Whether you’re just getting started figuring out how to pay for college or you’ve graduated and are beginning to repay your student loans, you need to understand how student loans work.
With the average annual cost of college rising to $10,230 for public schools and $35,830 for private non-profit schools, it’s likely you’ll have to take out student loans to pay for your education.
Knowing what types of student loans are available to you and understanding your student loan statement can help you figure out the best way to save money in the long run.
Student Loan Application Process
The first step in the student loan process is to fill out your Free Application for Federal Student Aid (FAFSA). That will involve compiling some financial family history. Even if you don’t think you’ll qualify for financial aid, you should still fill out a FAFSA. All federal student loans require a FAFSA first.
After filling out the FAFSA, you’ll be offered a financial aid package which will include any aid you are eligible for including grants, work study, and loans. Depending on your needs, the loans you are offered could be subsidized or unsubsidized.
If you didn’t receive enough funding from the federal government, you may look to private student loans as an option to finance your education. After you graduate, you’ll have to start paying back all these different loans—which can seem complicated if you have to make separate payments to various lenders.
Fortunately, there are ways to simplify the repayment process and lessen the amount of money you spend over the life of the loan. Understanding the different types of student loans will help you make savvy decisions when it comes to your student loan repayment plan.
What Are The Different Types of Student Loans?
One of the first things to understand on your student loan statement is the difference between federal and private student loans.
Federal loans are loans offered by the government, at a fixed interest rate and with certain restrictions. Depending on your needs, you could qualify for either subsidized or unsubsidized federal loans. Federal student loans come with protections for borrowers loans like income-driven repayment options, deferment, forbearance, and access to the Public Service Loan Forgiveness program.
Most federal student loans also have annual lending limits . For some students, federal student loans aren’t enough to cover the cost of a college education. Some turn to scholarships, grants, or a part-time job to fill in the gaps.
And other students rely on private student loans to cover the cost of college. A private student loan is offered by a private lender, like a bank. A private lender won’t use the FAFSA to determine your needs, but will review your credit history to determine your interest rate.
Think of federal student loans like an umbrella. Under that umbrella there are different types of federal student loans, each of which have different eligibility requirements, borrower maximums, and interest rates. Understanding all your options means you’ll be better prepared to determine the best way to finance your education.
Direct Subsidized vs. Unsubsidized Loans
Federal Direct loans, also known as Stafford Loans, can be either subsidized or unsubsidized. With a subsidized student loan, the government will cover the accrued interest while you are in school, during the grace period, and during any periods of deferment. Not having to pay interest on your loans during school can really help—especially since interest accrues and capitalizes, or gets added to the principal loan amount and then accrues more interest. There are no subsidized federal loans for graduate students—only for undergrads.
The government does not pay the interest on unsubsidized direct loans. That means, even while you’re in school, the loans are collecting interest. You don’t have to make payments on the loans while you’re a full-time student, but interest is still accruing. As the interest accrues, it is added to the loan’s principal.
That’s why you could end up owing more when you graduate than when you started. If you have an unsubsidized student loan you have the option to make interest-only payments on the loan during periods of deferment, but you are not required to do so.
Federal loans have fixed interest rates, meaning they don’t change over the life of your loan. For the 2018 to 2019 school year, the interest rate for both unsubsidized and subsidized direct loans is 5.05%. For graduate students, the interest rate for the unsubsidized direct loans is 6.6%.
Borrowing limits vary depending on factors like your year in school and whether or not you are a dependent student. For example, first-year undergrads who are considered independent or whose parents are not able to take out parent loans have a maximum borrowing amount of $9,500 (of which only $3,500 can be subsidized). The maximum for dependent students is $5,500 in their first year.
PLUS loans can be borrowed directly by a graduate student or, more commonly, Parent PLUS loans can be taken out by an undergrad student’s parents. PLUS loans, in both forms, have the same benefits as other federal loans in that the interest rate is fixed and there are flexible repayment options.
Unlike other federal loans, PLUS loans require a credit check. They’re designed for graduate and professional students, who have had more time to build up a credit score. The maximum PLUS loan amount you can borrow is the full cost of tuition less any other financial assistance.
When taking out student loans for college, a lot of your options depend on your FAFSA and what’s determined to be your family’s financial need or ability to pay. If you’re a dependent student , then there will likely be some expectation of parental contribution and your parents may be offered the option of taking out Parent PLUS loans.
Parent PLUS loans are similar to direct PLUS loans, except parents are expected to begin paying the loan
back while the student is still in school—though they can request a deferment until graduation.
Current interest rates for PLUS loans (both for grad students and for parents) for the 2018 to 2019 school year are set at 7.6%.
Direct Consolidation Loans
After you graduate, you might have a number of different student loans. That can obviously be confusing. If you want to consolidate all your federal loans into one place, then you may be able to pool them into a Direct Consolidation loan. This allows you to only make one monthly payment towards all your loans.
A Direct Consolidation loan will not lower your overall interest rate. The interest rate on your new direct consolidation loan is simply a weighted average of the interest rates on your existing federal loans. Consolidation could also wipe out any history of payments you were making towards public loan forgiveness. Only federal loans can be consolidated with a Direct Consolidation loan.
The terms, interest rates, and borrowing limits on private loans may vary by lender. Lenders will use factors like your credit score to determine the interest rate you qualify for you. When you borrow a private student loan you’ll have the option to choose between a fixed or variable interest rate.
Student loan repayment options will be determined by your lender. Some offer deferment plans while you are in school while others require payments start as soon as the loan is disbursed.
Another private loan option is to consolidate or refinance your student loans after graduation. This might be beneficial if it lowers your interest rate and saves you money.
Understanding Your Student Loan Statement
When you take out a loan, you sign a promissory note, which outlines the interest rate, loan amount, and repayment terms. If you hold federal loans, when you graduate you select a repayment plan. If you don’t do anything, you’ll automatically be put on the Standard Repayment plan.
For most federal loans, the Standard Repayment plan is a set monthly payment for up to 10 years . There are a few other repayment plans to choose from, including four income-driven repayment plans. The different plans allow you to pay back your loan over different time periods. The longer the repayment term, the more you’ll pay in interest over the life of the loan.
When you look at your student loan statement, you’ll see each loan listed as the total loan amount, how much principal remains, how much interest has accrued since your last payment, your current interest rate, and how much your current monthly payment is—in addition to any fees, such as late fees, you might owe.
The Benefits of Refinancing Your Student Loans
If you have a mix of both federal and student loans, you can consolidate both types into one new loan when you refinance your student loans with a private lender. When you refinance, if you qualify for a lower interest rate and a shorter term, it could reduce the amount of money you pay in interest over the life of the loan.
Make sure to weigh the benefits that come with your federal loans against the value of refinancing. When you refinance federal loans they will no longer be eligible for federal borrower protections.
Some private lenders offer similar borrower protections. When you refinance with SoFi you could qualify for Unemployment Protection. If you unexpectedly lose your job you’d be able to defer your loan payments.
SoFi may even help you find a new job. At SoFi there are no prepayment penalties or origination fees. To see what refinancing could mean for you, take a look at SoFi’s student loan refinancing calculator.
Student loans can get complicated—SoFi is here to help. From helping you finance your education to helping you get out of your college debt, we’ve got you covered.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.