6 Types of Student Loans – Do You Know Which You Have?

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The first step to take before thinking about borrowing money for college is to get as much free money as you possibly can! Applying for grants and scholarships is one way to do this. Working and saving up money if you can is also better than borrowing money. And finally, completing the FAFSA will make sure that you get the best offers before borrowing. If you did all of these things but still need to borrow money or you’ve already borrowed money in the past and want to know what your loans are all about, then you’re in the right place. Read on! 

Loans from the Federal Government should always come first before private loans from individual companies because the interest rates are lower and always fixed. That means you pay a lot less money in fees after you graduate compared to someone who borrowed money from a private company or bank and not from the government. The “fixed” interest part means they can’t change the interest fees on you once you sign on the dotted line, that’s good news for you as a borrower because you’ll always know what’s up when it comes to calculating your fees. The term on all federal loans will be between 10 and 25 years unless you consolidate your federal loans and extend to a 30-year term. The other great thing about federal loans is that you probably won’t need to do a credit check or get a co-signer for the application, and the repayment plans are pretty flexible depending on your financial situation after college. 

Now, with those general notes out of the way – let’s jump in and clear up the differences between the 6 major types of student loans:

  1. Direct Subsidized Federal Loan

Fast facts: 

 

  • 2019 interest rate is 4.53% for undergrad, 6.08% for grad school
  • Max you can borrow per year of undergrad is between $3,500-$5,500
  • Loan fee is 1.062% until October 2019 and then 1.059% until October 2020

 

These loans are called Stafford loans and they are the best type of federal loan to get it you qualify. If your family income tax return shows that you have some financial need, then you’ll probably be eligible for these. The word subsidized is used because you will get a “subsidy,” and that’s a great thing! A subsidy is an amount of free money you will get after graduation that will match the amount of interest fees your loan has accrued up while you were in school studying and living your best life! You read that right – they will pay the interest off the loan for you and you will only be responsible for paying the original amount you borrowed, which is called the principal. (Spelled like “principal of your elementary school” and not like “principle of the matter” FYI) If you see these loans on your financial aid letter, then you definitely want to accept these first before any other loan types below! An example for ya: I borrow $5,000 my freshman year at an interest rate of 4.53% in 2019. By senior year in 2023, the amount of my loan in my account will be up to $5,969.44. That’s an extra $969.44 that I’m being charged for 4 years of interest fees! (Insert fearful face emoji here!) But thank goodness it’s a subsidized federal student loan and I get a subsidy from the government of $969.44 to match the interest fees they charged me, which brings my balance back down to the original principal balance of $5,000. (Insert praise hands emoji here!)

  1. Direct Unsubsidized Federal Loan

Fast facts: 

 

  • 2019 interest rate is 4.53% for undergrad, 6.08% for grad school
  • Max you can borrow per year of undergrad is between $3,500-$5,500 for undergrad and up to $20,500 for grad school
  • Loan fee is 1.062% until October 2019 and then 1.059% until October 2020

 

That little prefix “un” in front of the word “subsidized” should make you sigh and roll your eyes because you won’t be getting any free money here! That’s right “unsubsidized” means that there’s no subsidy given to you by the government, so at the end of your time in college, you will be responsible for paying back the principal amount you borrowed PLUS the interest fees that accrued while you were in school. If this is the type of loan you have and you happen to still be in college then here’s a tip most people wish they knew sooner… At graduation, you’ll only owe what you borrowed if you log in to your student loan account each month during college and pay off the interest! It’s true! You can log into your account at any point in college and pay off the interest or even start paying down your principal loan balance. But most college students can’t afford to make big payments so they put it off completely until after graduation.

  1. Direct PLUS Loan (for Grad Students or Parents of Undergrads)

Fast facts: 

 

  • The interest rate is 7.08% for loans disbursed from July 1, 2019 – July 1, 2020
  • Max you can borrow per year depends. It is determined by subtracting all financial aid from your school’s cost of attendance. 
  • Loan fee is 4.248% until October 1, 2019 and then 4.236% through October 1, 2020. Any loans disbursed before these dates will have a different interest rate.

