Attending college can be difficult for many students to afford without financial assistance. With even a semester of community colleges costing thousands of dollars these days, college affordability often makes a big difference in which college you’re able to choose. Thankfully, there are several higher education loan options out there to help you pay your college bills, including scholarships, federal aid, and Income Share Agreements (ISA).
Today, we’re going to focus on federal loans. The federal loan program is robust and offers many different types of student loans. The regulations surrounding federal student loans can differ for each one as well. Though specific eligibility requirements vary, you could qualify for one or more of the following types of federal student loans for college or graduate school. But before you sign on the dotted line, it helps to know the differences between your loan options.
Below are the different types of student loans you might encounter, and which one could potentially be the best fit for you.
1. Direct subsidized federal loan
These loans are for students with demonstrated financial need. The rate of interest for these loans is pretty low at (as of 2020) 4.53%. Similar to many other federal loans, the interest rate is fixed, which is especially great if you lock it in at a low rate. But, since you have to apply for a new loan every year, and the percent does change from year to year, the rate you get on your freshman year loans will likely be different from the rate on your senior year loans.
With subsidized federal debt, the Department of Education will cover the interest that accrues on your loans while you’re enrolled at least half-time in school. For example, one year of interest on a $5,500 loan would be $277 for a class of 2019 college freshman. If you qualify for a direct subsidized loan, the government will take care of that interest for you.
The schools to which you’ve been accepted will then detail the amount you can borrow in your college award letter.
Interest rate: 4.53% for undergraduates (2019–20 Rate)
Aggregate loan limit: $23,000 for undergraduates
Loan fee: 1.059% (Through Sept. 30, 2020)
Terms: 10 to 25 years
2. Direct unsubsidized federal loan
Unlike subsidized federal loans, the unsubsidized version is also for graduate and professional students, not only undergraduate students, and loan eligibility is not based solely on financial need or merit. They’re useful if you just don’t have quite enough money on hand to pay for school but don’t qualify for financial need by government guidelines. Almost everyone is eligible for this federal student loan, as long as they’re enrolled at least half-time in school.
With unsubsidized loans, you’re on the hook for accruing interest while you’re enrolled, as well as during a grace period or while in deferment or forbearance. What’s more, the interest capitalizes when it goes unpaid, meaning that it will be added to the principal of the original loan amount.
Interest rate: 4.53% for undergraduates, 6.08% for postgraduates (2019–2020)
Aggregate loan limit: $31,000 to $57,500 (depending on your dependency status) for undergraduates, $138,500 for graduates
Loan fee: 1.059% (2019–2020)
Terms: 10 to 25 years
3. Direct Grad PLUS loan
PLUS loans, whether they’re for graduate students or parents, are unique in that they require the applicant to undergo a credit check. The Direct Grad PLUS loan, specifically, was built for graduate and professional students who have had more time to improve their credit score (unlike undergraduates entering college, who might have never held a credit card).
If you’re trying to qualify for PLUS loans but have an adverse credit history, enlisting a creditworthy cosigner can help your case. Grad PLUS loans also give their borrowers six months after they finish or leave school to begin making payments.
During any period when you’re not required to make payments, interest will accrue on your loan. You may choose to pay the accrued interest or allow the interest to be capitalized (added to your loan principal balance) when you have to start making payments. Your loan servicer will notify you when your first loan payment is due.
Interest rate: 5.30% (after July 1, 2020, and before July 1, 2021,)
Aggregate loan limit: The cost of attendance minus any other financial aid
Loan fee: 4.236% (for loans disbursed Oct. 1, 2019, and Oct. 1, 2020)
Terms: 10 to 25 years
4. Direct Parent PLUS loan
This loan type is for biological, adoptive, and step parents to support their dependent undergraduates.
A key difference between Parent PLUS loans and other types of loan options is that parents are expected to make payments while their children are in school, though they may request deferment during the loan application process.
The government does not offer a way for parents to transfer a PLUS loan to their children, but some private lenders do allow you to refinance a Parent PLUS Loan in a child’s name.
Interest rate: 5.30% (2020–2021)
Aggregate loan limit: The cost of attendance minus any other financial aid
Loan fee: 4.236% (2020–2021)
Terms: 10 to 25 years
5. Direct Consolidation Loan
Consolidating any of the federal student loan types above allows graduates (or dropouts) to pool multiple loans into a single loan with a single loan servicer. This means you can make a single monthly payment, too.
That payment would also likely be lower than your past loans, as the repayment period can be extended up to 30 years.
Although consolidation is convenient, it’s not right for everyone. It might give one borrower access to income-driven repayment options, but it might erase another’s progress toward Public Service Loan Forgiveness.
Before deciding to consolidate, it’s critical to consider your own situation.
Interest rate: The weighted average of the interest rates on your existing loans.
Loan fee: n/a
Terms: Up to 30 years
Consider all the different types of student loans
Federal loans were established to help low to no credit borrowers afford the rising costs of college. But take the time to consider each of these different loans before deciding which one’s best for you — and only you. If you’ve exhausted your federal loan options, and need additional financing, you can check out these different types of private student loans or ISAs. If you’re interested in different programs and schools that offer Income Share Agreements check out this page!
