Types of Student Loans: Private and Federal Options

Many students and families depend on student loans to help cover the costs of college education. According to Debt.org, about half of the 20 million students who were enrolled in colleges and universities in the U.S. in 2019 had taken out federal student loans totaling $93 billion — or an average of about $9,300 per student.

There are two types of student loans: federal student loans, which are made by the federal government, and private student loans, which are personal loans made by banks, credit unions and state governments. Here is a closer look at the student loan options.

Federal Student Loan Options

Many experts suggest that students and families pursue federal student loans before looking into private loans. This is because federal loans tend to be more flexible and usually feature lower interest rates.

Federal student loans also offer some protections, such as the ability to have loan repayment amounts tied to income after graduation. In addition, there are conditions and terms associated with private loans that can sometimes make them harder to obtain.

Your family or student must fill out the Free Application for Federal Student Aid — commonly referred to as the FAFSA — to apply for a federal student loan. Almost every graduating high school student will be eligible to receive a federal student loan.

There are two main types of federal student loans:

• Direct loans: Also known as Stafford loans, these student loans can be subsidized or unsubsidized. Subsidized Stafford loans are reserved for students and families with financial hardships — most go to families that have less than $50,000 in annual income. Students with subsidized Stafford loans don’t have to make any repayments until after graduation, and the government pays interest while they’re in school.

Students with unsubsidized Stafford loans must pay all the interest on their loans, though payments are usually deferred until after graduation. All students are eligible for unsubsidized Stafford loans regardless of their family’s income.

• PLUS loans: These are available to parents of dependent undergraduate students as well as graduate students. PLUS loans feature higher interest rates and origination fees than other types of federal student loans and also require a credit check on the student. If a student or the student’s parents has an adverse credit history, it will be more difficult to qualify for a PLUS loan, though co-signers are allowed.

Private Student Loan Options

Students and families who still need more money to pay for college even after taking full advantage of federal student loans can apply for a private student loan. The volume of private student loans has fallen in recent years, according to Debt.org — from $18.1 billion in 2008 to $11.6 billion in 2018.

The lender will gauge your credit history to determine your eligibility for receiving a private student loan and the interest rate charged. Rates are typically higher on private student loans than they are on federal loans. Also, private student loans are not subsidized and some stipulate that repayment be made before graduation while limiting options for deferment and forbearance.

Private student loans are often used by students in unique circumstances, such as law students who need additional financing to cover costs associated with taking the bar exam and medical students who need additional financing to attend medical school.

Myriad Student Loan Options Available

Between federal student loan options and private student loan options, there are myriad financing opportunities available to help students obtain the money needed to attend college. Spend some time researching which types of student loans are best for your situation.

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