What Types of Student Loans are Available?
There are many different types of student loans available. The main distinction is between federal education loans and non-federal education loans. Non-federal education loans include private student loans, private parent loans, state student loans and institutional student loans.
Federal Education Loans
Federal Stafford Loans are the most popular type of education loan. Federal Stafford loans come in two types, subsidized and unsubsidized. The federal government pays the interest on subsidized loans during the in-school, grace and other deferment periods, but not during forbearance periods. Interest on unsubsidized loans remains the responsibility of the borrower. If interest is not paid as it accrues, it is added to the loan balance at the end of the deferment or forbearance periods. Eligibility for subsidized Federal Stafford loans depends on financial need. Any amounts not borrowed as a subsidized loan may be borrowed as an unsubsidized loan, up to the annual and cumulative loan limits. Annual limits of Federal Stafford loans vary based on year in school. Annual and cumulative loan limits also depend on whether the student is a dependent or independent student. Interest rates are fixed and there is a loan fee. There is a 6-month grace period after graduation before repayment begins.
Federal Perkins Loans are subsidized loans awarding to students with exceptional financial need. The interest rate is fixed at 5% with no fees. There is a 9-month grace period after graduation before repayment begins. The Federal Perkins Loan program will end on September 30, 2017, unless Congress decides to extend the program.
Federal Parent PLUS Loans are made to parents of dependent undergraduate students. Borrowers must not have an adverse credit history. If the parents are denied a Federal Parent PLUS loan, the student becomes eligible for the increased unsubsidized Federal Stafford loan limits available to independent students. Annual loan limits of Federal Parent PLUS loans are up to the cost of attendance, minus other aid received. There are no aggregate loan limits. The name “PLUS” previously stood of “Parent Loan for Undergraduate Students.”
Federal Grad PLUS Loans are like Federal Parent PLUS loans, but the borrower is a graduate or professional student.
Federal Consolidation Loans let a borrower combine two or more federal education loans into a single loan, to streamline the repayment process. The interest rate on a federal consolidation loan is based on the weighted average of the interest rates on the loans included in the consolidation loan, rounded up to the nearest 1/8th of a percentage point.
Federal education loans are currently made through the William D. Ford Direct Loan Program, also known as Direct Loans.
Previously, federal education loans could also be made through the Federal Family Education Loan Program (FFELP), where federal loans were made by banks and other financial institutions with a federal government guarantee against default. The FFEL program ended on July 1, 2010. Since then, all new federal education loans have been made through the Direct Loan program.
More information on federal education loans can be found at StudentLoans.gov.
Private Education Loans
Students should exhaust eligibility for the federal student loans before considering private student loans, since federal student loans are cheaper, more available and have better repayment terms.
Private student loans are made by private lenders, such as banks, credit unions and other financial institutions. Interest rates, fees, repayment plans and other terms and conditions are set by the lender, not the federal government. Private student loans are not guaranteed or subsidized by the federal government. Eligibility for private student loans is based on the borrower’s credit scores, debt-to-income ratios, annual income and employment history. If the borrower is not creditworthy, eligibility may also be based on the credit history of a cosigner, who is equally obligated to repay the debt. Interest rates and fees depend on the credit scores of the borrower and cosigner, if any.
Private parent loans are similar to private student loans, but with the parent as the only borrower. Some parents are unwilling to cosign a private student loan because it makes their credit history depend on the repayment behavior of the student.
State student loans are made by state loan agencies. Some state loans are slightly less expensive than private student loans made by commercial lenders, some are not. Eligibility for state loans is usually restricted to state residents and students attending colleges and universities in the state. Some state loans, although credit-underwritten, offer the same rate to all eligible students regardless of differences in credit scores.
Institutional student loans are made by colleges and universities to their own students. The terms are often similar to the terms of commercial private student loans. In some cases, institutional loans have been private-labeled versions of commercial loans. Some institutional loans offer a lower interest rate or partial loan forgiveness upon graduation.