Types of Student Loans

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

By some estimates, 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, too. 

But did you know there are multiple types of student loans? And they can come from a bunch of different lenders? This article will provide you with an overview of federal and private student loans, along with a few things to consider before you apply for one.

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. And they’re 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. But 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. That means they’re not based on the credit of individual borrowers, unlike many private loans. All federal loans also have fixed interest rates. That means they won’t change over the course of the loan. 

But there are some differences. Here’s more about how each type of federal loan works:

Direct Subsidized Loans

Direct subsidized loans are available to undergraduate students who demonstrate financial need. That’s determined by comparing how much it costs to attend a school with how much a student’s family can contribute. 

Because subsidized loans are based on need, they often have better terms than other types of loans—particularly when it comes to student loan interest.

For example, the government will pay for the interest on subsidized loans as long as the borrower is enrolled in school at least half 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.

Direct Unsubsidized Loans

Direct unsubsidized loans are available to undergraduates, graduate students and professional students. And they’re similar to subsidized loans in many ways. But there are two major differences between unsubsidized and subsidized loans:

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

Even though you’ll be responsible for paying the interest, the rate for undergraduates is the same as it is for subsidized loans. The interest rates on these types of loans for graduate and professional students are typically a little higher though.

Direct PLUS Loans

Direct PLUS Loans are federal loans specifically for graduate students and professional students (Grad PLUS Loans) or the parents of dependent undergraduate students (Parent PLUS Loans). Eligibility for PLUS loans is not based on financial need. But applications for PLUS loans require credit checks. 

According to the Department of Education, an adverse credit history may negatively affect your PLUS loan application. Adverse circumstances include being at least 90 days past due on more than $2,085 on your accounts, having debt in collections or having any of the following on your credit report within 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 you from securing a PLUS loan. But there may be additional requirements, such as having a co-signer.

Direct Consolidation Loans

Direct consolidation loans allow you to combine multiple federal student loans into one loan with a fixed interest rate. Your new rate will be based on the average of all the loans you’re trying to consolidate. 

The Department of Education says there’s no cost for this process. And consolidation can allow you to roll multiple loans into one easier-to-remember payment. 

But there are potential downsides to consolidation loans. For instance, you may end up paying more in interest than you would have otherwise. Consolidating your loans might also cause you to lose benefits, like interest rate discounts, principal rebates, and eligibility for loan forgiveness or cancellation.

Other 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. That’s not the only difference. Private loans usually require credit checks, and application decisions are ultimately up to individual lenders.

Your credit could also factor into other parts of your loan, like the amount of money and interest rate you’re offered. If you have no credit history—or your credit is less than ideal—lenders may require you to have a co-signer. 

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

  1. Private loans might require you to make payments while you’re still in school.
  2. Private 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 loans are typically unsubsidized, meaning you will be responsible for paying all interest.
  4. Private loans may limit your options to have loans forgiven or have payments postponed.

It’s also important to note that lenders may advertise low rates for private loans. But the rate you’re offered may be much higher if you don’t have the best credit. Depending on your situation, there still might be private loans that fit your needs. That could include the following areas: 

  1. State loan programs: Many state agencies run their own student loan programs that function similarly to private loans. 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 loans tailored for borrowers with unique financial circumstances, such as parents of students or those who are unable to find a co-signer.

As you can see, there’s so much variety when it comes to private loans. It’s in your best interest to make sure you understand the terms of your loan and what you’ll be responsible for before applying.

What to Consider When Taking Out a Student Loan

If you’re thinking about taking out a student loan, then it’s probably a good idea to 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 loans tend to be less expensive, which could make paying off student loans easier. And federal loans also offer benefits like flexible repayment plans to help manage debt. 

In fact, before you can get funds for a private student loan, 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.

Student Loan Application Process

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

If you end up needing a private loan, it might be a good idea to compare rates and terms. 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 they may have their own deadlines to qualify for other student aid. 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.

Learn more about Capital One’s response to COVID-19 and resources available to customers. For information about COVID-19, head over to the Centers for Disease Control and Prevention

Government and private relief efforts vary by location and may have changed since this article was published. Consult a financial adviser or the relevant government agencies and private lenders for the most current information.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

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