Student Loan Guide: Know Different Types Of Student Loans
Going to a college is a dream for the American youth. However, the high college tuition fees has become a roadblock and most of the students have to depend on a scholarship or a student loan to fulfill this dream. Only few who have been working hard since early childhood days or some lucky fellas are the ones that receive the scholarships. And others have to depend on the scholarships. But with so many different types of student loans out there, how do you know which is the right one for you. Here a complete student loan guide to help you know the different types of student loans and understand the fundamental difference between them.
Table of Content
- 1 Federal Student Loans
- 2 Types of Federal Student Loans
- 3 Private Student Loan
- 4 Health Professions Student Loan
- 5 How To Get A Student Loan?
- 5.1 How to Get A Federal Student Loan?
- 5.2 Student Loan Repayment
The different types of student loans are:
- Federal Student Loans
- Private Student Loans
Federal Student Loans
Most of the students and their parents across the country prefer federal loans over private loans. This is due to the loan repayment programs and the amount of money available. The Direct Subsidized Loans, Direct Unsubsidized Federal Loan, Direct PLUS Loans and Direct Consolidation Loans are the major types of Federal Student Loans that fall under the William D. Ford Federal Direct Loan Program. These loan programs account for nearly 80% of the federal student loans for college.
Types of Federal Student Loans
Stafford Loans are given directly to the students. It is funded with government money and has low-interest rates with convenient repayment options. There is no need for a credit check or any collateral. After graduation, you can consolidate your Stafford Loan easily.
It is more common nowadays than Perkins Loans. The money for both these loans come directly from the federal government under the program Federal Direct Student Loan Program (FDSLP).
Federal Direct Stafford Loan is of two types:
- Subsidized Stafford Loans
- Unsubsidized Stafford Loans
1. Subsidized Stafford Loans
Getting a federal direct subsidized loan means you won’t have to worry about any payments till you are a graduate. While you are still in school, the government pays your interest.
Federal Subsidized loan is reserved for those students with financial issues. It mostly goes to students with annual family income below $50,000.
As an undergraduate, the maximum annual amount of subsidized loan you may get depends on your year in school. As a freshmen, you can borrow up to $3.500. A sophomore can borrow up to $4,500 while a third-year or above can borrow up to $5,500 in subsidized loans. However, throughout the undergraduate studies, you cannot accumulate more than $23,000 in subsidized Stafford Loans.
2. Unsubsidized Stafford Loans
You are responsible for paying off the interest for federal direct unsubsidized loan. The federal direct unsubsidized loan interest rate was fixed at 3.76% for 2017, for the time you are in school. However, loan payments can be delayed of postponed until the graduation. This type of student loan is available for every student.
Similar to federal subsidized loan, federal unsubsidized loan also has an annual Stafford Loan limit, which ranges from $5,500 to $12,500. This limit depends on whether you are claimed as a dependent on someone’s tax return or not. Your year in school is also a deciding factor. A financially independent student can apply for a larger loan. However, if your parents are ineligible for PLUS loans and you are financially dependent, then you are allowed the same maximum loan as a financially independent.
If you are a graduate student, the upper annual limit is increased to $20,500. The limit for total Stafford Loan for undergraduate and graduate is $138,500. The upper limit further increases if you are a medical student. In this case, a student can borrow up to $40,500 annually and $224,000 in total.
Direct Consolidation Loan
Throughout their course, students receive loans from different lenders every semester/year. As a result, there are times when they forget or miss a payment.
That’s when Federal Direct Consolidation Loan comes to rescue. The repayment process has been simplified with the principle of one payment to one servicer of loan, once a month. The Direct Consolidation Loan interest rate is fixed and has flexible options depending on your ability to repay. You can lower your monthly payment but, in return, extend the time period to pay off the loan.
On the plus side, you don’t have to remember multiple due dates as you are paying one servicer of loan a month. On the downside, the time period of loan payment is increased and you have to pay more interest. There is also a risk of losing original loan benefits, if any, like student loan debt forgiveness, through Obama student loan forgiveness program or other federal student loan forgiveness program, interest rate discounts. etc.
This loan program was remarkably popular but will be shut down on September 30, 2017. The program, however, will continue for those students who have already received a disbursement for the 2017-2018 academic year. They will receive the expenses for 2017-2018, but not beyond.
