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What Are The 4 Types of Student Loans
About 65% of today’s college students graduate with some form of debt. So if you’re planning on going to college, there’s a chance you might need a student loan. And it’s important to understand what options are available to you.
There are multiple types of student loans available from federal and private lenders. Read on to learn about federal and private student loans and what to consider before applying for one.
Key Takeaways
- Federal student loans are issued by the federal government and offer benefits such as fixed interest rates and income-driven and flexible payment plans.
- There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.
- Private student loans are issued through institutions like banks, credit unions, schools and even state agencies. Private student loans can have fixed or variable interest rates and, depending on the lender, the interest may be higher or lower than on federal student loans.
Types of Federal Student Loans
As the name suggests, federal student loans are issued by the federal government. They’re part of the Department of Education’s William D. Ford Federal Direct Loan Program.
Federal student loans are broken down into four categories: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans. Within those categories, there are loan options for undergraduate students, graduate students, professional students and even parents.
These loans all share a few things in common, especially when it comes to interest rates. Interest rates on federal student loans are set each spring by the federal government and are all fixed. Federal student loan interest rates aren’t based on the credit of individual borrowers, and they stay the same over the course of the loan.
Here’s how each type of federal loan works:
Federal Direct Subsidized Loans
Direct subsidized loans are available to undergraduate students of a college or career school who demonstrate financial need. The borrower’s eligibility is determined by comparing how much it costs to attend a school with how much the student’s family can contribute.
Because subsidized student loans are based on need, they often have better terms than other types of loans.
For example, the government will pay for the interest on subsidized loans as long as the borrower is enrolled in school at least half the time. It will also cover interest payments for six months after graduation—known as a grace period. The same goes for a loan deferment, a period when payments are postponed.
If a subsidized loan isn’t enough, an unsubsidized loan may be an option too. But how much an undergraduate can borrow across both types of loans depends on a variety of factors, including financial need and how far along in school they are.
Federal Direct Unsubsidized Loans
Direct unsubsidized loans are available to undergraduates, graduate students and professional students. There are two major differences between unsubsidized and subsidized loans:
- Unsubsidized loans don’t require borrowers to demonstrate financial need.
- Borrowers, not the federal government, are typically responsible for paying interest that accrues during school, grace periods and deferments. This is in part because of a process called capitalization.
Although borrowers are responsible for paying interest, the rate undergraduates pay for unsubsidized loans is the same as the rate for subsidized loans. Rates are generally a little higher for graduate and professional students.
Federal Direct PLUS Loans
Direct PLUS Loans are federal student loans specifically for graduate students and professional students—Grad PLUS Loans—or the parents of dependent undergraduate students—Parent PLUS Loans. Direct PLUS Loan amounts are based on attendance costs and other financial aid the borrowers receive.
Eligibility for PLUS loans isn’t based on financial need, but it does require a credit check. According to the Department of Education, an adverse credit history may negatively affect PLUS loan applications. Adverse circumstances include being at least 90 days past due on more than $2,085 on accounts, having debt in collections or having any of the following on credit reports within the previous five years:
- Default determination
- Bankruptcy
- Repossession
- Foreclosure
- Charge-off or write-off of federal student aid debt
- Wage garnishment
- Tax lien
Having an adverse credit history doesn’t instantly disqualify borrowers from securing PLUS loans. But there may be additional requirements, such as having a co-signer.
Federal Direct Consolidation Loans
Direct consolidation loans allow borrowers to combine multiple federal student loans into one loan with a fixed interest rate. The new rate is based on the average of all the loans being consolidated.
As the Department of Education says, there’s no cost for this process. And consolidation can allow borrowers to roll multiple loans into one easier-to-remember payment.
But there are potential downsides to consolidation loans. For instance, borrowers may end up paying more in interest than they would have otherwise. Consolidating loans might also take away benefits, such as interest rate discounts, principal rebates, and eligibility for loan forgiveness or cancellation.
Other Federal Student Loan Programs
You may have come across information regarding other types of federal loans, such as Perkins Loans, the Federal Family Education Loan (FFEL) Program and the Health Education Assistance Loan (HEAL) Program. But those programs are no longer offered.
