Student loan types: understand the main differences

Those who are starting to plan their adult lives will certainly come across many student loan types. They should indeed be part of your financial planning, considering that the wrong choice could send you into a spiral of debt that could be hard to escape. 

Sometimes, loans even come with a financial aid offer. But that doesn’t mean you can be less careful, even if part of your spending is subsidized by the estate or a sponsor, this could be problematic. That’s why you must understand where each student loan types comes from, how they work and how you will repay them over the years. 

All of this information is enough to help people decide the best for your financial future. Remember that paying off a loan, even personal loans, can take quite a few years. Once you decide on the student loan types, you’ll also have to make repayment plans, which we recommend you read through carefully before even signing up with the loan. 

You can get either private or federal student loans. Before we get started, let us tell you: both of them can be a great ally in funding your studies and guaranteeing a better professional life later on. All you have to do is study everything carefully, as we’ll explain below. 

Federal vs. private student loan types

First off, the student loan types are divided into federal and private. As the name implies, the federal ones are provided by the American government and have a few eligibility criteria that everyone must meet. One of the most common ones is financial need, which means that only those in families who earn less than a certain amount are eligible. 

There are three student loan types that come from the federal government, but we’ll get into details a bit further in this article. Another choice you’ll find when researching this type of loan are the private ones. Usually, they aren’t your top choice since they’re less flexible in payment options. 

The first thing students must pay attention to when it comes to private loans are interest rates. They either work with fixed or variable interest rates. When you decide to get a loan with fixed rates that gives you predictability, since you know how much you’ll pay over the next few years. 

Meanwhile, the variable rates might start lower, but they could surprise you with a huge increase over the months. So talk it through with your financial services provider to make sure that you’re not falling into a trap. 

What are the federal student loan types available? 

Let’s start talking about the federal student loan types you can find. To apply for any of these you’ll have to complete a form at the Free Application for Federal Student Aid. This will help authorities to determine whether you’re eligible for the benefit or not according to the criteria that each program has. 

These are divided into three distinct types. Check them out below and, if you still have any doubts, your school counselor should be able to help. 

Direct subsidized student loan

The direct subsidized student loans are one of the best options in the market for students. Their terms tend to be better and easier to pay off over time. But, as usual, there’s a catch: their eligibility terms are a lot harder to meet, especially financially. 

The subsidized student loans are aimed at those with financial needs who are still undergraduates. They happen in partnership with the university, which is responsible for determining how much each student can borrow. Students can’t borrow more than their current financial need. 

While most other types of loans have students paying interest when the payback time comes, the subsidized student loans don’t. The U.S. Department of Education is the one responsible for interest while you’re at school. After college is over, students even get a grace period of six months when they don’t have to pay interest. 

Sometimes, you can even apply for a period of deferment of interests after finishing school. 

Direct unsubsidized student loan

The direct unsubsidized student loans are also offered by the U.S. Government, but you don’t have to prove financial need. The amount of the loan varies from student to student and the school will consider the cost of your tuition and other financial aid you might receive. 

Unlike what happens with direct subsidized student loans, anyone who receives the money will have to pay interests from the get go. The U.S. Department of Education isn’t involved, it only approves the benefits. 

Those who wish to apply must be U.S. citizens or have an eligible non-citizenship. They must also have a high school diploma and not have defaulted on other existing loans. So a bad credit history or credit scores could get in the way. 

Direct plus student loan

Most federal student loan types focus on tuition. So they pay for your school monthly while you pay a smaller amount for the government without interest for a while. However, there is another federal program that allows students to pay for school, boarding, fees and other costs of student life. 

You can apply for these loans at the official government website. Some schools might have a few extra requirements, but generally, you don’t have to prove financial needs. Even parents can make the application and follow the payments using the portal. 

The interest rates apply normally in this kind of loan, but there’s a possibility of asking for a grace period. Remember that, in case this is approved, the interest rate won’t disappear for a few months. Instead, they will accumulate for you to pay at the end of this period. 

Direct consolidation student loan

Sometimes students get a lot of loans for their school, accomodation and other financial needs. That’s why you can look for a direct consolidation student loan. This category exists to merge all other loans you might have at the moment, making payments easier, simpler and faster. 

Pay attention to this, because direct loan consolidations can only happen if all of your loans are federal. A mix of private and federal loans will remain separated, even for those approved in this program. 

What are the student loan types from private companies?

The student loan types from private companies are usually the second choice for those who didn’t get an approval from federal programs. Most of them don’t have as many advantages when it comes to interest rates and payment, but they’re more flexible for admission. 

Sometimes, you can also use private loans to complete your financial needs after you already got an approval for a federal one. Here comes a warning for anyone that’s starting to research about this option: unlike federal programs, they don’t have easy repayment options and interest rates are quite high. 

Research your choices well before you actually do anything. That’s why we’ll explain the most important pros and cons for these student loan types below. Keep reading to find out!

Advantages of private student loans

As long as you have good credit scores you’ll find some pros and even rewards with these loans. And the best part is: as long as you keep paying on time, your scores should only get higher through a combination of proper loan payment and credit card use. 

Obviously, anyone can get a student loan despite bad credit scores, as defined by congress. But when it comes to private ones, you’ll get rewards in the form of low interest rates. An option for people who have less than stellar credit or don’t have a long credit history is getting a cosigner. As long as they have good numbers you’ll notice better rates overall. 

Higher borrowing limit for private options

We know that being an undergraduate or graduate student is expensive, but most federal loans don’t cover everything. That’s why you might wish to check out some private financial service providers before closing the deal. 

Federal loans can’t overpass their $31.000 limit for undergraduates or $57.500 for graduate students. Meanwhile, private choices can lend up to $138.500 for both programs. So you can choose pricier schools or cover up to 100% of your tuition costs. Some students even choose to use both options, combining federal and private loans. But remember that this could cause you some financial problems further on if you don’t manage to keep up with every payment.

Cons for private student loan types

Once you get a federal loan there’s always the option of looking for income-driven repayment plans. They offer the opportunity to limit monthly payments based on a student’s income. This doesn’t happen for private loans. 

Some lenders will offer you deferment or forbearance, but these only mean you can put off interest payment or some of your payments. You will have to pay the full monthly amount eventually without considering your income. 

The interest rates are also a problem. Most federal programs have at most 2,75% monthly interest rates, while private ones can vary and go a lot higher than that. That’s why it’s important to shop around before getting your student loans. You first must find the perfect option for your finances to avoid problems later.

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