized Loans
Unlike subsidized loans, federal unsubsidized loans are based on your school’s cost of attendance and other types of financial aid you qualify for. These loans also differ from subsidized loans because interest is charged during in-school, deferment, and grace periods. Any interest accumulated will be added to your principal balance, which increases the total amount owed. However, the same as subsidized loans, interest rates are fixed at 2.75 percent over the life of the loan.
Direct Consolidation Loans
If you want to simplify the repayment process and have one payment to one servicer rather than several loan payments, you can apply for a Direct Consolidation loan. This is a fixed-interest loan with flexible repayment options to fit what works best for your financial needs. While a Direct Consolidation loan eliminates the need to keep track of multiple payment due dates, it can potentially extend the amount of time for repayment on the total loan balance. Another thing to consider is that if you have a mix of federal and private loans, private loans are not eligible for the Direct Consolidation loan option.
Parent Loan for Undergraduate Student (PLUS) loans are available for parents of dependent undergraduate students. Graduate students are also eligible to receive PLUS loans. The maximum amount PLUS loan borrowers can receive is equal to the school’s total cost of attendance, minus any other awarded financial aid. The interest rate for PLUS loans disbursed after July 1, 2020 and before July 1, 2021, is 5.3 percent and is fixed for the life of the loan.
Different Types of Private Loans
If you have completed your education and want to find options to lower your monthly student loan payments or interest rates, refinance loans are available through banks and credit unions. Refinance loans are most desirable for borrowers with multiple loans, stable income, and a solid credit history. Once you apply to have your loans refinanced, you will have one monthly payment, and ideally be able to lock in a lower interest rate. Refinance loans also give you the option to choose repayment terms, typically between three to 15 years. This can be an attractive benefit for borrowers who want to pay off their loans quickly.
A word of caution: any loans refinanced through a private lender will lose federal protections such as deferment, income-based repayment, or federal forgiveness eligibility. It might be best to continue with your federal student loan repayment schedule in the event of a job loss or other income changes.
Figuring out how to cover the cost of college is a big responsibility. It’s important to know from the beginning about interest rates, eligibility requirements, and repayment terms for any loans you borrow. If you arm yourself with enough information upfront and choose the loans that best fit your financial needs, you’ll be off to a strong start in your pursuit of education.