Types of Private Student Loans
Unlike federal student loans, private student loans are issued through institutions like banks, credit unions, schools and even state agencies. Private student loans usually require credit checks, and application decisions are ultimately up to individual lenders. They may also have higher interest rates and other fees, too.
A borrower’s credit can also factor into other parts of private loans, like the amount of money and the interest rate offered. If an individual has no credit history—or their credit is less than ideal—lenders may require a co-signer on the loan.
Because private lenders can set their own terms, you may notice other differences when comparing their loans with federal student loans:
- Private student loans might require borrowers to make payments while they’re still in school.
- Private student loans could have fixed or variable interest rates, depending on the lender and type of loan. These rates could be higher or lower than the current rates for federal student loans.
- Private student loans are typically unsubsidized, meaning borrowers are responsible for paying interest.
- Private student loans may limit repayment options, such as loan forgiveness or postponement.
- Private student loans cannot be consolidated into a federal Direct Consolidation Loan, but they can sometimes be refinanced.
It’s also important to note that you might be offered a higher interest rate than advertised if you don’t have the best credit. Depending on your situation, there still might be private loans that fit your needs, including:
- State loan programs. Many state agencies run their own student loan programs that function similarly to those of private lenders. The Department of Education maintains an index that you can use to track down programs within your state.
- Profession-based loans. Some loans, like bar exam loans and medical school loans, help cover expenses specific to education in fields like law or health care.
- International student loans. This category covers student loans for noncitizens studying in the United States.
- Borrower-specific loans. There are also private student loans tailored to borrowers with unique financial circumstances, such as parents of students or those who are unable to find a cosigner.
When it comes to private student loans, before applying it’s important to make sure you understand the terms of your loan and what you’ll be responsible for.
What to Consider When Taking Out a Student Loan
If you’re thinking about taking out a student loan, consider all your options before you make any moves.
Talking to a financial expert could be helpful. It’s not always easy to know where to turn. But one nonprofit company, Moneythink, is on a mission to change that. Its goal is to set students up for financial success by helping them navigate the complex student loan process. Check out the video below to see how.
https://www.youtube-nocookie.com/embed/MMAIWrooWPc?rel=0&controls=2&enablejsapi=1&origin=https%3A%2F%2Fwww.capitalone.com&widgetid=1
Weighing the benefits of federal student loans versus private ones could be another good step.
The Department of Education says federal student loans tend to be less expensive because of lower interest rates, which could make paying off student loans easier. Federal student loans also offer benefits, like flexible repayment plans, to help manage debt.
With private student loans, you’ll be required to fill out a form to confirm you know all your options. The form encourages borrowers to “pursue the availability of free or lower-cost financial aid.” Your school’s financial aid office or your lender should be able to provide more details.
There’s so much to consider when it comes to student loans. Loan terms, borrower requirements and how student loans might affect your credit scores are a few high-level things to keep in mind.
Student Loan Application Process
The application process for student loans depends on where you’re applying for financial aid.
If you end up needing a private loan, it might be a good idea to compare rates and terms and to check with individual lenders to learn more about how to apply.
To apply for a federal student loan, you’ll need to complete a Free Application for Federal Student Aid (FAFSA®). There’s a federal deadline for submitting your FAFSA, which is usually June 30.
FAFSA forms are also used to determine whether you’re eligible for other grants and scholarships. State agencies and colleges may use FAFSA too—and may have their own deadlines to qualify for other student aid. The bottom line is that the earlier you can submit your form, the better.
Exploring as many opportunities as possible could give you the best shot at securing the money you need to pay for higher education.
Best Student Loans
The federal government also has a program called the Graduated Repayment Plan that allows you to pay back your loan over time with interest rates starting at 3.4% and increasing every two years until they reach their maximum rate of 8%. The plan should be used only by borrowers who can afford higher payments than what they’d pay under a fixed repayment plan. Students who choose this option must be aware that they will end up paying more in interest over the life of their loan than those who opt for a fixed payment plan. In this guide, we review the types of student loans explained, what are the 4 types of student loans, types of student loans subsidized unsubsidized, student loan pause and federal student loans extension.
