Different Types of Student Loans: 2 Types and A Student Loan That Suits You

Types of Student Loans

Students generally have two options available when it comes to the selection of loans for their assistance in bearing their school and college expenses i-e federal student loans and private student loans.

1) Federal student loans

They are also known by the name of government loans. It helps the students and their parents/guardians to borrow money for college expenses directly from the federal government.

Forms of federal student loans

There are further three forms of federal student loans:

  1. Direct Subsidized Loans
  2. Direct Unsubsidized Loans
  3. Direct PLUS Loans. Then there are further two types of Direct PLUS Loans.  i) Grad PLUS Loans, it is for the assistance of graduate and professional students ii) Parent PLUS Loans, these are issued to the parents of the students.

All the above mentioned loans are available through the government program which is by the name of the Federal Direct Loan Program.

  • Direct Subsidized Loans: Under this category, loans are issued to the students with demonstrated financial need, which is determined by federal regulations, and interest is not charged on this type of loan when an undergraduate student is in school at the least half-time during the deferment phase which is a period when loan payments are temporarily postponed or during grace period which is generally of six months after a student graduate or leave school before a student starts making payments of principal and interest amounts.
  • Direct Unsubsidized Loans: This is another category of federal student loans which aren’t based on the financial need of the students. Instead, it is the administration of the school that will determine the amount a student can borrow based on the cost of attendance and other financial aid he receives. Interest under this loan category is charged during all periods and capitalized even when a student is in school, during grace, and deferment periods. This will subsequently increase the cost of student’s federal loans.
  • Direct PLUS Loans are basically unsubsidized credit-based federal loans for the parents of the dependent undergraduate and graduate/professional students. It can assist them in paying their child’s educational expenses up to the cost of attendance (the amount of money school believe that a student will need to remain in school for one year), after the student’s other financial aid is discharged. While interest here is to be charged during all the periods and will be capitalized also which will ultimately increase the cost of student’s federal loan.
See also  Straight Debt: Definition, Example, Components, And Mores

Applying for a federal student loan is mostly free of cost.  What a student is required to do is to fill out the Free Application for Federal Student Aid (FAFSA).

A good thing about FAFSA is that in addition to federal student loans, it also decides student’s eligibility for other federal student aid like grants and work-study.

However, a student is required to submit this application every year when he is enrolled in college in order to receive federal student aid.

Applying online is the easiest and fastest way to file for FAFSA. It will take almost 3-5 days in processing the application. A student may also mail a paper application, but it will take a little longer like about 7-10 days in processing.

A very important thing that is needed to be considered by all the students and their parents while applying is that FAFSA is totally free of cost.

2) Private student loans

This type of loan facility is usually availed by the students to pay for college when savings, scholarships, and federal assistance are not adequate.

Private student loans are unlike in many ways from federal loans. At first, this loan is credit-based which means that the lender will review the creditworthiness of the students before giving them loans – their ability and willingness to repay.

The interest rate in this type of loan is based on several factors like how students with their credit limits in the past and what loan terms and options.

Many such private student loans can be requested by the student but parents or creditworthy individuals (such as a legal guardian, or relative) also have the right to request for this loan.

See also  Bank Guarantee: Feature, Process, Types, Advantages, and Limitation

In this type of loan there are different ways to repay like students or the recipient of this loan may have the option to repay while being studied in the school. This will help them in reducing their interest rate and/or total loan cost.

Before calling for this private student loan, the recipient must keep this in his mind that regardless of whether he actually graduates from the school or not, he has to pay back the loan taken. Defaulting on which can have a negative effect on his credit health.

While applying for private student loans, one has to be aware of the following facts.

  • A good place to start is the college’s financial aid office, which may have a list of all private student loan givers that the school also recommends. Compare what each lender is offering in terms of fees, interest rates, and repayment options.
  • When applying for a private student loan, be certain that terms and conditions are properly read and understood. This can assist while comparing different private student loans from multiple lenders who are willing to provide loans.

A Student Loan That Suits You

Federal student loan has many benefits as compared to private student loan and therefore is the best option for the students at first sight. It is beneficial due to the following reasons.

  • It has more flexibility.
  • Federal or private student loans both are legal agreements and has to be paid back with interest but federal student loans generally extend more flexible options than private student loan like with federal student loans, the loan recipient can change his repayment options even after the loan has been paid out to the educational institute.
  • Payments of the principal amount of the loan are based on his or his parent’s salary.
  • A student is not required to have a strong credit history to apply for federal student loans. This can be really useful for high school graduates who desire for attending college but haven’t had sufficient money of their own.
See also  4 Limitation of medium-term finance with detailed explanation
Scroll to Top