Finding the money to pay for college can be a difficult task, especially with the astronomical cost of tuition these days. Sometimes the scholarships, grants, and work-study that you are eligible for just aren’t enough. With that being said, a large number of students are taking out student loans, whether to help pay for their entire tuition or just living expenses. If you’re wondering about what student loans are and how you can get a loan for school, here’s what you need to know.
What Are Student Loans?
Student loans are a type of loan that is specifically designed to help college students pay for their education. The loans can be used to cover tuition, room and board, books, and other expenses related to school. Students don’t have to repay the loan principal until they are out of school.
You can break student loans down into types, or categories, based on where they come from: federal loans, state loans, institutional loans, and private loans.
Beyond that, you will find that some loans are earmarked for certain types of students or students who are in certain programs. Some loans are for undergraduate students, others are for graduate students, and still others are available to both undergraduate and graduate students. In addition, there are other loans that are designed for students who are enrolled in certain professional degree programs.
So, let’s take a closer look at some of the different student loan options.
What Different Types of Student Loans are Available?
With the many different types of student loans that are available, all with their own advantages and disadvantages, each loan has its’ place. The wide variety of loans that are available helps fit each student’s unique circumstances and financial situation.
Federal Student Loans
The National Defense Education Act of 1958 helped to usher in the era of federal student loans, which were offered to a select few who were pursuing studies in specific fields such as engineering, science, or education. Then in the 1960s federal student loans were made more widely available with the passage of the Higher Education Act of 1965 with the goal of helping to promote greater social mobility and equal opportunity by putting college financially within reach of more people.
Federal student loans are provided by the government, not a private lender, and typically have better terms, more flexible repayment options, and better protections for borrowers against predatory lending practices. Plus, these federal loans come with competitive fixed interest rates. All of this helps to make federal student loans more desirable for most borrowers.
Currently, the following types of federal student loans are available.
Direct Subsidized Loans
A Federal Direct Subsidized Student Loan is a loan from the federal government that is available to undergraduate students who demonstrate financial need.
One of the benefits of Direct Subsidized Loans is that while you’re enrolled in college at least half-time, you won’t have to pay interest on the amount you borrowed. This loan also won’t accrue interest during the six-month grace period after you graduate or fall below half-time enrollment status. This can save you a lot of money in the long run.
Direct Unsubsidized Loans
Direct Unsubsidized Loans are available to undergraduate, graduate, and professional students, without any need-based eligibility requirements.
Beyond being available to a larger group of students and not requiring students to have demonstrated financial need, unsubsidized loans differ from subsidized loans in another important way and that is how the interest is handled. With an unsubsidized loan, you are responsible for the interest that accrues on the loan from the time you borrow the money (when it is disbursed) until the time you pay the loan back, whereas the government pays the interest on a subsidized loan both while the student is enrolled at least half time as well as during the grace period before you begin repayment, as we mentioned earlier.
You will have the option to either pay the interest that has accrued on your loan while you are in college, or have the interest be capitalized (added to the loan balance), which can add up over time – especially if you end up borrowing larger amounts of unsubsidized loans. Being responsible for the interest while you are still in school is an important difference between unsubsidized and subsidized loans, so it’s important to understand the implications before deciding to take out an unsubsidized loan.
Direct PLUS Loans
Federal Direct PLUS Loans are available to graduate or professional students and parents of dependent undergraduate students. When looking for a way to pay for school-related expenses not covered by subsidized, unsubsidized loans or other financial aid, they are a great option for parents and graduate students to consider. The loans are not based on financial need, but a credit check is required. Applicants with a poor credit history may still be approved, but they will need to meet additional criteria.
The maximum amount that can be taken out in a PLUS loan, for both Parent PLUS and Grad PLUS loan borrowers, is calculated by subtracting any other financial aid being received from the cost of attendance, which is calculated by the school.
Grad PLUS loan borrowers don’t have to start making payments until six months after they graduate, leave school, or drop below half-time enrollment status. In contrast, Parent PLUS loan borrowers are expected to make payments as soon as the loan is disbursed, unless they request a deferment. If a Parent PLUS loan is deferred the parents will not be required to make payments while their child is enrolled at least half-time and for an additional six months after the student graduates, leaves school, or drops below half-time enrollment.
Borrowers of Grad PLUS and Parent PLUS loans should be aware that these loans are not subsidized and they begin accruing interest as soon as the loan is disbursed. Like the Direct Unsubsidized Loans mentioned above, you will have the option to pay the interest that has accrued on your loan when it becomes due, or have the interest be capitalized and added onto the loan balance.
Direct Consolidation Loans
Over the course of their college careers, many students will end up taking out multiple student loans. Then when they enter repayment they are faced with making multiple loan payments each month. Federal Direct Consolidation Loans allow borrowers to consolidate all of their eligible federal loans into a single loan with a fixed interest rate that is based on the average of the interest rates of the loans being consolidated. The loan amount is based on the total of all eligible federal loans you are consolidating and does not include private student loans.
After the consolidation is complete, you will only have to make one monthly payment on your new Direct Consolidation Loan. This will simplify your payments and make it easier for you to stay on top of your debt.