You’ve probably heard the term “student loan” before, but what exactly is it? A student loan is a type of financial aid that helps you pay for your education. It’s made up of two parts: a principal (the amount you borrowed) and an interest rate. Read on to learn more about types of student loans explained, what are the 4 types of student loans, types of student loans subsidized unsubsidized, student loan pause and federal student loans extension.
There are four types of student loans.
The first is subsidized. This type of loan is awarded to students based on financial need, and the government pays interest while the student is in school.
The second type of loan is unsubsidized. This loan does not take into account your financial need, and you are responsible for all interest payments while you are in school.
The third type of loan is a Stafford Loan which allows you to borrow up to $5,500 per year for each academic year; this amount includes both subsidized and unsubsidized loans. The fourth type of loan is a Perkins Loan which allows you to borrow up to $8,000 per year for each academic year; this amount includes both subsidized and unsubsidized loans.
There are also two different types of federal student loans: subsidized or unsubsidized. Subsidized loans are awarded based on financial need, so if you qualify for a subsidized loan then the government will cover the interest that accrues during your grace period (which can be up to six months after graduation). Unsubsidized loans do not have any type of interest subsidy attached to them, so they accrue interest while they’re still in school.
types of student loans explained
We begin with types of student loans explained, then what are the 4 types of student loans, types of student loans subsidized unsubsidized, student loan pause and federal student loans extension.
Though there are two major sources of student loans — federal and private – the federal side dominates the action, both in amount of money available and loan repayment programs.
U.S. colleges and universities enrolled 17.5 million students in 2021, a huge number but, in fact, a slight dip from 2019 that experts connect to COVID-19 challenges. Roughly half of them received federal loans from the William D. Ford Federal Direct Loan Program.
The average student loan debt among 2021 college graduates who borrowed — 62% of all students — was $39,000.
Regional differences are significant. Higher-debt graduates emerge from colleges in the Northeast:
- New Hampshire, $39,410
- Pennsylvania, $39,027
- Connecticut, $38,546
- Rhode Island, $37,614
- Delaware, 37,447
- Maine, $33,591
- New Jersey, $33566
- Massachusetts, $33,256
Lower-debt graduates emerge primarily from colleges in the West
- Utah, $17,935
- New Mexico, $20,991
- Nevada, $21,254
- California, $21,485
- Wyoming, $23,444
- Hawaii, $23,557
- Florida, $24,629
- Washington, $24,645
Average student debt among graduates also hinges on which type of college or university was attended. The TICAS breakdown for the Class of 2018 (the latest year available):
- 66% of public college graduates had loans (average debt $25,500)
- 75% of private, nonprofit college graduates had loans (average debt $32,300)
- 88% of graduates from for-profit colleges had loans (average debt $39,950)
Private student loans are available, but every expert, even those who work for banks and credit unions, advise students to exhaust all avenues for federal aid first. Private student loans have some conditions and terms — very good credit or a cosigner needed – that make them difficult to obtain. The interest rates usually are higher than those on federal loans and there are some terms involved that aren’t part of federal loans.
Student loans come in many shapes and sizes, and the regulations for them can be different as well. There are several types for which you may be eligible.
Types of Federal Student Loans
There are five categories of federal student loans, including Direct Consolidation loans, the one many experts advise students to look into to make payments easier when they graduate.
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Parent PLUS Loans
- Graduate PLUS Loans
- Direct Consolidation Loans
Types of Private Student Loans
The door to borrow from private lenders doesn’t offer nearly as many choices. There are, in fact, only two options:
- Private Student loans
- Private Parent loans
Private loans differ, depending on the lender and conditions each one sets. The rates on private loans can be fixed or variable. Some private loans require payments while you are still in school.
Stafford Loans
The federal Direct Loan program is better known as Stafford Loans. These are available to undergraduate and graduate students alike. Money for these loans comes directly from the federal government.
Stafford Loans come in two types: subsidized and unsubsidized. The type helps determine your interest rate and maximum loan amount.
Subsidized Stafford Loans
If your loan is subsidized, you won’t be responsible for making any payments until after you graduate. Under normal circumstances, the federal government pays the interest (rates set by federal law) on subsidized loans.
However, the CARES Act, passed in March 2020 in response to the coronavirus pandemic, zeroed out the rate on all federal student loans. On his first day in office, President Joe Biden extended the moratorium through May 1, 2022.
