In this topic, you'll learn:
- The differences between subsidized and unsubsidized loans.
- Understanding Parent Loan for Undergraduate Students (PLUS) loans for parents.
- How Federal Consolidation Loans work.
- Why non-governmental, private student loans may be needed by some borrowers.
Loans are a reality for many college students who receive financial aid. Unlike scholarships and grants, loans must be repaid after graduation. Understanding the different loan types can help you make more informed borrowing decisions, as each type has unique repayment terms. Some federal loans may also be eligible for forgiveness programs under specific conditions - eligibility requirements vary and are not guaranteed.
For many students, federal loans are one of the first options to look at. The interest rate may be lower than that of other loans, and there are often ways to reduce your monthly payments if needed. The repayment period for federal loans typically begins after college and generally lasts for at least 10 years (you can pay sooner if you choose). These loans are available through the U.S. Department of Education's Direct Loan Program.
Here's a simplified overview of the major types of student loans:
- Federal Direct Subsidized Stafford Loans - These loans are awarded to financially needy students based on their Student Aid Index (which indicates the amount each family is expected to contribute toward college costs) and the cost of attendance at a particular school. The federal government pays the interest on subsidized Stafford loans while the student is in school, and interest is not charged until the student graduates or drops below a half-time course schedule.
- Federal Direct Unsubsidized Stafford Loans - These loans are generally available to student borrowers regardless of calculated financial need, though other federal eligibility requirements and borrowing limits still apply. Note that the government does not pay interest on these loans. Borrowers can either pay the interest while they are enrolled in school or have it added to the loan principal when they begin repayment.
- Federal Direct Parent Loan for Undergraduate Students (PLUS) - Parents who have exhausted subsidized and unsubsidized Stafford loan options may want to explore the PLUS loan. Keep in mind that the interest rate is higher than Stafford loans, and eligibility depends in part on credit history. Whether this loan makes sense depends on your overall financial picture. Repayment begins 60 days after the funds are disbursed, but repayment may be deferred until after the student graduates or leaves school.
- Federal Consolidation Loans - A federal consolidation loan enables borrowers to consolidate multiple types of federal education loans with varying repayment schedules into a single loan. This can simplify repayment since there is only one payment per month. Keep in mind that consolidating may extend your repayment term and increase the total interest you pay, and some borrower benefits tied to the original loans may not carry over.
- Private Loans - These loans are from private lenders, banks, credit unions, colleges, universities, and other lenders that don't rely on the federal government as a guarantor (meaning they, not the government, are generally responsible for any losses if the student defaults). If you've borrowed the maximum amount available through federal loans and still need more, a private loan may help cover the remaining cost of attendance. Keep in mind that private loans generally don't include the repayment options or forgiveness programs available with federal loans, and rates and terms vary by lender.
Because unsubsidized loans start charging interest the day the money is disbursed, one strategy to consider is paying that interest while you're still in school. When interest is added to the money you borrowed, referred to as capitalization, the loan becomes more expensive to repay since you're being charged on both the amount borrowed and the interest that grew while in school.
The Takeaway
Since it will be your responsibility to repay both federal and possibly private loans, it's essential to be aware of and carefully consider your total indebtedness. Keep in mind that being offered a certain loan amount does not mean you need to borrow all of it - borrow only what you need as part of a broader aid strategy.
