The cost of education, like that of so many other services, has steadily crept up over the years. This occurrence has made student debt almost inevitable. However, all student loans are not the same. There are two basic categories. Private institutions such as banks and credit unions issue some, while the federal government backs others. There are also different requirements, benefits and considerations to take into account for each.
Here, we will take a look at the different types of student loans.
Private Student Loans
As mentioned above, these types of loans are issued by business entities such as banks, credit unions, and schools. Some state agencies issue them as well. Generally, they carry higher interest rates than federal student loans that are backed by the government. Their qualification requirements tend to be more stringent as well. For example, the borrower’s immediate ability to make on-time payments is considered.
Unlike federal student loans, private loans often require borrowers to begin repayment while the student is still in school. Interest rates can be either fixed or variable, and since they tend to be unsubsidized, borrowers are responsible for all interest payments. Repayment options tend to be less flexible and they cannot be converted into federal Direct Consolidation Loans.
The types of private student loans include:
- State loan programs
- Profession based loans
- International student loans
- Loans specific to a borrower’s particular circumstance
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Federal Student Loans
As part of the Department of Education’s William D. Ford Federal Direct Loan Program, these student loans are backed by the federal government. They fall into one of four categories: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.
Within each category, there are subcategories for undergraduates, graduates, professional students, and parents of students. In most cases, interest rates are fixed.
Direct Subsidized Loans – Offered to undergraduates with a demonstrated financial need, eligibility is determined based on a family’s income. Due to this, these loans typically carry better terms. As an example, the government will pay the interest on one of these loans as long as the student is enrolled in school on at least a half-time basis. The government will then continue to cover interest payments for six months after the borrower graduates. Payments on these loans can also be deferred, and they can even be forgiven under certain circumstances.
Direct Unsubsidized Loans – Available to undergrads, graduate students and professional students, these loans don’t contain a financial need requirement, and interest payments are the sole responsibility of the borrower. In other words, there are no subsidization privileges. That said, interest rates are the same as those for subsidized loans for undergrads. Graduate students and professionals pay slightly higher rates.
Direct PLUS Loans – Designed for grad students and professionals, as well as the parents of students who fit into one of those categories. The amounts of these loans are based on the costs associated with attending a school and the amount of other student aid received, if any.
Direct Consolidation Loans— Borrowers can combine multiple federal loans into a single one at a fixed interest rate. The resulting rate is determined by averaging the rate of the loans included in the bundle. If the average works out to be higher than what the student would pay if the loans remain separate, this would not be the best option. Consolidation can also sometimes render key benefits such as rate discounts, principal rebates, and eligibility for loan forgiveness or cancellation inactive.
Understanding the types of student loans and their benefits can help you make the best decision when seeking assistance to fund higher education. It’s important to consider the pros and cons of each before submitting an application. Given all the options, consulting professional help can be a prudent decision. The non-profit organization, Moneythink exists specifically to help students navigate the processes associated with student loans.