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Congratulations! You’ve received your acceptance letter and you are headed to college.
Once you’ve been accepted into school, the second most important letter future college students will receive is your financial aid package. The price of higher education in the US continues to tick upwards. Undergraduate students pay an average of $17,237 per year for tuition, fees, and room and board at public institutions and $44,551 at private schools, according to the most recent numbers for the National Center for Education Statistics.
Nearly 70% of college graduates took on student loan debt to cover their college costs. We break down the loan types outlined in your financial aid package as well as other options you can explore.
Types of Federal Student Loans
The financial aid you receive from the federal government is determined by the information in your Free Application for Federal Student Aid, or FAFSA. Both undergrad and graduate students should fill out the FAFSA, even if you think you won’t qualify for a need-based loan.
The information in your FAFSA will be used not just to determine federal loan options or loan limits, but also any college-based financial aid, scholarships and other aid packages to cover the cost of attendance. Your school’s financial aid office will determine the loan amount you can borrow from the federal government, which will not exceed your financial need for the school year.
There are several different types of federal loans, but all of them only offer fixed interest rates (not variable rates), and the rate is determined by the loan option, not your credit score.
Direct Subsidized Loans
Direct subsidized loans, also called subsidized Stafford loans, are given to undergraduate students with financial need to help cover the cost of their education, whether at college or at a career-training school.
Direct loans have slightly better terms than unsubsidized loans because the US Department of Education pays the interest while you are in school at least part-time, including during the six-month grace period after you leave school and during a deferment if you qualify. When interest starts accruing can make a major impact on your repayment plans and loan payments.
The Perkins loan program, a low-interest federally subsidized loan, stopped in 2017.
Direct Unsubsidized Loans
These loans, also called unsubsidized Stafford loans, are given to eligible undergraduate, graduate, and professional students. Unlike direct subsidized loans, eligibility for unsubsidized loans is not based on financial need. Your school determines the amount of your loan based on the cost to attend that school along with other financial aid you may be receiving.
Because this federal loan is unsubsidized by the government, you are responsible for paying the interest on the direct unsubsidized loan, including the interest that accrues while you are in school and during grace periods, or during a deferment or forbearance.
If you choose not to pay interest on the loan while you are in school or during the six-month grace period after you graduate, that interest will be added to the principal amount you owe on your loan. If possible, you may want to pay interest while you are in school to avoid adding to your loan.
Direct PLUS Loans
These loans are made to graduate and professional students as well as parents of dependent undergraduate students to bridge the gap left by other financial aid. Parent PLUS loans and Grad PLUS Loans have higher interest rates than any other federal student loan options.
Eligibility is not based on financial need, but a credit check is required. If you have a low credit score or an otherwise questionable credit history, you may have to meet additional requirements to qualify. Payments will be made directly to the US Department of Education, which will be your lender for the duration of your loan period.
Types of Private Student Loans
Federal loans come with borrowing limits, and can lead to a gap in funding. Private loans can be a great alternative to pay for the rest of your college tuition and expenses for the academic year.
Students can apply directly to their financial institution if they offer a student loan, or with a private lender that specializes in student loans. It’s best to shop around to find the lender that offers you the best interest rate. You may be able to get a quote without a credit check, but lenders will run your credit history before determining how much you can borrow and your interest rate.
If you don’t have strong credit or if you don’t have an established credit history, consider getting a cosigner, such as a parent or other trusted adult. A cosigner with a good credit history can also help you secure a lower interest rate.
You have the option to refinance your loan down the road, which can also land you a lower interest rate and lower monthly payments.
Remember to ask your lender about repayment terms and if they will also be your loan servicer. While federal loans don’t start repayment until after graduation (or when you dip below half-time enrollment) and a grace period, private loans may require you to begin paying your loan or interest while you are still in school.
Picking the Right Education Loan Option for You
Choosing a loan program is a major decision that can affect your education and your finances for years to come. Students should do their research and talk with family members that may be helping with education expenses.
College counselors are another great resource for information to learn more about the types of loans available. They can help you figure out which loan program is right for you and what other options might be available to you, including scholarships and work-study programs.