Different Types of Student Loans and How They Work
Student loans are available through multiple lenders and with varying qualifications for eligibility. There are federal student loans and private student loans as well as subsidized and unsubsidized loans — all with differing regulations and requirements. It’s useful for you to examine what each type of loan consists of as well as its associated advantages and disadvantages.
Federal Student Loans
Federal student loans, as the name implies, are offered through federal government funding. Applications for federal student loans are made via a FAFSA, or Free Application for Federal Student Aid.
Based on your financial status, you may be eligible for more than one of the following federal student loan types:
- Stafford loans: Low-interest loans that are available to graduate and undergraduate students. These are guaranteed by the federal government and offer flexible options for repayment. Repayment is deferred while the student is enrolled in school at least half-time.
- Perkins loans: Fixed-interest (5%) loans for graduate and undergraduate students who have exceptional financial need. Funding for these loans are via the school itself and are subsidized by the federal government. Perkins loans are offered based on financial need and are contingent upon the availability of funds.
- PLUS loans: Though originally named Parent Loans for Undergraduate Students, PLUS loans are for both graduate or undergraduate students as well as parents of dependent undergraduates.
Private Student Loans
Private student loans are offered through lenders that do not use government funding. Banks, credit unions and other financial institutions frequently offer education loans; some schools do, too. These types of loans are typically subject to similar eligibility and credit requirements as any other private loan. Interest rates vary on private student loans and can be much higher than federal loans.
What Are the Advantages of Federal Loans Over Private Loans?
When comparing federal student loans to private loans, there are several important differences to consider.
- Since federal loans are guaranteed by the federal government, they are usually offered with much lower interest rates than a private lender is apt to offer because of the reduced risk.
- Private lenders may require a co-signer or stipulate that you begin repayment while still in school. Federal loans typically defer repayment as long as you’re still enrolled at least half-time and do not require a co-signer.
- Federal loans include no pre-payment penalty, meaning you can pay down your debt sooner if possible to save interest. Private loans often do include such fees.
- Federal loans are often subsidized by the federal government, which will pay the interest while you’re in school. Private student loans are not subsidized.
Because federal and private loans offer different lending options, there is no clear-cut answer as to which type is better. Usually, the type of loan that is best for you depends on a variety of factors, including your financial standing and tuition costs. When in doubt, speak with your school’s financial advisor to see which type of loan is right for you.
For more information on student loans, also see:
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