Because of the high cost of annual college fees, most students use loans to help them pay for their education. More than 65% of students attend school and graduate with different forms of debt or loans. Students understand the different types of student loans and all they need to know about the loans before applying for them. The two major different types of student loans must consider are the Federal student loan and private student loans.
Federal student loans is one of the different types of student loans that is supported by the US Department of Education, with fixed interest rates, flexible repayment plans and income-driven. Private student loans are offered by financial institutions like banks, credit unions, schools, state agencies, and online lenders. The interest rates offered in private student loans may be fixed or variable, higher or lower than that of the Federal student loan depending on the lender.
What Is Student Loan?
Student loans can be described as loans obtained by students either from the Federal government or from private companies to help them pay for their post-secondary education and other associated fees like books and supplies, living expenses and tuition fees. However, the students are expected to pay back both the principal and interest after graduation. Student loans are helpful if they are utilised responsibly.
Different Types Of Student Loans
There are different types of student loans you can access, but the two major types of student loans are Federal and Private student loans. There are still other types of loans under the two major types mentioned above. These different types of loan options are made for different types of borrowers according to the purpose or reason they want to borrow the funds. For example, Direct subsidized loans are mainly for undergraduate students that have pressing financial needs, and Direct Plus Loans are made available to graduate students and parents who have financial needs.
4 Different Types Of Federal Student Loans
Federal student loans is also among the different types of student loans that are given to students by the Federal government through the Department of Education in the USA. You must apply for Federal student loans if you need financial aid. You will complete and submit a free application form to the Federal Student Aid (FAFSA) online. To be eligible to apply for this type of loan, you must either be a US citizen or an eligible noncitizen to qualify for the loan.
One of the advantages of this type of loan is that it has lower fixed interest rates and an affordable repayment plan based on your level of income. With the Federal student loan, you don’t need to pay back the loan until you have graduated or left school. You don’t also need a credit check before you will be qualified to access most Federal government loans. The following is the list of four different types of Federal Student loans you can apply for.
Direct Subsidized Loans
Direct subsidized loans are the type of loan that is available for eligible undergraduate students that have demonstrated financial needs. The loan does not accrue interest while the student is still in school. One of the advantages of direct subsidized loans is that the Federal government pays the interest accrued to the loan on their behalf while the student is still in school, during the grace period or if your payments are paused through deferment. It is the duty of the college to tell the student if they are eligible for Direct Unsubsidized loans and the amount they can borrow. The amount to borrow will depend on the type of student you are (dependent and independent student).
It has a low fixed interest rate but the real benefit is that you don’t need to pay interest accrued to the loan during the time from disbursement to repayment and this will help you save some money. Once the student starts repaying the loan, the government stops paying for the interest and the student takes over the repayment of both the principal amount and the interest. The Federal government will give you a grace period of six months after graduation before you will start repayment of the loan.
Direct Unsubsidized Loans
This is the type of loan that is available to undergraduates, graduates and professional students. They may not need to demonstrate financial need before they can access the loan. Direct unsubsidized loans accrue interest immediately after the loan is given whether you are still in school, after graduation, or during deferment and forbearance periods. Even if you don’t pay the interest while still in school, the interest will still accrue and will be added to the principal balance which you must pay.
It has a low-cost fixed interest rate. One of the major factors that will determine if you are eligible to get the loan is if you are a dependent or independent student. The school on the other hand has the right to determine how much loan you are eligible to receive each year. Whether you graduate, or drop below half enrollment time, you will still be given six months grace period before you will start repaying the loan.
Direct Plus Loans
This is the type of loan that is available to graduates, professional students, or parents of dependent undergraduate students to help them pay for their education fees. The amount students are allowed to borrow is the cost of attendance minus any other financial aid the student has received. The interest rates for direct plus loans are higher than the subsidized and unsubsidized loans and there is an origination fee attached to it.
Eligibility to apply for Direct Plus loans is not dependent on financial need but on your credit check. An adverse credit history may negatively affect the application for a direct plus loan. Although having an adverse credit history will not automatically disqualify you from getting a Direct Plus loan, but you might be required to have a co-signer. One of the adverse circumstances includes having passed your due date for payment by at least 90 days, your account having debt in collections or having any of the follwing on your credit reports within the last five years:
- Charge-off or write-off of Federal student aid debt
- Default determination
- Tax lien
- Wage garnishment
Direct Consolidation Loans
This is the type of loan that allows students with multiple and eligible Federal student loans to combine them into one loan with a fixed-interest loan which is usually done when the student graduates. The new interest rate will be based on the average of all the loans being consolidated. It doesn’t cost any fees to consolidate your loans. Consolidating your loan will help to give you a single monthly repayment plan instead of multiple monthly repayments. It can increase your repayment period. Not considering the lower interest rates it gives, it can also result in paying more on interest because the loan repayment period has been stretched to a longer period.
2 Different Types Of Private Student Loans
Private Student loans are among the different types of student loans that are issued through various institutions like banks, schools, state agencies and credit unions. It requires that credit checks be conducted on the student applying for any type of private student loan. And also the application decisions are the sole responsibility of individual lenders. Students with a poor credit rating or history may need to apply with a cosigner to qualify for more attractive loan terms. Cosigners are adults who stand in and agree to take responsibility for repaying your student loan in case the student defaults. Private lenders always require cosigners because undergraduate students do not have a credit history.
A borrower’s credit can also affect the other parts of private loans, like the interest rate offered and the amount of money to access as a loan. A student that does;t have any credit history will require a cosigner when applying for the loan. Private lenders have the right to set their terms and this is part of what makes private student loans different from Federal student loans. The following are some of the features of Private student loans.
- It may require that borrowers will make repayments while they are still in school.
- It may have fixed or varied interest rates depending on the lender and the type of loan.
- They are typically classified as an unsubsidized loan because the borrowers are responsible for the repayment of both the principal and interest.
- It may limit repayment options for the loan such as postponement or loan forgiveness.
- It cannot be consolidated into a Federal Direct consolidation loan but the loans can be refinanced.
The following are among the types of private student loans. See the list below:
Private Student Loans
This is among the different types of student loans that is for undergraduates, graduates and other groups of students enrolled in eligible schools. Parent loan is also under private student loan and is taken by parents relatives or other creditworthy individuals who want to be responsible for the financing of their children’s or relatives’ education. Before you start thinking of taking a private student loan, you have to first check with your school if they have a list of lenders available. Then if you find a lender, ensure that the lender you choose works with your school of choice.
When you apply for a private student loan, the lender will review your creditworthiness and other necessary factors before accepting and giving you an offer. You have the right to review the interest rates and loan terms the lender is offering before accepting the loan. Most private lenders ( although not all) allow students to defer and start repayment of their loans after they have graduated from school.
Refinanced Student Loans
Student loan refinance is among the different types of student loans where lender has taken up the responsibility to pay off your existing loans and issue or give you a new loan with new terms and conditions attached. Just like the government offers options to refinance federal student loans, many private lenders also do the same. You can always see refinancing loans with fixed and variable interest rates, and consolidation of your private loans into one makes it possible for you to have only one repayment to focus on.
As it has already been stated, refinancing your student loans can help you get a lower interest rate especially if you have improved your credit history after taking your original loans. Before you think of refinancing your student loan, you must have graduated with student loan that is in good standing.
There are so many options one can use to finance their education. As a student, you need to understand the different types of student loans so as to know the one to apply for. Students also need to understand the different features of the different types of loans. Federal student loans are cheaper and affordable with lower interest rates. You can only consider taking private student loans when you have exhausted your Federal loans.