Types of student loans: What to consider

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One of the most important decisions you’ll make in planning for college is how to pay for school. You can borrow money, but there are several different types of student loans to choose from — each of which comes with its own pros and cons.

Federal student loans are usually the first option to consider due to the low fixed interest rates and consumer protections they provide. But in some cases, private student loans are another good option, since they come with high loan limits. If you already have a loan, you may also want to look into student loan refinancing in order to get a lower rate.

What are the different types of student loans?

There are three types of student loans: federal, private and refinancing. Each have their own rates, terms and features.

  • Federal student loans: Federal student loans make up 90 percent of all student loans and offer the most benefits and protections for students, including income-driven repayment plans, longer deferment options and loan forgiveness.
  • Private student loans: Private student loans have fewer limits on how much you can borrow than federal student loans. In some cases, private loans have lower interest rates than federal loans, but they also don’t offer loan forgiveness or income-driven repayment options.
  • Student loan refinancing: Student loan refinancing is a type of loan that replaces one or more existing loans in order to get you a lower interest rate or better terms. Student loan refinancing is offered only through private lenders.

Types of federal student loans

While there are many ways to pay for college, federal student loans are one of the most common. Not only do these loans offer flexible payment options, but they can also feature reasonable interest rates.

The federal Direct Loan Program offers a few loan types, each with their own perks.

Direct Subsidized Loans

Direct Subsidized Loans are available to undergraduate students who have demonstrated financial need. These loans do not accrue interest while the borrower is in school, during the six-month grace period or during any period of deferment afterward.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to undergraduate, graduate and professional students. Borrowers do not need to demonstrate financial need, but these loans do accrue interest immediately. This means that you’ll be gathering interest during school, after you graduate and during periods of deferment and forbearance.

Direct PLUS Loans

Direct PLUS Loans are available to graduate or professional students and/or parents of dependent undergraduate students to help pay for education expenses. Direct PLUS Loans (also known as graduate PLUS loans and parent PLUS loans) carry higher interest rates and loan origination fees than Direct Subsidized and Unsubsidized Loans.

Unlike other student loans, parent PLUS loans are taken out by parents directly. While students can make payments themselves, their parents will still be legally and financially responsible for repaying the full balance of parent PLUS loans. The loan will only show up on the parent’s credit report, not the student’s.

Types of private student loans

Popular private student lenders include Sallie Mae, Discover and Citizens Bank, but there are dozens of additional private student loan companies. Private lenders offer various repayment terms, incentives and consolidation options, and they may offer additional options tailored to graduate school, law school, medical school, business school and more. Private student loans can also come with incredibly low interest rates for qualified borrowers with good or excellent credit, and you can typically choose a repayment plan that suits your budget and goals.

Unlike federal student loans, which offer only fixed rates, private student loans can have fixed or variable interest rates. If you opt for a private loan with a variable rate, your rate will change over time — which means that you may end up paying far less than you would with a federal loan, but you might also get hit with an unexpected rate hike.

Compare all types of loans before making a decision on federal or private loans. It’s generally best to see if you qualify for federal aid first and fill in the gaps with private lenders. If you do go with a private lender, make sure to shop around to compare rates and terms.

Types of student loan refinancing

If you already have student loans but want to make your loans more affordable, you can refinance your existing loans into a new loan. By refinancing, you can qualify for a competitive interest rate if you or your co-signer has good or excellent credit, and you can often choose a repayment plan that fits with your income and goals. And if you refinance multiple loans, that consolidation process can help you save money on interest and simplify your finances, since you’ll have only one payment to make.

You can refinance both private and federal student loans, but you’ll lose out some federal protections when you refinance federal loans, including access to income-driven repayment plans and protections like deferment and forbearance. There’s no way to undo refinancing, so consider the consequences before you enroll.

If you’d rather not refinance your federal student loans, you could instead apply for a Direct Consolidation Loan, which allows you to combine all of your eligible federal student loans into one new loan with a single loan servicer. The interest rate for the new loan is determined by the weighted average of the interest rates on all of the loans being consolidated, so this option won’t save you money — in fact, with a longer repayment period, you’ll end up paying more in interest overall. But consolidating your loans could still be your best option if you’d like to hold on to your federal protections.

