Types of Student Loans

There are two main types of student loan: private and federal. But there are several different types of both private and federal loans and this can complicate matters if you’re new to the subject and seeking to apply for a student loan.

In this guide we’ll look at all available types of loans for students and show you how to apply for them. If you’re looking for tips to pay off student loans you already have, check with our guide to Paying off Student Loans Fast. If it’s foreignness you seek, click onto our Student Loan Forgiveness guide.

What are Federal Student Loans?

Federal student loans are loans acquired directly from the government, either by the student or by their parents/guardians. Borrowers don’t need to start paying back these loans until they graduate, the interest rates tend to be a lot lower than private student loans and there are also programs that can reduce these loans or even clear them.

Federal student loans are generally more accommodating and they also don’t require a co-signer or a credit check. They should be the first port-of-call for students seeking funding and they often are.

Federal Student Loans

  • More flexibility.
  • No need for a high credit score or positive credit history.
  • Repayment can be made based on eventual salary.
  • No co-signer required.
  • Additional benefits and help available.
  • Forgiveness programs and student loan reduction programs are available.
  • Interest can be tax deductible.

Types of Federal Student Loans

Private Student Loans

There are three main types of federal student loans, each with their own pros and cons and ways to apply. Your situation, as opposed to your preference, will likely determine which loan you opt for.

  1. Direct Subsidized Loans: These loans are for students who have demonstrated a need for financial assistance. No interest is charged when the student is at school or during the grace period that follows their graduation. However, students must demonstrate a financial need according to the FAFSA guidelines. They must also not be in default on any loans, have received a high school diploma, be a US citizen and be an undergraduate student.
  2. Direct Unsubsidized Loans: These are federal student loans that are not based on financial need. The amount that you can borrow will be determined by the school you choose to attend and this figure will be determined by a number of factors, including the cost of attendance and any additional financial aid that you receive. Unlike direct subsidized loans, interest on direct unsubsidized loans will be charged during attendance and during the grace period.
  3. Direct PLUS Loans: This is an unsubsidized loan taken out by the parents of students. The parents will need a good credit score to apply, after which these loans can be used to pay for attendance and other fees. Interest is charged during attendance and during the grace period, which means the total cost of the loan steadily increases over time.

How to Apply

There is no cost involved with applying for a federal loan. You just need to visit the FAFSA website, create an account (FSA ID) and then submit your application. Financing begins on the 1st of October and federal student loans operate on a first-come first-served basis, so it’s important to submit your application as soon as possible.

You can apply for these loans every year that you are, or plan to be, a student. And even if you do not succeed in an initial application it’s worth taking the time to submit another one the following year.

What are Private Student Loans?

Federal Student Loans

A private student loan is a loan offered by a financial institution, such as a bank or a credit union. These loans are more accessible and they are available to any student, or parent, with a respectable credit history. However, as with all loans there are some potential pitfalls that borrowers need to be aware of.

While defaulting is never a good thing, it can be worse on a private loan than a federal loan as there are fewer support systems in place and less allowances made. Unlike some federal student loans, interest is charged throughout the borrowing period, the rates are higher (and rarely fixed), there are late penalty fees, and a co-signer is often required. There is also minimal chance of having your student loans forgiven, but you can, of course, consolidate them and refinance them.

Private Student Loans

  • The highest rates are very high, with some lenders charging an APR of more than 18%.
  • These loans are not subsidized, which means no one will cover the interest.
  • You need a good credit history and the loan will impact on your credit score.
  • You may need someone to co-sign your loan.
  • Interest is not tax deductible.

Types of Private Student Loans

Types of Private Student Loans

The types of private student loans are only limited by the number of lenders offering them. There is a lot of competition in this field and many lenders offer different types of private student loans to account for this and to provide something that can appeal to students or their parents.

Sallie Mae, for instance, offer loans for undergraduates, graduates, borrowers in training for a career, parents, and parents of younger children who want to pay for a private education. Each loan has its benefits and disadvantages and as is usually the case, the lower the interest rate and the better the terms, the higher your credit score will need to be and the bigger the penalties will be.

If you have the advantage of a good credit score or parents who are willing to foot the bill, then shop around. If your credit score is poor, then you may want to look at ways that you can improve on this before you apply.

Private student loans charge such high interest rates over such a long period of time that even a single percentage point could add up to hundreds or even thousands of dollars over the lifetime of the loan, and that percentage point could be dropped simply by spending some months working on increasing your score before applying.

How to Apply

There are comparison sites and services that will help you to find the most suitable private student loan for you. Spend some time looking through these, reading the terms and conditions and doing your sums in order to find the best loan for you. Only then should you apply.

Your credit score may be impacted by repeat applications, so choose carefully and make sure you meet all of the criteria. If you have supportive parents then consider asking for their help because having someone with a good credit history and some collateral on your side can significantly improve the offers you receive.