Heading to College? Here’s Help to Sort Through Types of Student Loans

University students studying in a circle
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It’s no secret that the cost of education has skyrocketed in America and continues to be a core issue with which politicians, educators, activists and students grapple. The average total tuition and fees plus room-and-board charges in 2018-19 for an in-state, public four-year college was $21,370, according to a College Board report.

How are students paying for that? With student loans. Lots of student loans.

Outstanding student loan debt rose to $1.46 trillion in the fourth quarter of 2018, according to the Federal Reserve.

While we can advocate for change within and outside of the political system, we must play ball in the meantime — that means getting familiar with the types of student loans available to us so that we can make the best financial choices for our current and future situations.

Student loans fall into two major categories — federal and private. Each of those has its own set of subcategories. While federal loans are typically the better option for students (more on that in a bit), it is impossible for many to fund an entire college education with just federal loans. Thus, it is important to take some time to familiarize yourself with the various types of federal student loans while also considering private loans.

Federal Student Loans

For the sake of simplicity, there are two main types of federal student loans to consider: Subsidized Stafford Loans and Unsubsidized Stafford Loans.

You may have heard of another federal student loan option called Perkins Loans. But as of September 30, 2017, the federal government ended that loan program; final disbursements were on June 30, 2018.

You’ll also come across two types of PLUS Loans: Parent PLUS Loans and Grad PLUS Loans. Beyond that, you can consider consolidating your various types of student loans into one: a Direct Consolidation Loan.

Stafford Loans

Stafford Loans are either subsidized (government helps with interest payments) and unsubsidized (no help). They typically offer better rates than other loans.

If you’re planning to receive federal loan aid, the Stafford Loan (also called a Direct Loan) is the one to know. Funding for this common student loan comes from the Federal Direct Student Loan Program (FDSLP) and can be offered as subsidized or unsubsidized.

Subsidized Stafford Loans afford you the ability to defer any interest payments until after you graduate. Instead, the federal government will pay the interest rates while you are in school at least halftime, as well as during the six-month grace period that follows graduation, (in theory, you would be spending that time looking for a job.)

Subsidized Stafford Loans are great for college students because it means less time spent working to pay for school and more time focusing on studying and writing papers. Interest rates for all subsidized Stafford Loans and all unsubsidized undergraduate Stafford Loans have a fixed interest rate of 5.05% for loans disbursed before July 1, 2019, according to the Federal Student Aid Office. Unsubsidized Stafford Loans for graduate students clock in at a 6.6% interest rate.

Subsidized Stafford Loans are not for everyone, however. According to the Federal Student Aid Office, students must demonstrate a financial need when filling out the Free Application for Federal Student Aid (FAFSA) form.

Pro Tip

In addition to the interest, you’ll have to pay fees on all Stafford Loans. Fees are calculated as a percentage of the loan amount and are proportionately deducted from each loan disbursement.

There are limits to the amount of money you can borrow via a subsidized Stafford Loan, and it largely depends on your family’s situation and your current year in school. The Federal Student Aid Office offers a helpful table that breaks down the credit limits for this loan, though please note your school may not actually grant this amount.

There are also Unsubsidized Stafford Loans, which are easier to obtain, as you won’t need to prove any financial need. However, the federal government will not make payments on your interest while you are in school. You can still defer these payments until after graduation, but you will be responsible for the entire interest amount.

PLUS Loans

There are two types of PLUS Loans: Parent and Grad. The maximum loan amount is the cost of attendance (determined by the school) minus any other financial aid. PLUS loans have higher interest rates.

The federal government offers PLUS loans to two sets of applicants: parents and grad students.

Though grad students are eligible to apply for the latter without their parents, PLUS stands for Parent Loans for Undergraduate Students. To obtain a Parent PLUS Loan, your parent(s) or guardian(s) must apply. However, you must still fill out the FAFSA form before your parents can apply for a PLUS loan.

PLUS Loans are designed to pay for expenses not covered by other financial aid, but they come with higher interest rates — the current interest rate is 7.6%.

Direct Consolidation Loans

Consolidation loans combine multiple loan payments into one for convenience. They could lengthen your payback timeframe and cost you more in interest over time.

The final federal student loan type is the Direct Consolidation Loan. This loan, according to the Federal Student Aid Office, is a no-fee option to group your various loans into one single monthly payment — thereby consolidating your student loans into one.

Why would you need to do this? Because the government doesn’t make anything easy — that’s the short answer. The longer answer is that, though you may rely on the Stafford Loan every year, there’s a good chance that each year — or even each semester — that money is coming from a different lender.

Pro Tip

Don’t fall for private companies that contact you, offering to help you consolidate your federal loans — for a fee. There is no application fee to complete a Direct Consolidation Loan application.

For example, assume you are in school for four years at two semesters a year with a different lender for each semester. That means you’ll have eight different payments to make each month, presumably with several different due dates, just for your federal loans.

Direct Consolidation Loans make this less of a headache for you and also make it more difficult for you to miss a payment (since there’s only one to remember) and incur a late fee.

Beware: There are some downsides to consolidating your loan. Consolidating could very easily draw out the payback time on your loans, meaning you may end up paying more over time and you’ll have to deal with the looming fear of student loans for longer than you had planned.

Private Loans

Private loans can help cover costs above and beyond your federal loans. They require a good credit history and may have high interest rates.

Federal loans should usually be your first line of defense when grants and scholarships are not enough to fund your education. However, given that Stafford Loans have caps and PLUS Loans require parent participation and the rates can be too high, you might need to seek additional funding. That’s where private loans come in.

Pro Tip

Think of private education loans as a necessary evil — they’re not great, but they’re there if you need them.

These loans are more like the personal loans you might take out with your lending institution. Given that most college students are in their late teens or early twenties, however, these can be challenging to get. You’ll need a cosigner and/or good credit to earn a private education loan.

With private education loans, there is a lot more left up to your unique situation. Interest rates could be fixed or variable and will depend on your credit history. You may also have to make payments while still in school.

Health Professions Student Loans

Health Professions Student Loans are options for students studying medicine in specific areas. They are based on financial need.

Health Professions Student Loans are reserved for those studying in specific areas of medicine, according to the Health Resources and Services Administration. Degree areas that qualify for this type of loan include dentistry, optometry, pharmacy, podiatric and veterinary medicine. These loans are need-based and competitive.

Alternatively, students who are studying allopathic or osteopathic medicine can apply for Primary Care Loans, while students who are working toward their diploma, associate, baccalaureate or graduate degree in nursing can apply for Nursing Student Loans. These two loan types are also need-based and competitive.

Schools must participate in these loan programs for students to be eligible; before enrolling, make sure your school of choice will have these options available.

Given the rising costs of higher education, it’s likely you’ll need to tap into loans to help finance your education, but before you start looking at loans, exhaust these other options for paying for college.

Timothy Moore is a proud graduate of Wright State University and now works as a full-time editor and freelancer in his free time. He lives with his partner and their two dogs in Nashville, Tennessee. Staff writer/editor Tiffany Wendeln Connors contributed to this post.