Which One is For You? Here’s How to Sort Out All Those Student Loan Choices

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 College Board estimated that the average undergraduate college student spent nearly $50,000 on education during the 2016-2017 school year.

How are students paying for that? With student loans.

According to Student Loan Hero, recent reports indicate that 44.2 million American college students, past and present, are currently $1.44 trillion in debt collectively, due to the rising cost of education.

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 students loans while also considering private loans.

Federal Loans

For the sake of simplicity, there are two main types of federal student loans to consider: Stafford Loans and Perkins Loans. As of September 30th, 2017, the federal government will be ending the Perkins Loan program, making Stafford Loans the go-to student loan option.

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

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

The Short Version:

  • Loans via the federal government
  • Come in subsidized (government helps with interest payments) and unsubsidized (government doesn’t help)
  • Reasonable interest rate
  • Limit to how much you can borrow depends on your year in school

The Breakdown: Subsidized vs. 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. According to Debt.org, interest rates for subsidized Stafford Loans during the 2017-2018 school year will be roughly 3.76%.

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; this typically means the family’s income is below $50,000, per Debt.org.

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.

Unsubsidized Stafford Loans 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. For the 2017-2018 school year, the rate is still 3.76%.

Note: Stafford Loans are sometimes referred to as Direct Loans.

PLUS Loans

The Short Version:

  • Two types: Parent and Grad
    • Parents must apply for Parent PLUS
    • Grad students can apply for Grad PLUS
  • No borrowing cap
  • High 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.

What makes these different from the Stafford Loans and the dying Perkins Loans is that there is no cap on how much you can borrow. PLUS Loans do, however, come with higher interest rates; at the time of writing, the interest rate is 6.31%.

Direct Consolidation Loans

The Short Version:

  • Combine multiple loan payments into one for convenience
  • 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.

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

The Short Version:

  • Can cover whatever federal loans do not
  • Require a good credit history
  • 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.

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.

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

Health Professions Student Loans

The Short Version: Health Professions Student Loans

  • For students studying medicine in specific areas
  • 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 current state of our country’s education system, student loans are necessary, though they are never ideal. If you have to take out money to fund your education, just remember that it is in the pursuit of higher knowledge — which can help you land a job to pay off those loans.

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.

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