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What Are the 4 Types of Student Loans and Which One is Right for Me?

CB Experts
Written by CB Experts

Are you considering your financial options when it comes to attending university or college?

In a perfect world, you’d be able to front the cash for your post-secondary education. However, the majority of students in the United States rely on loans in order to finance their education.

It can be confusing trying to figure out how student loans work. Luckily, the federal government offers four different types of student loans, which we are going to explain to you here:

Types of Federal Student Loans:

1. Direct Subsidized Loans

Direct subsidized loans are available to undergraduates and the government covers the interest while you are in school and up to six months after you graduate.

In order to qualify, you need to demonstrate financial need but no credit check is required. However, there are limits on what you can borrow, which is determined by the year of school you are in and whether you are a dependent or independent student.

The current interest rate is 2.75% which remains fixed over the term of the loan.

Direct subsidized loans are eligible for repayment plans and loan forgiveness programs.

2. Direct Unsubsidized Loans

Also known as the Stafford loan, undergraduate and graduate students are not required to prove financial need in order to qualify.

Interest on these loans begins to accrue while you’re in school and are not deferred until after graduation. However, you are not required to pay on the loan while you are in school.

The interest rate on unsubsidized loans remains the same for undergraduate students. Graduate and professional students, on the other hand, have a higher interest rate of 4.3%.

Borrowing limits are based on whether you’re an undergrad or grad student and whether you are a dependent or independent student.

In total, you can borrow a maximum of $31,000 if you are a dependent student and $57,500 if you are an independent student.

3. Direct PLUS Loans

There are two types of PLUS loans: the Grad PLUS loan (for professional students) and the Parent PLUS loan (for parents of students).

These loans are designed to fill in the gap between the cost of school and any other resources available to the student.

For example, if you have borrowed your limit on a direct subsidized or direct unsubsidized loan, you can possibly use a PLUS loan to cover the rest.

With higher interest rates (fixed at 5.3%), it’s best to explore other loan options first.

When it comes to differences between the Grad PLUS and Parent PLUS loans, Grad PLUS defers payments on the loan while the borrower is enrolled in school and six months after graduation.

Parent PLUS borrowers are expected to make payments during enrolment but can apply for deferment during this time.

4. Direct Consolidation Loans

Direct consolidation loans differ from other types of federal loans since they allow you to combine all eligible federal student loans into one single loan – this is typically done after leaving school.

Interest rates on consolidation loans are calculated by averaging and weighing the current interest rates on the loans being consolidated.

These loans are available for repayment plans and loan forgiveness.

Consolidation does make repayment easier by providing a single payment. However, if you have older loan programs such as FFEL (Federal Family Education Loans) or a Perkins Loans – both of which no longer exist – you could lose the benefits of these programs if you consolidate them.

Financing Your Education

With options out there to finance your education, you can make an informed decision about the student loan you want to commit to.

Have experiences with student loans? Which one worked best for you? Let us know in the comments!

About the author

CB Experts

CB Experts

Content created by retired College Admissions consultants.