Understanding the different types of student loans

Student loans typically fall into two categories: federal and private. But there’s plenty more to it all. If you (or your soon-to-be college student) need help paying for school, this guide might help you understand your options.

What you’ll learn:

• The government issues federal student loans. 

• There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.

• Banks, credit unions, schools, state agencies and other institutions issue private student loans.

• You can compare student loans based on eligibility and credit requirements, financial need, repayment terms and interest rates.

The federal government issues federal student loans as part of the Department of Education’s William D. Ford Federal Direct Loan Program. Federal student loans are categorized in four primary ways: 

• Direct Subsidized Loans 
• Direct Unsubsidized Loans
• Direct PLUS Loans 
• Direct Consolidation Loans 

Within those categories, there are loan options for undergraduate students, graduate students, professional students and even parents. But every category has some things in common. For example:

• Interest rates are set each spring by the federal government, and they aren’t based on creditworthiness. 
• Interest rates are fixed, which means they won’t change over the course of the loan.
• Applications start with the Free Application for Federal Student Aid (FAFSA®) form.

Direct Subsidized Loans are available to undergraduate college or career school students who demonstrate financial need. The borrower’s eligibility is determined by completing the FAFSA form. The school then reviews the information on the FAFSA form regarding the cost of attendance to calculate the type and amount of aid the student can receive. 

Because subsidized student loans are based on need, they often have better terms than other types of loans. For example, the government will pay the interest on subsidized loans as long as the borrower is enrolled in school at least half the time. It will also cover interest payments for six months after graduation—known as a grace period. The same goes for a loan deferment, a period when payments are postponed.

Direct Unsubsidized Loans are available to undergraduates, graduate students and professional students. Compared to subsidized loans, unsubsidized loans don’t require borrowers to demonstrate financial need. And borrowers, not the federal government, are typically responsible for paying interest that accrues during school, grace periods and deferments.

Although borrowers are responsible for paying interest, the rate undergraduates pay for unsubsidized loans is the same as the rate for subsidized loans. Rates are generally a little higher for graduate and professional students.

Direct PLUS Loan amounts are based on attendance costs and other financial aid offers. Eligibility for PLUS loans isn’t based on financial need, but it does require a credit check. According to the Department of Education, an adverse credit history may negatively affect PLUS loan applications. Having an adverse credit history doesn’t instantly disqualify borrowers from securing PLUS loans. But there may be additional requirements, such as having a co-signer.

There are two main types of Direct PLUS Loans:

• Grad PLUS Loans: These loans are for graduate students and professional students. Grad PLUS Loans typically have a six-month deferment period.

• Parent PLUS Loans: These loans are for parents of dependent students. Parent PLUS loans typically don’t have a deferment period unless requested and the loan servicer approves the request.

Direct Consolidation Loans allow borrowers to combine multiple federal student loans into one loan with a fixed interest rate. The new rate is based on the average of all the loans being consolidated. 

There’s no cost for this process. And consolidation can allow borrowers to roll multiple loans into one easier-to-remember payment. 

But there are potential downsides to consolidation loans. For instance, borrowers may end up paying more in interest than they would have otherwise. Consolidating loans might also take away benefits, such as interest rate discounts, principal rebates, and eligibility for loan forgiveness or cancellation.

You may have come across information about other federal loan programs, such as Perkins Loans, the Federal Family Education Loan (FFEL) program, the Health Education Assistance Loan (HEAL) program and the Saving on a Valuable Education (SAVE) program. But those programs are no longer offered.

Unlike federal student loans, private student loans are issued through institutions like banks, credit unions, schools and state agencies. Private student loans usually require credit checks, and application decisions are ultimately up to individual lenders. They may also have higher interest rates and possibly other fees.

A borrower’s credit can also factor into other parts of private loans, like the amount of money and the interest rate offered. If an individual has no credit history, lenders may require a co-signer on the loan. 

Private lenders set lending terms, which means borrowers might be required to make payments while they’re in school. Private student loan interest rates could be fixed or variable, and borrowers are typically responsible for the interest that accrues while in school.

Compared to federal student loans, private student loans may limit repayment options, such as loan forgiveness or postponement. They can’t be consolidated into a federal Direct Consolidation Loan, but they can sometimes be refinanced.

Depending on your situation, there are also specialized private student loans, including:

• State loan programs. Many state agencies run their own student loan programs that function similarly to those of private lenders. The Department of Education maintains an index that you can use to check programs in your state.

• Profession-based loans. Some loans, like bar exam loans and medical school loans, help cover expenses specific to education in fields like law or health care.

• International student loans. This category covers student loans for noncitizens studying in the United States.

• Borrower-specific loans. There are also private student loans tailored to borrowers with unique financial circumstances, such as parents of students or those who are unable to find a co-signer.

If you’re considering a student loan, there are a few factors you might consider before you apply for a student loan:

• Eligibility: If you can demonstrate financial need, you might be able to qualify for a subsidized federal loan—in addition to any other aid the school is offering. This type of loan offers a lower rate than other student loan types, which could save you money over time. 

• Credit requirements: Student loans like Direct PLUS Loans and some private student loans base approvals on scores. But credit isn’t a factor with federal Direct Subsidized and Direct Unsubsidized loans. 

• Repayment options: Federal student loans typically offer more options to reduce or pause loan payments than private student loans.

• Interest rates: Interest can have a major impact on the total cost to repay a student loan. Direct Subsidized Loans and Direct Unsubsidized Loans typically have a lower interest rate than Direct PLUS Loans. But they all have a fixed interest rate that’s not dependent on creditworthiness. On the other hand, private student loans could have either a fixed or variable interest rate, and the percentage can vary and be based on credit inquiries.

For many college students, taking out a student loan is one of the first major financial moves they’ll make, which is why it’s important to understand the differences between types of student loans.

Another financial decision college students make is deciding whether to get a student credit card. Capital One offers a variety of student credit card options that can help students start their credit journey and earn rewards while in school. Find out if you’re pre-approved to see which options you may be eligible for.