Subsidized loans are reserved for students who can demonstrate a financial hardship. Most go to students whose families’ annual income is less than $50,000.
If you’re an undergraduate, the maximum annual amount of a subsidized loan depends on your year in school. Here’s the breakdown for students who are dependents (subsidized maximum in parentheses):
- First-year undergraduate, $5,500 ($3,500)
- Second-year undergraduate, $6,500 ($4,500)
- Third-year and beyond undergraduate, $7,500 ($5,500)
- Aggregate loan maximums, $31,000 ($23,000)
Here’s the breakdown for students who are independent (subsidized maximum in parentheses):
- First-year undergraduate, $9,500 ($3,500)
- Second-year undergraduate, $10,500 ($4,500)
- Third-year and beyond undergraduate, $12,500 ($5,500)
- Aggregate loan maximums, $57,500 ($23,000)
Graduate- and professional-degree-seeking borrowers are discussed in the next section.
Unsubsidized Stafford Loans
Outside of pandemic emergencies addressed by Congress and/or the president, unsubsidized loans require the borrower to pay the accumulated interest. But not until you graduate, drop out, or otherwise fail to qualify as a full-time student.
The suspended interest rate on undergraduate loans beginning July 1, 2020, was 2.75%. For graduate students and professional-degree seekers, it was 4.3%. Parents PLUS loans checked in at 5.3%.
Your annual Stafford Loan limit for unsubsidized loans ranges from $5,500 to $12,500, depending on your year in school and whether you are claimed as a dependent on someone’s tax return (see the bullet points above).
If you are financially independent, you’re eligible for a larger loan. If you’re financially dependent but your parents are ineligible for Parent PLUS loans, you’re permitted the same maximum loans as if you were independent.
Graduate students have access to unsubsidized Stafford loans. There is no requirement to demonstrate financial need, which means that almost anyone is eligible.
There are, however, limits on how much you can borrow. If you’re a graduate student, you have a higher annual limit of $20,500. In total, your undergraduate and graduate Stafford Loans cannot exceed $138,500. The highest limits are reserved for medical students: You may borrow up to $40,500 annually and $224,000 in total.
Direct Consolidation Loans
Most students receive loans from a different borrower every year, if not every semester, so it is commonplace to have 8-10 student loan payments due every month when you finally graduate.
You can simplify the repayment process by applying for a Direct Consolidation Loan, which can best be defined as: one payment to one servicer, once a month.
The Direct Consolidation loan is a fixed-interest loan with flexible options, based on your ability to repay. There is no fee to consolidate student loans, though you can do it only once. It could lower your monthly payments, but also could extend the amount of time needed to pay off the loan.
Direct Consolidation Loans cut down on the torture of having to remember multiple due dates for various amounts to a variety of lenders. It also should help reduce (or eliminate) late fees when you miss a payment.
The downside — of course there’s a downside — is, depending on the Direct Consolidation Loan program, you could end up stretching payments over a longer period and paying more in interest on the debt. Also, you could lose some of the benefits offered by the original loan, such as eligibility for loan forgiveness programs and interest rate discounts.
Private student loans are not eligible for the Direct Consolidation Loan program.
PLUS Loans
PLUS loans are available for both parents and graduate students. Parent PLUS loans are for parents of dependent undergraduate students, and Grad PLUS loans are for graduate students themselves.
As with other education loans, PLUS loans are funded directly by the federal government. Unlike traditional student loans, they have no maximum amounts and can be used to cover education costs not covered by other financial aid.
Before they were suspended by the CARES Act, Direct PLUS Loans for parents and graduates carried a 5.3% interest rate, fixed for the life of the loan.
Perkins Loans Discontinued
The Perkins Loan program was extremely popular with need-based college students, but, having extended its life by two years in 2015, Congress allowed it to expire September 30, 2017. Disbursements continued through June 30, 2018.
Perkins Loans were more desirable than Stafford Loans because they were subsidized (government paid the interest while you were in school) and had a fixed interest rate of 5%. Other advantages of the Perkins loan included a longer grace period (nine months) before repayment began and special loan forgiveness provisions.
Because of their favorable terms, Perkins Loans were reserved for students who show exceptional financial need. The loans were granted by a college; but not all schools participated.
