If you need money for college, you might be considering a student loan. But before you apply for one, it’s important to understand how they work.
What is a Student Loan?
If you don’t have the money to pay for college, a student loan will enable you to borrow money and pay it back at a later date, with interest.
College loans are different from a grant or scholarship. If you receive a grant or a scholarship you’re not borrowing that money. That is money that has been given to you as a gift and doesn’t need to be repaid.
What Types of Student Loans are Available?
There are two main types of lenders that offer student loans. The U.S. government offers federal student loans. Banks, credit unions, state loan agencies and other financial institutions offer private student loans.
Be careful, as some of the lenders that offer private student loans also service federal student loans on behalf of the U.S. government, so it is easy to get confused.
Federal student loans are loans that are made by the U.S. government. It’s a good idea to take out federal loans first because these loans are less expensive and usually come with more benefits than loans from private lenders.
The advantages of a federal loan over a private loan include:
- Fixed and lower interest rates
- The ability to borrow money without a cosigner
- Repayment plans that start six months after you leave college or attend less than half time
- Flexible repayment plans like income-driven repayment and extended repayment
- There is also the possibility that some of your loans can be forgiven — that is you don’t have to repay them — if you work in certain professions, such as teaching and public service
There are four types of federal student loans for college:
Direct Subsidized Loan
Subsidized Stafford loans are available to undergraduate students with demonstrated financial need. While enrolled in college at least half-time and for six months after you graduate or drop below half-time enrollment, you won’t have to pay interest on the amount you borrowed. This can be a huge cost savings.
Direct Unsubsidized Loan
Unsubsidized Stafford loans are available to undergraduate and graduate students, regardless of financial need. Unlike subsidized loans, you will need to pay the interest that has accrued on your loan while you are in college, or the interest will be capitalized (added to the loan balance).
Federal Direct PLUS loan
Grad PLUS and Parent PLUS loans are available to graduate students and parents of dependent undergraduate students. PLUS loans aren’t subsidized, so interest will start accruing as soon as the loan is fully disbursed. Repayment can be deferred while the student is enrolled in college and for six months after graduation.
Federal Direct Consolidation loan
Consolidation loans allow you to combine multiple federal student loans into one loan, without losing the benefits of the federal loans. Consolidation can be used to streamline repayment or to switch loan servicers.
Private student loans are loans that come from a private lender, usually a bank, a credit union, a state loan agency or a non-bank financial institution. They can come with fixed or variable interest rates and often require the student borrower to have a cosigner. Interest isn’t subsidized, so as soon as you borrow money the loan will begin accruing interest.