 

PLUS loans require a credit check in order to be issued. They’re not intended for undergraduate students who often have limited credit history and are largely issued to parents as Parent PLUS Loans. These loans have a higher interest rate than previous federal loan types we’ve looked at above, but at least the interest is fixed. In order to get the lowest interest rate PLUS loans you’ll need to work on increasing your credit score first. There are two major cons for this loan type. The first con (which applies to the previous federal loan types too) is that you can’t refinance federal loans to get a lower interest rate, even if you happen to improve your credit score later on. That’s why it’s a good idea to work on increasing your credit score before applying for a PLUS Loan. The other con is that the loan fee is significantly higher for PLUS loans compared to subsidized and unsubsidized loans for undergraduate borrowers.    

  1. Direct Consolidated Loan

Fast facts: 

 

  • The new fixed interest rate is equal to the average of the interest rates on the loans being consolidated 
  • There is no fee to apply for a Direct Consolidation Loan

 

You can consolidate any federal student loans listed so far into one main pile of money that will count as one account with one monthly payment to the same company every month. While this is much more convenient that dealing with multiple lenders and multiple payment amounts, there is a downside. For one, all the interest that accrued on your loans will be considered part of the principal balance for the new consolidated loan. So that means interest is going to accrue faster now than it did before. As if that weren’t bad enough, you also end up extending the term of your loan to about 25 to 30 years, which means not only owing more in interest, but also making payments for longer. NOT a good combo! Finally, if you have some Parent PLUS Loans in the mix, they do not qualify for the consolidation loan because you cannot combine them into the same account with federal loans that the student received. Bottom line is that even though in theory it sounds great because it’ll be easier and more convenient to have one payment, you’d have to make sure that this makes sense for your situation before applying to consolidate! 

  1. Private Student Loan

Fast facts: 

 

  • In 2019, interest rates vary widely and range between 3.27% to 12.94% depending on the borrower’s or co-signer’s credit score
  • Max you can borrow per year is usually equal to the cost of attendance for your college minus the financial aid you’ve been awarded, if any
  • Loan fees vary between 1% and 6% but many private lenders are doing away with loan disbursement fees completely

 

Many students often look at the cost to attend their dream school and subtract all the federal financial aid and federal student loans, but still owe a balance. That’s when most choose to rely on private student loans. These loans have nothing to do with the government and they operate by their own set of rules. For example, while the federal government changes federal student loan interest rates once per year, private lenders can change their interest rates anytime they feel like it based on how much other competitors are charging or based on how the market is doing. 

  1. Refinanced Loans (with a Private Lender)

Fast facts: 

 

  • In 2019, private student loan refinancing rates vary between 3.45% to 9.62% depending on your credit and whether you choose a fixed or variable rate
  • Loan fees vary widely but have largely been done away with
  • You CANNOT refinance federal loans alone as this option only exists through private student loan providers and not through the federal government

 

When you refinance your loans, not only do you get just one payment each month – you also get a lower interest rate based on your credit score. In order to get approved for refinancing, you’ll need to prove that you can afford to make your monthly payments and simultaneously manage your personal financial responsibilities. You’ll need to have a solid record of making on time payments in the past. Most lenders will check your FICO score for this information, but certain lenders might have less strict rules for you to qualify. Generally if someone has a steady and reliable source of income, a strong credit profile, and manages to lock in a low interest rate offer for refinancing, then this could end up being a good option for repaying student loans in a more manageable way. 

If you have a chunk of student loan debt, you may have more than one of these loan types listed above. Many people have a mix of different types of loans. The important thing is that you understand which loans you do have and which options or strategies for repayment make the most sense for you given your goals and personal financial situation. 

 

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