Private Education Loans
Private education loans, also called alternative education loans, are an option for students and parents who still can’t meet financial obligations for attending college, even with money available through federal loans.
Accounting for 8.4% of outstanding student loan debt ($137 billion), new private student loan origination has, since 2012, outpaced nearly every other consumer financial product, including credit cards and auto loans, according to Student Borrower Protection Center.
Private student loans peaked at $22.35 billion in 2008. After dropping by two-thirds over the next three years, private loan disbursements have steadily inched higher, to $13.1 billion (or 16% of the student loan market), for the 2019-2020 academic year.
About one sixth of student loans went to for-profit colleges.
Private education loans more closely resemble personal loans than student and parent loans. Your eligibility and interest rate depend on your credit history. Your interest rate could be fixed or variable and is typically higher than with federally guaranteed education loans but lower than with other debts such as credit card debt.
You still may qualify for a private student loan with bad credit.
Other drawbacks on private loans are that they are not subsidized; some require payments while you’re still in school; and deferment and forbearance options are limited.
Health Professions Student Loans
Specialized student loans exist for students studying specific areas of medicine such as nursing, dentistry, optometry, sports medicine, or veterinary medicine. Each loan has its own requirements about accepted areas of study and financial need.
Learn more about medical education loans from the Health Resources and Services Administration (HRSA), a part of the U.S. Department of Health and Human Services.
Despite your financial standing or field of study, you can find an education loan that suits your needs. It can help you and your family to fund your higher education and reduce the financial burden of school.
what are the 4 types of student loans
Next, we consider what are the 4 types of student loans, types of student loans subsidized unsubsidized, student loan pause and federal student loans extension.
There are four types of federal student loans available:
Direct subsidized loans. You don’t have to pay any interest while you’re in school at least half-time and during the grace period. And if you’re a low-income student, your loan may be subsidized by the government.
Direct unsubsidized loans. You pay interest on these loans right away, but they might be better for you if you have a high credit score and can get a lower rate than what’s offered through other federal programs.
Direct PLUS loans. If you need more money than a direct subsidized or unsubsidized loan can provide, this is the program for you—but it’s not for everyone! Only parents who will be paying for their children’s education can use these funds.
Direct consolidation loans. These are used to combine multiple existing federal student loans into one new one with a lower interest rate and shorter repayment period that works better with your current financial situation than what’s already available to you through other federal programs (or from banks or other private lenders).
types of student loans subsidized unsubsidized
More details coming up on types of student loans subsidized unsubsidized, student loan pause and federal student loans extension.
Subsidized loans are federal student loans that are subsidized by the government. These loans are given out at the same rate as unsubsidized loans but they have a different interest rate structure.
The interest on subsidized loans is paid by the government while you’re enrolled in college at least half time. You don’t have to start paying interest on your subsidized loan until after graduation or if you drop below half-time enrollment status, whichever comes first.
Unsubsidized loans are not subsidized by the government and therefore accrue interest as soon as the loan is disbursed. This includes while students are enrolled in school. Unsubsidized loans also have a six-month grace period after graduation before any payments are due on them.
student loan pause
You might have heard about the president issuing a series of short-term extensions on student loan pauses, but President Trump, and subsequently President Biden, issued a series short-term extensions. Biden’s most recent extension is now set to end on August 31, 2022, which means billing would resume in September.
The good news is that this isn’t the end of your grace period! You can continue to avoid paying any interest or principal during this time by making payments under an income-driven repayment plan—which is what you should be doing anyway.
And if you do decide to pay off your loans before the end of your grace period, we’ve got some tips for that too! Check out [link] for more information.
federal student loans extension
In an effort to help more people get a college education, the federal government has extended the payment pause put in place more than two years ago.
President Biden has pushed the restart date to Sept. 1, which means nearly 27 million borrowers will no longer be expected to begin their payments next month.
Undergraduate students who took out loans in 2013 will have until 2023 to repay their debt—another five years after they originally planned on doing so. Graduate students will now have until 2024, and parents who took out loans for their children will have until 2025.
The move comes as President Obama is trying to make college more affordable for lower-income students by proposing free tuition at community colleges and millions more dollars in grant money for low-income families.
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