Perkins Loans were subsidized with a 5% fixed interest. It also had a nine month long grace period and special loan forgiveness provisions. Perkins Loans were reserved specifically for students with extreme financial needs.
Parents Loan for Undergraduate Students is available for parents and graduate students. Federal Grad PLUS loan is a parents loan for college students, which includes loan for graduate students as well. And federal parent PLUS loan is for parents of dependent undergraduate students.
In contrast with other student loans, PLUS Loans have no maximum limit and can cover any education costs. For 2017, any loans taken will have a 6.31% interest.
Private Student Loan
They are also called alternative education loans. A student or parent unable to meet the financial obligations to attend college, even though money is available through federal loans, can use this option.
The eligibility and interest rate depends on your credit history. The private student loan rates is much higher than the federal student loans. They are not subsidized and may require payments while still in school. Also, the private student loan forgiveness, deferment and forbearance options are limited. There are several financial institutions offering student loan programs like Wells Fargo private student loan and Chase private student loan; however, you need to know Wells Fargo routing number and JPMorgan Chase routing number to make transactions in these banks respectively.
Health Professions Student Loan
These are specialized loans for students studying distinct areas like nursing, sports medicine or veterinary medicine. Each loan specifies a certain requirement for accepted areas of study and financial need.
How To Get A Student Loan?
Discover Student Loans
Getting a student loan is a big decision, so consider all the options available to you and then choose. Except for Federal and Private Student Loans which are specifically designed for educational funding, you can use:
- Home equity loans (if you own a house)
- Peer to Peer loans
- Personal loans
Why Federal Student Loans are considered a better option?
Loans funded by the federal government may seem the best loan for students. They provide low-interest rates and the government may pay the interest on your behalf while still in school.
There are, though, limits to how much you can borrow from Federal Loans. And this might make it unable to cover all the expenses.
How to Get A Federal Student Loan?
In order to get a federal student loan, contact your school’s financial aid office. Tell them you want to take a student loan and they will guide you through the process. Fill the FAFSA application form to determine the aid you are eligible for. Be careful while filling the FAFSA application and provide your details correctly.
Once the FAFSA is processed, you can either accept the offer made by your school or decline if you have other plans. If you accept the funds, you’ll be asked to complete entrance counseling and sign the loan agreement.
What If You Don’t Qualify For Federal Student Loan?
Federal loans have a limit to how much you can borrow. It might happen that you need more money to cover expenses. This is where private lenders come in. For this, you will need low debt to income ratio and high credit scores. Most of the times students don’t meet these criteria.
If you fail to get a loan yourself, you may ask someone to co-sign the loan. In co-signing, someone can jointly apply for a loan with you who can promise to repay if you fail to do so. This process is a risky affair and needs a person who can repay.
Student Loan Repayment
During school, after graduation or drop below half-time enrollment
You get a “grace period” after your graduation, leave school, or fall short of half-time enrollment. A “grace period” is a short time before you start repayment process.
If you took a private loan, most probably the repayment will commence shortly after your school begins. To help in repaying, a part-time job will prove beneficial in the long-run.
Selecting Repayment Plan
Consult your loan servicer within the grace period to talk about the appropriate repayment plan. Selecting the right repayment plan is important as you will be paying according to it.
Resolve Student Loan Disputes
It might happen that you and your loan servicer might disagree on something related to your loan. In this case:
- Handle the issue with your loan servicer
A simple discussion with your loan servicer can work miracles. Talk to them and understand what the situation is.
- Writing to FSA Ombudsman Group
If the situation is still unresolved, you can contact the Federal Student Aid (FSA) Ombudsman Group. The group works with student loan borrowers to resolve loan disputes and issues.
Unable to repay loans
If it happens that you are not able to pay the complete amount of loan in time or missed a payment, the loan may be considered unpaid and charged with late fees. Contact your loan servicer for a way out.
Cancellation or Discharge, Loan forgiveness for students
If you work full-time in a public service job, you may qualify for a partial or complete student loan forgiveness. A school or a financial institution may agree to cancel or discharge a loan if they find a circumstance fit to do so. But keep paying you loan amount till you hear if the loan was discharged or you cleared for forbearance.