Which student loan option is best for you?

There are no hard-and-fast rules for deciding which loan option is best for you — the best option ultimately comes down to your finances, preferences and risk tolerance. As a general rule of thumb, federal student loans should be the first place you look, but private student loans may be appropriate if you need to borrow a lot of money for school.

Who are federal student loans best for?

Federal student loans are best for every kind of borrower. They offer unique repayment options and longer deferment periods than private lenders, and they’re the only avenue to loan forgiveness programs. In general, borrowers should max out their federal student loans before taking out private loans.

Who are private student loans best for?

Private student loans are best for borrowers who don’t qualify for federal student loans because of citizenship status or borrowers who need to borrow far more than what federal student loans provide. Private student loans may also be a good option for borrowers with excellent credit, since some lenders offer lower starting rates than the federal government.

Who is student loan refinancing best for?

Student loan refinancing is a great option for borrowers with private student loans because they won’t be giving up any significant benefits when they refinance, and refinancing can lower the overall cost of the loan. Refinancing can also help you remove a co-signer from a private student loan.

How to apply for federal or private student loans

Most students take out a combination of federal student loans and private student loans by the time they finish school. Often this involves maximizing federal student loan options as much as possible while using private student loans to fill in the gaps or refinancing into a new loan with better rates and terms later on.

Applying for a federal student loan

To apply for federal student loans and other types of financial aid, you have to fill out the Free Application for Federal Student Aid (FAFSA). Completing the FAFSA will put you up for consideration for federal student loans. Students who complete the FAFSA are also considered for federal and state aid, such as the Pell Grant, work-study and even school-sponsored scholarships. You should always fill out the FAFSA if you want to receive financial aid of any kind.

Students and their parents (if the student is a dependent) will need to create a Federal Student Aid ID in order to access and electronically sign the FAFSA. To complete the FAFSA, students must have access to the following information:

  • Identification information for themselves and parents if they are dependents, including Social Security number, driver’s license and alien registration numbers if not a U.S. citizen.
  • Bank statements.
  • Federal tax forms with W-2s.
  • Records of investments, assets (excluding the family home) and untaxed income.

When it comes to providing tax and financial information, it’s important to remember that you must provide the information from two years prior to your school year. For example, if you are filling out the FAFSA for the 2021-22 school year, you will need to report information from 2019.

Students must also complete the FAFSA for each year they plan to enroll in school. This step is important, since financial information can change over time and it’s possible that your loan options or available aid can increase over the years you’re in school.

Applying for a private student loan

If you plan to apply for a private student loan, you won’t need to fill out the FAFSA. Instead, you’ll choose among the top private student loan companies to find the best fit.

As you look for the best private student loan, here are the steps you need to take:

  1. Compare lenders’ rates and terms. Spend some time comparing lenders based on the rates and terms they offer qualified borrowers.
  2. See if you can “check your rate.” Some companies let you check your interest rate without a hard inquiry on your credit report. Checking your rate can help you get an idea of whether you can qualify for the loan amount you want and a reasonable interest rate.
  3. Fill out a loan application online. Once you settle on a lender, you can apply for your loan through a standard online loan application. You’ll need to provide the level of school you’re completing (undergraduate or graduate), your school name, your estimated annual income, the amount you want to borrow, your Social Security number and your contact information. You may have to provide financial information for a co-signer if you’re using one.
  4. Receive your loan funds. Once you’re approved for your private student loan, your funds will typically be disbursed to your school to cover tuition, room and board and other expenses. The remaining loan funds are typically sent to you, the borrower, so you can cover additional costs, like books or living expenses.

The bottom line

Before taking out a student loan, consider the pros and cons of each type. No matter what kind of student loan you apply for, you should understand how your payments will work after graduation. Apply for scholarships and grants to minimize your college costs so you can borrow as little as possible, and map out a budget before you graduate to account for your new monthly payments.

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Written by
Zina Kumok
Contributing writer
Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference.
Edited by
Student loans editor