There are two main types of federal loans available to student borrowers: Stafford Loans and Perkins Loans. Money for these student loans comes directly from the Federal Direct Student Loan Program (FDSLP). In addition to federal student loans, private loan options are available to help cover any gaps in financial aid.
Most federal financial aid arrives in the form of Stafford Loans, which are otherwise known as Direct Loans. There are also two types of student loans under this category:
- Subsidized Stafford Loans (Direct Subsidized Loans)
- Unsubsidized Stafford Loans (Direct Unsubsidized Loans)
Subsidized loans tend to have better terms to help students meet their financial needs. Direct Subsidized Loans are available to undergraduate students, and, while you cannot exceed the amount of your financial need, your school does determine the amount you can borrow using your completed FAFSA® application.
On a subsidized student loan, the U.S. Department of Education pays the interest while you’re in school at least half-time, during a deferment period, or for the first six months after you leave or graduate school.
Unlike subsidized loans, Direct Unsubsidized Loans do not require students to demonstrate financial need. They are available to both undergraduate and graduate students, and the school determines how much you can borrow based on other types of financial aid you receive. The borrower is responsible for paying the interest at all times, and unless you pay interest while you’re in school and during any grace periods, the interest will accumulate and capitalize, which means the interest gets added to the principal loan amount.
Another type of federal financial aid is the PLUS Loan, which helps graduate students or parents of dependent undergraduate students pay for college. PLUS Loans are a smart option when you still need help covering expenses because the U.S. Department of Education is your lender.
To qualify for a PLUS loan, you must have good credit and be a graduate or professional student enrolled at least half-time in an eligible school or a parent of a dependent undergraduate enrolled at least half-time. For parents to qualify, the student must also meet the general requirements for federal financial aid.
Applicants with an adverse credit history might still qualify for a PLUS Loan, but they will need to get a co-signer or document any extenuating circumstances relating to the poor credit history.
Direct Consolidation Loans
Because most students receive a new loan from a different borrower each year, it’s not unusual to have several student loan payments due each month when you graduate. To simplify the process, apply for a Direct Consolidation Loan.
Direct Consolidation Loans combine your various loan into one. This means one servicer and one monthly payment, so there’s less to keep track of. Plus, Direct Consolidation Loans have flexible repayment options that come with a fixed interest rate. You don’t have to pay a fee to consolidate your loans, but you can only do it once, which means you could end up stretching out how long it takes to pay off the loan.
Private Student Loans
Finally, after exhausting all federal financial aid options, private loans can help fill any expense gaps. These can be great when you need extra money for housing or textbooks and supplies, but it’s important to consider all other options first. That’s because private student loans are not regulated like federal student loans are, so they lack many of their protections.
For instance, you cannot take advantage of income-based repayment options or even deferments. They also come with higher interest rates, and you need good credit to qualify.
When considering your options, it’s important to think long-term about your repayment plans and how much you’ll potentially owe once you graduate. With that in mind, you can choose the types of loans best suited to you.