Though there are two major sources of student loans — federal and private – the federal side dominates the action, both in amount of money available and loan repayment programs.
There were 20 million students enrolled in colleges and universities in the fall of 2019 and approximately 10 million of them received federal loans from the William D. Ford Federal Direct Loan Program. The students took in $93 billion in loans, or about $9,300 per student.
The average student loan debt for 2019 college graduates who borrowed, was $29,900, according to Mark Kantrowitz of savingforcollege.com, and 70% of graduates left school owing money.
Private student loans are available, but every expert, even those who work for banks and credit unions, advise students to exhaust all avenues for federal aid first. Private student loans have some conditions and terms — very good credit or a co-signer needed – that make them difficult to obtain. The interest rates usually are higher than those on federal loans and there are some terms involved that aren’t part of federal loans.
Student loans come in many shapes and sizes, and the regulations for them can be different as well. There are several types for which you may be eligible.
Types of Federal Student Loans
There are five categories of federal student loans, including Direct Consolidation loans, the one many experts advise students to look into to make payments easier when they graduate.
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Parent PLUS Loans
- Graduate PLUS Loans
- Direct Consolidation Loans
Types of Private Student Loans
The door to borrow from private lenders doesn’t offer nearly as many choices. There are, in fact, only two options:
- Private Student loans
- Private Parent loans
Private loans differ, depending on the lender and conditions each one sets. The rates on private loans can be fixed or variable. Some private loans require payments while you are still in school.
The federal Direct Loan program is better known as “Stafford Loans’ and these are available to undergraduate and graduate students. Money for these loans comes directly from the federal government.
There are two types of Stafford Loans: subsidized and unsubsidized. The type helps determine your interest rate and maximum loan amount.
Subsidized Stafford Loans
If your loan is subsidized, you won’t be responsible for making any payments until after you graduate. Your interest rate should be 4.53% in 2019-2020 school year. The government pays your interest for you while you’re in school.
Subsidized loans are reserved for students who can demonstrate a financial hardship. Most go to students whose families’ annual income is less than $50,000.
If you’re an undergraduate, the maximum annual amount of a subsidized loan depends on your year in school. Freshmen can borrow up to $5,500, and nor more than $3,500 can be in subsidized loans. For sophomores, $6,500 in loan, $4,500 subsidized. For third-year and beyond students, loan amount is $7,500, $5,500 in subsidized loans.
The loan limit for a student before graduation is $31,000, no more than $23,000 of which can be subsidized.
Unsubsidized Stafford Loans
If you have an unsubsidized loan, you’re responsible for paying off all the interest. In 2019, interest rates were fixed at 4.53% while you’re in school, but payments are typically deferred — or postponed — until after you graduate. All students are eligible for this type of loan.
Your annual Stafford Loan limit for unsubsidized loans ranges from $5,500 to $12,500, depending on your year in school and whether you are claimed as a dependent on someone’s tax return. You are eligible for a larger loan if you are financially independent. If you’re financially dependent but your parents are ineligible for Parent PLUS loans, you’re permitted the same maximum loans as if you were independent.
Graduate students have access to unsubsidized Stafford loans. There is no requirement to demonstrate financial need, which means that almost anyone is eligible.
There are, however, limits on how much you can borrow. If you’re a graduate student, you have a higher annual limit of $20,500. In total, your undergraduate and graduate Stafford Loans cannot exceed $138,500. If you’re a medical student, you have the highest limits. You may borrow up to $40,500 annually and $224,000 in total.
Direct Consolidation Loans
Most students receive loans from a different borrower every year, if not every semester, so it is commonplace to have 8-10 student loan payments due every month when you finally graduate.
You can simplify the repayment process by applying for a Direct Consolidation Loan, which can best be defined as: one payment to one servicer, once a month.
The Direct Consolidation loan is a fixed-interest loan with flexible options, based on your ability to repay. There is no fee to consolidate student loans, though you can only do it once. It could lower your monthly payments, but also could extend the amount of time needed to pay off the loan.
