Student Loans

Private vs. federal student loans

The two main types of student loans are private and federal loans. While both serve the same function, there are some significant differences students should keep in mind.

• Eligibility: Federal student loans are generally available to any student who needs them. Only Direct PLUS Loans, which are available to parents, graduate students and professional students, require a credit check. Even then, there’s no minimum credit score requirement you need to meet. In contrast, private student loan companies require a credit check, which may make it challenging for most students to qualify.
• Interest rates: Private lenders offer a range of interest rates, which can be fixed or variable. If you apply and get approved, your interest rate will depend on your credit history, income, other debts and more. Federal student loan interest rates, on the other hand, are standardized, which means that for each type of loan, every borrower receives the same rate. The federal government sets federal loan rates once a year, and those rates are always fixed. 
• Loan limits: Both the federal government and private student lenders have caps on how much you can borrow. However, these limits can vary by lender and loan type, so it’s important to double-check before you apply to make sure you can get what you need.
• Features: Federal student loan borrowers get access to several benefits that can help with their repayment plan. These features include loan forgiveness programs, income-driven repayment plans and forbearance and deferment options. Private lenders may offer forbearance and deferment, but the terms may not be as generous. Also, most private lenders don’t provide income-driven repayment plans, and none of them offer loan forgiveness.
• Repayment plans: Private student loan repayment plans can vary depending on which lender you choose. They’ll typically offer the chance to defer your payments until you’re done with school, but you may also have the chance to start making full payments now or make interest-only payments until you leave school. Repayment terms can range from five to 25 years. With federal loans, the standard repayment plan is 10 years. However, you have the option to extend your term to up to 30 years. 

Types of student loans

Both the U.S. Department of Education and private student lenders offer a variety of loan options. Here are some of the more common ones and how they work:

• Direct Subsidized Loans: With these loans, students with financial need can have their student loan interest paid by the federal government while they’re in school at least half time, in the six-month grace period after leaving school or in deferment. These loans are available only to undergraduate students.
• Direct Unsubsidized Loans: Available to undergraduate, graduate and professional students, these federal loans don’t come with a government subsidy, meaning you are responsible for paying all interest.
• Direct PLUS Loans: Parents, as well as graduate and professional students, can apply for these loans. They offer higher loan amounts than Direct Unsubsidized Loans but also charge higher interest rates. These are the only federal loans parents can get.
• General private loans: Most private student loan lenders offer general student loans that students and their parents can get to pay their college expenses.
• Graduate school loans: Regardless of your area of study, you can apply for one of these private loans to pay for graduate school.
• Medical school loans: Students can get these loans to pay for medical school and residency. 
• MBA loans: You can apply for one of these private loans if you’re pursuing a master's degree in business administration.
• Law school loans: Graduate students in law school can use these loans to pay their expenses, which can even include living expenses and prep classes for the bar exam.
• International student loans: For some international students, it can be challenging to get a student loan for school in the U.S. These loans are designed specifically for those students’ needs.

What to know about student loan interest rates

Student loan interest rates represent the cost of borrowing money to pay for school. They’re represented as a percentage, which is applied to the principal amount of your loan. As a result, the amount of interest you pay with each payment will go down over time as you pay more of your actual loan amount.

Student loan interest rates come in two forms: fixed and variable. A fixed interest rate will remain the same for the life of your loan, which provides some certainty. With variable interest rates, your rate can change over time, depending on the current market interest rates.  

Variable rates tend to start lower than fixed rates, but because you take on the risk of interest rates rising in the future, they’re generally best if you plan to pay off your loans quickly. 

As you consider whether to borrow money to pay for college, calculate your student loan interest to get an idea of how much you’ll end up paying. Depending on how much you borrow and what your repayment term looks like, it could amount to thousands or even tens of thousands of dollars.

How do I get a private student loan?

It’s relatively easy to get federal student loans. Simply fill out the Free Application for Federal Student Aid (FAFSA), and your school will use that information to determine how much money you need and provide federal loans as an option. With Direct PLUS Loans, you’ll undergo a credit check, but the government is only looking for some major negative items.

Getting private student loans, however, is trickier. Private lenders offer a variety of loan types, interest rates, repayment options and other features, so it’s a good idea to shop around and compare what’s available before you submit an application.

Also, private lenders have minimum credit score requirements, and they’ll run a credit check to determine whether you’re eligible based on their criteria. If you get approved, your credit history and other factors will also determine your loan’s interest rate.

If you can’t get approved for a private student loan on your own, you can improve your odds with a creditworthy co-signer. But even that’s no guarantee, and some parents may be hesitant to co-sign because the account will show up on their credit report, and they’ll be responsible for paying back the debt if you can’t. 

Refinancing student loans

After you leave school, you’ll have the option to refinance federal loans, private loans or both. This process involves consolidating one or more existing loans with a single loan through a private lender. 

Refinancing student loans can provide significant benefits, but the process also has its drawbacks for some borrowers. If you’re considering refinancing, most lenders will allow you to get prequalified before you apply, which can allow you to compare loan offers from multiple lenders and decide if it’s the right move for you.

Benefits of refinancing student loans

For starters, if you qualify, refinance rates can be lower than what you’re paying on your current loans, which can save you money and reduce your monthly payment. You’ll also get some flexibility with your monthly payments because you’ll have the option to choose a shorter or longer repayment term. 

Finally, if your parent co-signed a private student loan while you were in school, you can refinance into your own name and eliminate their obligations. Parents who take out student loans on behalf of their children can also refinance in the child’s name later on if everyone is on board.

Drawbacks of refinancing student loans

The primary drawback of student loan refinancing is that not everyone is eligible. You typically need good or excellent credit and a relatively high income to get approved and achieve a low interest rate. Also, if you’re refinancing federal loans, you’ll lose access to the benefits the government offers, including loan forgiveness programs, income-driven repayment plans and generous deferment and forbearance programs.