Understanding the different types of student loans

Learn more about student loan borrowing options from the federal government and private lenders.

About 65% of today’s college students graduate with some form of debt. So if you’re planning on going to college, there’s a chance you might need a student loan. And it’s important to understand what options are available to you. 

There are multiple types of student loans available from federal and private lenders. Read on to learn about federal and private student loans and what to consider before applying for one. 

Key takeaways

  • Federal student loans are issued by the federal government and offer benefits such as fixed interest rates and income-driven and flexible payment plans. 
  • There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.
  • Private student loans are issued through institutions like banks, credit unions, schools and even state agencies. Private student loans can have fixed or variable interest rates and, depending on the lender, the interest may be higher or lower than on federal student loans.

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Types of federal student loans

As the name suggests, federal student loans are issued by the federal government. They’re part of the Department of Education’s William D. Ford Federal Direct Loan Program.

Federal student loans are broken down into four categories: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans. Within those categories, there are loan options for undergraduate students, graduate students, professional students and even parents. 

These loans all share a few things in common, especially when it comes to interest rates. Interest rates on federal student loans are set each spring by the federal government and are all fixed. Federal student loan interest rates aren’t based on the credit of individual borrowers, and they stay the same over the course of the loan.

Here’s how each type of federal loan works: 

Federal direct subsidized loans

Direct subsidized loans are available to undergraduate students of a college or career school who demonstrate financial need. The borrower’s eligibility is determined by comparing how much it costs to attend a school with how much the student’s family can contribute. 

Because subsidized student loans are based on need, they often have better terms than other types of loans.

For example, the government will pay for 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.

If a subsidized loan isn’t enough, an unsubsidized loan may be an option too. But how much an undergraduate can borrow across both types of loans depends on a variety of factors, including financial need and how far along in school they are.

Federal direct unsubsidized loans

Direct unsubsidized loans are available to undergraduates, graduate students and professional students. There are two major differences between unsubsidized and subsidized loans:

  1. Unsubsidized loans don’t require borrowers to demonstrate financial need. 
  2. Borrowers, not the federal government, are typically responsible for paying interest that accrues during school, grace periods and deferments. This is in part because of a process called capitalization.

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. 

Federal direct PLUS loans

Direct PLUS Loans are federal student loans specifically for graduate students and professional students—Grad PLUS Loans—or the parents of dependent undergraduate students—Parent PLUS Loans. Direct PLUS Loan amounts are based on attendance costs and other financial aid the borrowers receive. 

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. Adverse circumstances include being at least 90 days past due on more than $2,085 on accounts, having debt in collections or having any of the following on credit reports within the previous five years:

  1. Default determination
  2. Bankruptcy
  3. Repossession
  4. Foreclosure
  5. Charge-off or write-off of federal student aid debt
  6. Wage garnishment
  7. Tax lien

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.

Federal direct consolidation loans

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. 

As the Department of Education says, 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.

Other federal student loan programs

You may have come across information regarding other types of federal loans, such as Perkins Loans, the Federal Family Education Loan (FFEL) Program and the Health Education Assistance Loan (HEAL) Program. But those programs are no longer offered.

Types of private student loans

Unlike federal student loans, private student loans are issued through institutions like banks, credit unions, schools and even 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 other fees, too.

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—or their credit is less than ideal—lenders may require a co-signer on the loan. 

Because private lenders can set their own terms, you may notice other differences when comparing their loans with federal student loans:

  1. Private student loans might require borrowers to make payments while they’re still in school.
  2. Private student loans could have fixed or variable interest rates, depending on the lender and type of loan. These rates could be higher or lower than the current rates for federal student loans.
  3. Private student loans are typically unsubsidized, meaning borrowers are responsible for paying interest.
  4. Private student loans may limit repayment options, such as loan forgiveness or postponement. 
  5. Private student loans cannot be consolidated into a federal Direct Consolidation Loan, but they can sometimes be refinanced.

It’s also important to note that you might be offered a higher interest rate than advertised if you don’t have the best credit. Depending on your situation, there still might be private loans that fit your needs, including:

  1. 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 track down programs within your state.
  2. 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.
  3. International student loans. This category covers student loans for noncitizens studying in the United States.
  4. 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 cosigner.

When it comes to private student loans, before applying it’s important to make sure you understand the terms of your loan and what you’ll be responsible for.

What to consider when taking out a student loan

If you’re thinking about taking out a student loan, consider all your options before you make any moves. 

Talking to a financial expert could be helpful. It’s not always easy to know where to turn. But one nonprofit company, Moneythink, is on a mission to change that. Its goal is to set students up for financial success by helping them navigate the complex student loan process. Check out the video below to see how.

Weighing the benefits of federal student loans versus private ones could be another good step. 

The Department of Education says federal student loans tend to be less expensive because of lower interest rates, which could make paying off student loans easier. Federal student loans also offer benefits, like flexible repayment plans, to help manage debt. 

With private student loans, you’ll be required to fill out a form to confirm you know all your options. The form encourages borrowers to “pursue the availability of free or lower-cost financial aid.” Your school’s financial aid office or your lender should be able to provide more details. 

There’s so much to consider when it comes to student loans. Loan terms, borrower requirements and how student loans might affect your credit scores are a few high-level things to keep in mind.

Student loan application process

The application process for student loans depends on where you’re applying for financial aid.

If you end up needing a private loan, it might be a good idea to compare rates and terms and to check with individual lenders to learn more about how to apply. 

To apply for a federal student loan, you’ll need to complete a Free Application for Federal Student Aid (FAFSA®). There’s a federal deadline for submitting your FAFSA, which is usually June 30. 

FAFSA forms are also used to determine whether you’re eligible for other grants and scholarships. State agencies and colleges may use FAFSA too—and may have their own deadlines to qualify for other student aid. The bottom line is that the earlier you can submit your form, the better.

Exploring as many opportunities as possible could give you the best shot at securing the money you need to pay for higher education.

Student loan FAQs

What are the different types of student loans?

Student loans are often classified in two ways: federal student loans and private loans. Within those categories, people may refer to different types of loans. One example is consolidation loans.

Federal student loans are issued by the federal government and typically come with better terms than private loans. Private student loans are issued by institutions like banks, credit unions and schools.

What are the four types of federal student loans?

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

What are the most common federal student loans?

The most common federal student loans for undergraduate and graduate students are Direct Subsidized Loans and Direct Unsubsidized Loans.

The bottom line

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

Wondering what happens when it comes time to start paying back your loans? Learn more about student loan interest rates and strategies for paying off your student loans.

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