When it comes to student loans there are two different types that you’re generally going to get, federal or private. Still, most of the loans you’ll see or hear about come from federal sources.
For those who do have loans, Student Loan Hero actually estimates that Americans alone owe more than $1.56 trillion in student loans, which is divided amongst a total of 45 million borrowers. When it comes to student loans compared to credit card debt, student loans win by over $521 billion.
When looking at these numbers, it’s also important to note that there were approximately 19.9 million students that were taking classes at over 6,000 colleges during the fall semester of 2018. And the federal government processed over 18.6 million FAFSA forms. From that, over 122 billion dollars were given to over 12.7 million students in the form of loans. When divided out, all those students, nearly 45 million, have payments that average around $393 a month.
If we keep breaking things down we can see that the class of 2018 consisted of approximately 69% of students with student loans. Those students had an average amount of debt around $29,800, which was made up of both federal and student loans. Another 14% of parents had Parent PLUS loans as well, which totaled an average of another $35,600.
For those who are looking at getting a student loan it’s important to keep some of these numbers in mind and to keep looking at the options. That’s because different types of federal loans are created differently. By understanding what’s out there you can make the best decision for you.
The first thing you need to know are the types of student loans that are out there, so you can make the best decision possible for you.
1. Federal Loans
Federal loans are one of the two types that you’ll find and they’re given out by the government. Within this category though, you’ll actually find a total of three different types, which all come from the Federal Direct Loan Program.
- Direct Subsidized Loans – Offered based on financial need.
- Direct Unsubsidized Loans – Offered to all students regardless of financial need or credit.
- Direct PLUS Loans – Offered to credit-worthy students and parents.
Because there are so many different loans available, the federal programs are able to provide assistance to even more students and their parents, but you’ll want to look at the specifics about how to get one.
Direct Subsidized Loans
These types of loans are some of the most common and they’re the ones that most people want. That’s because they end up costing you less out of pocket by the time you’re all done. Anyone can apply for this loan (also called a Stafford Loan) as long as you have no outstanding government debt and you’re an American citizen. As of 2020, interest rates were offered at 4.53%.
These loans give you a little bit more support because the federal government actually pays the interest that accrues while you’re in school. They’re also lower interest than an unsubsidized loan, which gives you a second added benefit. With these loans the amount you owe when you finish school is the same as the amount that you signed up for. That’s not the case with unsubsidized loans that continue to build up interest even when you’re still in school.
Direct Unsubsidized Loans
These loans are available to graduate and professional level students as well as undergraduate students (subsidized loans are not). They’re also offered without any kind of regard to financial need or credit-worthiness. That means anyone who is attending school at least half-time is generally going to be eligible for this type of loan.
The downside to unsubsidized loans is that the interest starts accruing from the moment you take out the loan.
It starts at 4.53% while you’re in school, and then your payments will be deferred while you attend. That still means when you get out of school your total loan amount will be higher than the amount you originally signed for. You’re going to owe all that interest that built up.
The annual limit here is generally between $5,500 and $12,500, depending on what level of schooling you’re taking and whether you’re considered a dependent or not. If you are considered independent you’ll have the opportunity for larger loans. This is true if you’re considered a dependent but your parents are ineligible for Parent PLUS loans as well.
Speaking of those PLUS loans, these are the type of loans that your parents can take out to help pay for education for you. These loans allow your parents to get a low interest rate and to contribute to you. They also have rate discounts if you enroll in automatic payments and the interest is considered a tax deduction, which makes it even better for your parents. As of 2019, the rates were 7.6% for interest.
Direct Consolidation Loans
It’s not unusual for a student to be offered a number of different student loans each semester or year. That means you could have a large number of different loan payments due each month by the time you graduate.
One way to combat the difficulty is to apply for a single consolidation loan that can make things easier. You would pay only a single payment each month that would go toward paying off all of your loans. This type of loan offers a fixed interest rate and also keeps your options flexible.
That’s because they want you to be able to make the payments. While you won’t have to pay a fee to combine all your loans, you’re only going to have one chance to do it as well, so make sure you get everything together at once.
What’s really great about these loans is that you won’t have to remember a number of different due dates and instead you can just make a single payment. That helps you with reducing the risk of late fees because you shouldn’t miss a payment.
On the other side of things, you could end up owing money for a lot longer because you consolidate. That means you may end up paying even more interest and you may lose your ability to qualify for loan forgiveness. Overall, it’s important to take a closer look at the options and the risks before you decide to go for it. Private student loans don’t qualify for this type of consolidation.
Which Loans Can I Get?
If you’re looking at subsidized and unsubsidized federal loans you should be enrolled in a degree or certificate granting program at an authorized college or university.
You also need to be attending at least half-time. For a subsidized loan you must be an undergraduate student who exhibits financial need. For an unsubsidized loan you can be undergraduate, graduate or professional level and you do not need to show financial need.
How to Apply?
To get either of these types of loans you need to complete the FAFSA form. The school you choose to attend will use the information contained on this form to decide how much and what types of financial aid you will be eligible for.
2. Private Loans
For those who don’t have financial need or who are going to graduate school, subsidized loans may not be an option. That means your options are a parent PLUS loan, an unsubsidized loan or private loans. Deciding between these isn’t always easy.
If you are only eligible for these types of loans you may find that sometimes, private loans offer you better interest rates. This is especially true if you have someone willing to act as a co-signer, but you don't have to add co-signer. In fact, many private lenders are actively looking for ways to compete with federal loans and offering interest rates around the 7.6% offered for PLUS loans in 2019.
With these types of loans you’re applying and getting the money through a bank or credit union. What this means is they’re not government-related and you have to follow the rules of the institution you borrow from. You could have higher interest but you’re generally going to have more freedom about how much you want to take out and when. You can generally get a whole lot more money from private loans.
Just In Case You Can't Qualify For a Federal Loan
If you’re not able to qualify for a federal loan you’re going to be stuck with this option. On the other hand, if you can get federal loans they’re usually going to be a better option. That’s because private loans could put you at a higher risk for a lot of different reasons. You could end up with a negative credit score if you don’t make the payments. You could also stick your co-signer with bad credit or a lot of debt if you don’t make the payments. There’s also the opportunity for the institution to garnish your wages to get the money back.
Your best way to find out more is going to be talking to a guidance counselor while you’re still in high school. They can walk you through the different options and how you can apply for financial aid. They can also help you look for different alternatives if you can’t get federal aid or if you’re not going to get enough. Grants and work study programs may be available depending on where you’re planning to go to college, so make sure you’re getting as much help with the process as you can.