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What’s important to understand about student loans?
Student loans are a type of financial aid where money is loaned to students to cover tuition, fees, living expenses and class materials. The money must be paid back with interest, usually after the borrower graduates or decides to leave school.
When picking a student loan, you may want to consider the following factors:
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The interest rate: This determines how much you will pay on top of what you borrow, and even a small difference in rates can end up costing you thousands. The federal government sets the interest rate for federal loans, and interest rates for private loans are determined by your lender, based on your credit history and other financial factors.
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The repayment length and terms: This will affect your monthly payment and overall cost of your loan. A longer repayment term can mean more interest paid overall, while a shorter term can mean higher monthly payments.
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Whether there are borrower protections in place: Borrower protections are like safety nets when life throws you a curveball: They can include income-driven repayment, deferment, forbearance and forgiveness programs. Federal loans typically have more borrower protections, including forgiveness programs, but some private loans can have deferment options.
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The customer service support available to borrowers: A responsive customer service team can help you understand your repayment options and manage your loan much easier. This will likely be the team you work with for the entire repayment term of your loan.
If your program is very expensive, you may not have the luxury of choosing how much to borrow. Even so, consider capping your total borrowing at a level that keeps your payments below 10% of your projected monthly salary after graduation.
Federal vs. private loans
Federal loans are generally better choices than most private loans because they offer:
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Fixed interest rates (typically lower than private loans).
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More than one repayment plan (including one that considers your income).
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Loans without a specific credit score requirement.
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Generally more borrower protections than private loans.
There is a maximum amount of federal loans you can borrow over your lifetime. Private loans can help you bridge the potential gap between the cost of your degree and how much federal loans will give you.
The total amount of subsidized and unsubsidized loans a dependent student (one whose family’s income is considered) can receive as an undergraduate is $31,000. For an independent student (a student who only reports their or their spouse’s income on the FAFSA) the number is $57,500. For both dependent and independent students, subsidized loans are capped at $23,000. We’ll explain the differences between subsidized and unsubsidized loans more below. In short, subsidized loans don’t accrue interest while you’re enrolled in school at least half-time or during the six months after you leave school, while unsubsidized loans do.
Whether or not you are approved for a private loan, and what interest rate you can get, will depend on your creditworthiness, income and debt levels. A private loan application will typically involve a credit check.
Types of student loans side-by-side
Compare the types of student loans below.
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Direct Subsidized Loans |
Direct Unsubsidized Loans |
Parent PLUS Loans |
Private student loans |
|---|---|---|---|
|
Federal loan. |
Federal loan. |
Federal loan. |
Private lender. |
|
For undergraduate students with financial need. |
For undergraduate and graduate students. |
For biological or adoptive parents of dependent undergraduate students. |
All students eligible, credit check usually involved in application. |
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Maximum borrowing of $23,000. |
Borrow up to $31,000 for dependent students and $57,500 for independent students. |
$20,000 annual borrowing cap and a $65,000 lifetime borrowing cap per dependent student. |
Check with the lender, but usually a private student loan is up to the cost of attendance. |
|
No credit check required. |
No credit check required. |
Credit check required, endorser option available. |
Credit-dependent, co-signer option available. |
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Access to income-drive repayment, deferment, forbearance and forgiveness programs. |
Access to income-driven repayment, deferment, forbearance and forgiveness programs. |
Some access to income-driven plans, some federal protections. |
Repayment flexibility and protections vary by lender. |
|
Borrower doesn’t have to pay interest while in school. |
Interest accrues immediately. |
Interest accrues immediately and parent borrower responsible. |
Usually interest accrues immediately. |
Subsidized vs. unsubsidized loans
The two main types of federal loans available to students are Direct Subsidized Loans and Direct Unsubsidized Loans. Your college will determine how much you will receive of these loans based on the cost of attendance, other financial aid you might have received, and your FAFSA. With both unsubsidized and subsidized federal loans, payments won’t begin until six months after you graduate or leave college.
Direct Subsidized Loans are available to students with financial need: the difference between what you or your family can pay for college and the cost of college, as determined by your FAFSA. Interest on these loans won’t be charged while you are in school or during deferment periods (a temporary period of no or lower payments due to illness, additional education like graduate school, military service or unemployment).
It is best to maximize the amount of subsidized loans you take out before you consider other loans, because these loans usually accrue the least amount of interest.
If you are borrowing federal student loans for a graduate degree program, you are not eligible for subsidized loans.
With Direct Unsubsidized Loans, interest is charged and added to the principal even when you are in school. This means that interest starts accruing — and your loan debt starts growing — as soon as the loan reaches your college. If you pay the interest while you’re in school, then your loan amount won’t increase.
You may have also seen the term Stafford Loan thrown around. Stafford Loan is the former name of what is now known as Direct Subsidized and Direct Unsubsidized Loans.
What are parent PLUS loans?
Parent PLUS loans are offered through the federal government, have fixed interest rates, are eligible for forgiveness and have an income-driven repayment option.
They are an option for parents of undergraduate students to pay for their dependent child’s education. Students must be enrolled at least part time.
As a general rule of thumb, Parent PLUS loans should be considered after all other federal loan options are exhausted. They can be a good option for parents who:
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Want a loan that will have a death and disability discharge for the parent borrower.
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Can’t qualify for a private loan with a lower interest rate.
How to apply for federal student loans
🤓 Nerdy Tip
You will need to complete the FAFSA every year you’re in school if you want to receive federal and state grants, scholarships and loans. You will never be asked to pay to complete the FAFSA.
You can accept or reject any part of your financial aid package. It’s entirely up to you and what best meets your needs. When it comes to loans, it’s smart to only accept what you need to pay for college.
Student loans for nontraditional students or programs
There are loans available for students who are attending part time, community college or trade school. However, you may have more limited options depending on the program you enroll in.
You must be enrolled at least part time in your program to be eligible for federal loans. If you are enrolled less than part time, you will only be eligible for private loans.
If you are an international student, you also are only eligible for private loans, which may require you to have an American co-signer with good credit. Deferred Action for Childhood Arrivals, or DACA, students are not eligible for federal student loans, but can be eligible for private, state and institutional loans.
Reach out to your program’s financial aid office if you have any questions about what loans you might be eligible for. No matter your program, if you want access to any federal financial aid you will need to complete the FAFSA.