While technically not a loan that you can take out while you are a student, Direct Consolidation Loans are another federal student loan nonetheless.
Institutional Loans
Institutional loans are loans that are given by a university or college to its students. These loans are usually administered by the institution itself and are provided as part of a student’s financial aid package. The purpose of these loans is to help supplement federal financial aid programs to help students pay for tuition, books, room and board, and other expenses. Students pay these loans back to the college over time when they are done with their studies.
Not every college has the funds to offer its own institutional loans. For those who do, these loans will each have their own unique, application, eligibility criteria, terms, repayment options, and interest rate.
State-Funded Student Loan Programs
In an effort to supplement federal financial aid programs every state has its own state-specific financial aid programs to help students pay for the cost of college. In addition to any of the unique scholarship and grant programs that are offered by individual states, many states also offer their own state-funded student loan programs.
Each of these state-funded student loan programs will differ in terms of its application process, eligibility criteria, loan amounts, interest rates, and loan terms.
Private Student Loans
Private student loans, offered by banks and financial companies, tend to have higher interest rates, fewer borrower protections, and more limited repayment options – especially when compared to federal student loans. Furthermore, each private loan can have its own unique application process, eligibility requirements, and terms.
There are a wide variety of private student loans out there including both fixed and variable interest rate options.
that said, it is typically in most people’s best interest to see what federal loans you are eligible for first. Then if you find that you are still in need of additional money, or if you don’t qualify for any federal loans, you can consider applying for other types of loans including private student loans.
How to Apply for Student Loans (How Do You Get Student Loans for College)
When it comes to student loans, the process of applying for them can be pretty straightforward. The most important thing to know is that you want to determine your eligibility for federal student aid and that includes your eligibility for federal student loans.
So the first thing you want to do is to fill out the Free Application for Federal Student Aid (FAFSA). Using the information from your FAFSA the college financial aid office will calculate your financial need and determine your eligibility for federal and state grants as well as work-study. Then after factoring in any scholarships you are receiving they will be able to tell you your eligibility for federal subsidized, unsubsidized, and PLUS loans.
If you need additional student loans beyond the subsidized and unsubsidized loans that are offered and the Parent PLUS loan isn’t an option for your parents (for undergraduate students) you should talk to one of the financial aid officers at your school. They will be able to explain the different student loan options that are available to you including your eligibility for any institutional loans (if your school has them), state loans, and private loans for which you might be eligible.
If you end up needing a private student loan don’t expect the financial aid office to promote or endorse any specific private loans. This is because everyone’s situation is unique and no one loan is best for everyone. Ultimately you are free to borrow from any lender you choose. However, your financial aid office may provide you with resources that can help you identify the best private loan for your specific needs.
How Do You Repay Student Loans?
Federal Student Loan Repayment
You’re required to start repayment of your Federal Direct Subsidized, Unsubsidized, and Grad PLUS Loans six months after you graduate, leave school or drop below half-time enrollment.
Before 2008, Federal Direct Parent PLUS Loan borrowers were required to start repayment within 60 days of the loan being fully disbursed. However, since that time, Parent PLUS loan borrowers have been given the option to defer their loan payments until six months after the student graduates, drops below half-time enrollment, or leaves school.
One of the benefits of having federal student loans is the different repayment options that are available.
The standard repayment plan has you pay off the loan over 10 years with your payment amount staying the same throughout the life of your loan. This repayment plan is perfect for anyone looking to save money in the long run! Although your monthly payments may be a bit higher than with other plans, you’ll pay off your loan much sooner – meaning you’ll pay less interest over the repayment period.
With the graduated repayment plan, your loan will still be paid off over 10 years, but the payments start out low and increase every two years. If your income is low now, but you are anticipating a steady increase in your income in the future, this plan may be perfect for you!
If you borrowed a larger amount of money the extended repayment plan may be the perfect solution if you need to make lower monthly payments over a longer period of time. The extended repayment plan for student loans can be a fixed or graduated amount, with payments that can be made for up to 25 years. This plan usually has lower payments than the standard and graduated repayment plans making them more manageable for your budget.
If your income is low and you have a hard time affording the standard payment plan you might be interested to know that the government also offers four different income-driven payment plan options:
- income-based repayment
- income-contingent repayment
- Pay As You Earn (PAYE)
- Revised Pay as You Earn (REPAYE)
You can read more about the different repayment options for federal student loans here.
Repayment for Other Student Loans
Each student loan is unique in that the repayment process can vary based on the lender. In most cases, you will repay the loan over a set period of time. This repayment period is dictated by the terms of the loan agreement, which is agreed upon by you and the lender before you take out the loan. It is important to understand these terms before choosing a loan so you aren’t surprised by when you are expected to begin making payments, the monthly payment amount, or the length of time that you are expected to pay back the loan.
Final Thoughts
There’s no getting around it: paying for college can be a daunting task. Between tuition costs that seem to be constantly on the rise and the other expenses that come with attending school, it’s easy to feel overwhelmed. But don’t worry, there are plenty of ways to finance your education. If the scholarships, grants, or work-study that you are eligible for aren’t quite enough, there a several different student loan options that you can use to close that financial gap and help make your college education possible.
