In the U.S., student debt goes hand-in-hand with college.
In fact, about 44 million people in the country owe $1.4 trillion in student loan debt, according to Inside Higher Ed.
The average student loan in the U.S. is $30,100 per borrower, according to the Project on Student Debt, an initiative of the Institute for College Access and Success (TICAS).
Given the high cost of receiving a higher education, it’s important for college-bound students and families to understand the different types of loans that are available. Students need know what options are best for their academic goals and how the loans will affect their future finances.
The first thing to know, is that there are two major sources for student loans- federal and private.
Federal student loans are loans made by the federal government and typically have lower interest rates and more flexible repayment plans than private loans.
Universities generally advise students to consider federal loans before private loans.
The U.S. Department of Education has two federal loan programs: the William D. Ford Federal Direct Loan (Direct Loan) Program and the Federal Perkins Loan Program.
There are four types of direct loans available:
- Direct Subsidized Loans are available to undergraduate students and are based on the financial need of the student. The school determines the amount that can be borrowed and can’t exceed the financial need of the student. The government pays the interest on the loan while the student is in school at least half the time, as well as for the first six months after the student graduates, known as a “grace period”, and during loan deferment periods (payment postponements). However, students that received a direct subsidized loan between July 1, 2012, and July 1, 2014 are responsible for paying any interest accrued during their grace period. There is a limit on how long direct subsidized loans can be received for first-time borrowers who applied for the loan on or after July 1, 2013. If this limit applies to you, you may not receive Direct Subsidized Loans for more than 150 percent of the published length of your school program.
- Direct Unsubsidized Loans can be used by both undergraduate and graduate students and there is no requirement based on financial need. The government charges interest from the time the loan is dispersed throughout the life of the loan. The school determines how much money can be borrowed based on attendance and other loans borrowed by a student. Students can choose not to pay interest as it accumulates, but the interest will be capitalized and added to the principal balance.
- Direct PLUS Loans are available to graduate students and the parents of dependent undergraduate students to help pay for education not covered by financial aid. The borrower must have a good credit history and the maximum loan amount is the cost of attendance, which is determined by the school, minus any other financial aid received.
- Direct Consolidation Loans allows the borrower to combine all eligible federal loans into single loan with a single loan servicer. This way, one single payment can be made instead of multiple payments a month. Loan consolidation can also give access to additional loan repayment plans and forgiveness programs. There is no fee to apply for a consolidation loan through the federal government.
- The Federal Perkins Loans Program is a school-based loan program for both undergraduate and graduate students with exceptional financial need. Unlike direct loans where the government is the lender, the school is the Perkins loan lender so it’s important to make check that the loan is available through the school attended. The interest rate for a Perkins loan is five percent. The amount a student can borrow depends on financial need, the amount of other aid received, and the availability of funds at the school.
Private loans can be borrowed through banks or private lenders, such as Sallie Mae. It is an option if a student and their family needs help bridging the gap between federal aid and tuition costs. Private loans can vary in terms, from interest rates to repayment schedules, according to CollegeXpress. Private loans don’t have the option of being subsidized, the interest is completely paid for by the borrower and can sometimes be as high as 18 percent. A parent or guardian is usually required to co-sign on a private loan and borrowers typically need to have a good credit history.
Some private loans require payment as soon as the student begins school which can be difficult for some students to keep up with. Additionally, private loans cannot be consolidated into a direct consolidation loan and typically don’t offer forbearance or deferment options.
While private loans can lend a helping hand if students need a little more cash to pay for school after financial aid is exhausted, education experts usually advise sticking to only federal loans if possible, since government loans provide more flexibility and lower interest rates.