Educational loans (commonly referred to as student loans) are loans awarded to qualifying college students to help them finance their education. If you are a student who is considering taking out an educational loan, it is important to understand the differences among the student loan types to help you make wise decisions for funding your education.
Below is information about common types of student loans in the United States.
Federal loans are appealing to many students because they typically have lower interest rates and fewer fees than most private loans. Following graduation there is also a grace period before the loan payments are due. Assistance programs are available under certain conditions for borrowers who have trouble repaying these loans.
To qualify for federal student loans, students must complete the Free Application for Federal Student Aid (FAFSA) and maintain satisfactory academic progress while in college.
Below are the common types of federal student loans awarded in the United States:
Stafford Loans are low-interest federal student loans available to those who qualify. These loans grant borrowers a six-month grace period following graduation before the first payment is due.
There are two types of Stafford Loans: subsidized and unsubsidized:
Subsidized Stafford Loans
Subsidized Stafford Loans are available to students who have a demonstrated financial need. The federal government will pay the interest on subsidized Stafford Loans while the borrowers are enrolled in college and during the grace period.
Unsubsidized Stafford Loans
Eligibility for Unsubsidized Student Loans is based on enrollment. Therefore, college students who do not have to have a demonstrated financial need may qualify for these loans.
Students are responsible for the payment of the accrued interest of the Loan from the time the loan is disbursed. Borrowers may pay the interest while attending school or allow the interest to be capitalized to the loan principal through the grace period.
Perkins Loans are one of the most appealing types of loans because of their low interest rates. However, many students do not qualify for them. These loans are reserved for students who demonstrate the strongest financial need.
The federal government pays the interest on all Perkins Loans while students are enrolled in college. Following college, borrowers have a nine-month grace period before the first loan payment is due.
Parent PLUS Loans
Parent PLUS Loans may be taken out by parents of undergraduate students to help their children cover their educational expenses. The interest rate is fixed and determined by the federal government. To be eligible for these loans, parents must undergo a credit check and be considered creditworthy. The parents are responsible for the repayment of Parent PLUS loans.
Payment on the loan begins at the time the loan is disbursed. However, repayment may be eligible for deferment while student is attending college. The federal government does not subsidize the interest on PLUS loans. Therefore, even if the repayment has been deferred, the loan will continue to accrue interest, which will be capitalized to the loan principal
Once students are no longer enrolled in college, they may be eligible to consolidate their federal loans into one federal loan. Once borrowers have consolidated their loans, they cannot consolidate again unless they add a new loan.
Consolidation can help borrowers of multiple loans manage their loans because they will be making only one monthly payment. It can also help some borrowers meet their repayment obligations because the length of the loan is often extended and the monthly payments are lowered. The interest rate for consolidation loans is a low fixed-rate based on the average rate of the loans that were consolidated.
Private loans are awarded through financial institutions. There are many lenders that offer these loans to students. Students who have a gap between their financial aid and educational expenses or living expenses, might consider applying for private loans.
Students who do not qualify for traditional student aid might choose to apply for private loans. Private loans do not require a demonstration of financial need nor do they require students to maintain satisfactory academic progress while enrolled in college. However, students who want to borrow from private lenders will have to undergo a credit check. Those who cannot qualify for private loans based on their own creditworthiness may be able to qualify with a creditworthy cosigner.
Private student loans are often utilized only when all other means of educational funding have been exhausted. This is, in part, because private loans typically charge higher interest rates and require more fees than federal student loans. There are also few options for borrowers who have trouble repaying these loans after graduation. If you are interested in taking out a private student loan, it is important to compare the loan specifications offered by various institutions.
If you are considering taking out either a federal or private student loan to meet college expenses, it is important to make wise decisions considering potential loan applications. Use the information above to understand the most common types of student loans available in the United states and compare your available options.