Direct Consolidation Loans cut down on the torture of having to remember multiple due dates for various amounts to a lot of lenders. It also should help reduce (or eliminate) late fees when you miss a payment.
The downside is that, depending on which Direct Consolidation Loan program you choose, you could end up stretching payments over a longer period and paying more in interest on the debt. Also, you could lose some of the benefits offered by the original loan such as eligibility for loan forgiveness programs and interest rate discounts.
Private student loans are not eligible for the Direct Consolidation Loan program.
PLUS loans are available for both parents and graduate students. Parent PLUS loans are for parents of dependent undergraduate students, and Grad PLUS loans are for graduate students themselves.
As with other education loans, PLUS loans are funded directly by the federal government. But unlike traditional student loans, they have no maximum amounts and can be used to cover any education costs not covered by other financial aid. They have a fixed interest rate of 6.08% for Direct PLUS Loans for Graduates and 7.08% for those made to graduates and parents in 2019.
Perkins Loans Discontinued
The Perkins Loan program was extremely popular with need-based college students, but decision by the Trump administration ended the program on June 30, 2018.
The Perkins Loan Program effectively shut down that day, unless a student already has received a Perkins disbursement for the 2017-2018 academic year. In that case, the student would continue to receive disbursements for the remainder of the 2017-2018 academic year, but not beyond that.
Perkins Loans were more desirable than Stafford Loans because they were subsidized (government paid the interest while you were in school) and had a fixed interest rate of 5%. Other advantages of the Perkins loan included a longer grace period (nine months) before repayment began and special loan forgiveness provisions.
Because of their favorable terms, Perkins Loans were reserved for students who show exceptional financial need. The loans were granted by a college and not all schools participated.
Private Education Loans
Private education loans, also called alternative education loans, are an option for students and parents who still can’t meet financial obligations for attending college, even with money available through federal loans.
The volume of private student loans peaked at $18.1 billion in 2008 but has dropped to $11.6 billion in 2018. About one sixth of student loans went to for-profit colleges.
Private education loans more closely resemble personal loans than student and parent loans. Your eligibility and interest rate depend on your credit history. Your interest rate could be fixed or variable and is typically higher than with federally guaranteed education loans but lower than with other debts like credit card debt.
You still may qualify for a private student loan with bad credit.
Other drawbacks on private loans are that they are not subsidized; some require payments while you’re still in school; and deferment and forbearance options are very limited.
Health Professions Student Loans
Specialized student loans exist for students studying specific areas of medicine such as nursing, sports medicine or veterinary medicine. Each loan has its own requirements about accepted areas of study and financial need.
Learn more about medical education loans from the Health Resources and Services Administration (HRSA), a part of the U.S. Department of Health and Human Services.
Despite your financial standing or field of study, you can find an education loan that suits your needs. It can help you and your family to fund your higher education and reduce the financial burden of school.
Comparing Federal Loans vs. Private Loans
The majority of student loans are made through the William D. Ford Federal Direct Loan Program, but when students need more help to complete their college education, they turn to private lenders, such as banks or credit unions.
The major difference between federal student loans and private student loans is the cost and the use of credit scores in determining eligibility.
Undergraduate students applying for federal loans will not have to go through a credit check. Graduate students seeking federal loans must go through a credit check and could be denied loans if there is adverse information in their credit history.
Credit checks are the norm for public loans. A credit score of 640 or better is required and, depending on the terms and conditions, you may need a score much higher than that to be approved.
Other differences between public and private student loans include:
- Interest rates on federal loans are fixed. The interest rates on private student loans can be variable or fixed and are usually higher.
- Undergraduate borrowers who can demonstrate financial need could receive a federal subsidized loan, meaning the government pays the interest until you graduate. Private loans are never subsidized. You pay all the interest.
- Federal loans offer flexible repayment options and loan forgiveness programs. Private loans have few repayment options and no loan forgiveness programs.
- Federal loans don’t have to be repaid until you graduate or drop below half-time status as a student. Many private loans ask for repayment while you’re still in school.