Types of Student Loans
Choosing the right student loan might be as important as picking the right major — both decisions have a cascading effect on your future financial wellness.
There are several different types of student loans available, but each falls into one of two buckets: federal or private.
Federal student loans typically offer lower interest rates and enhanced borrower protections, so it’s a good idea to apply for those first. And if you need more money after you’ve exhausted your federal loan options, that’s when private student loans can help.
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What are the types of student loans?
Federal and private are the main types of student loans. Between the two, federal loans are far more common: In the third quarter of 2022, private student loans accounted for only 7.2% of all outstanding student debt.
Within each type of student loan (federal and private) resides a subset of loans, all with their own targeted borrowers and eligibility requirements. There are a few differences between federal and private student loans, but generally, federal student loans offer:
- Lower interest rates that are always fixed
- Access to federal loan forgiveness programs
- Income-driven repayment (IDR) plans
Nevertheless, private student loans can play an important role for borrowers who have hit the limit on their federal loans, but still have remaining college expenses.
Types of federal student loans
There are a handful of federal student loans. Most students are eligible for at least one, so long as they’re enrolled at least half-time (six credit hours per semester). Fill out a Free Application for Federal Student Aid (FAFSA) to find out which ones you qualify for and how much you can borrow.
| Loan type | Must demonstrate financial need | Credit check required | Interest rate | Loan fee |
|---|---|---|---|---|
| Direct subsidized | Yes | No | 6.53% | 1.057% |
| Direct unsubsidized | No | No | 6.53% for undergrads, 8.08% for graduates and professionals | 1.057% |
| Direct grad PLUS | No | Yes | 9.08% | 4.228% |
| Direct parent PLUS | No | Yes | 9.08% | 4.228% |
| Direct consolidation | No | No | Weighted average of all loans being consolidated | None |
Direct subsidized loan
Previously referred to as Stafford loans, Direct loans for undergraduate students come in both subsidized and unsubsidized forms. With the subsidized loans, reserved for students with financial need, the government will pay your interest while you’re in school (hence the name “subsidized”). You also won’t be responsible for interest during your post-graduation grace period or during deferment.
Aggregate loan limit: $23,000
Direct unsubsidized loan
Direct subsidized and Direct unsubsidized loans are largely the same — however, with unsubsidized loans, interest accrues while you’re in school, during your grace period and during deferment. Plus, any interest you don’t pay off during these periods is added to your loan balance —a phenomenon known as “capitalized interest.”
Further, Direct unsubsidized loans are available to eligible graduate and professional students as well as undergraduates, while Direct subsidized loans are only available to undergraduates.
Aggregate loan limit: Dependent undergraduates can borrow up to $31,000, while independent undergraduates are limited to $57,500. Graduate and professional students are eligible for up to $138,500, but this limit includes federal funds borrowed during undergraduate study. Graduate and professional students may also have a larger aggregate limit, depending on their field of study.
Direct grad PLUS loan
The Direct grad PLUS loan helps graduate and professional students fund their education after earning their four-year degree. Unlike Direct subsidized and Direct unsubsidized loans, borrowers must show that they have no “adverse credit history” — meaning no bankruptcy, default or other issues on their report. If this is a problem, you can seek out a cosigner (also known as an “endorser”) to help you qualify for a PLUS loan.
This loan isn’t subsidized, and interest rates and loan fees are higher than on other Direct loans. Even so, if you’ve maxed out your Direct unsubsidized loan limit, then the Direct grad PLUS loan is your next best choice.
Aggregate loan limit: The cost of attendance, minus any other financial assistance
Direct consolidation loan
Direct consolidation allows graduates or those who’ve unenrolled to combine multiple federal student loans into one. Student loan consolidation won’t lower your interest rate, but you might find budgeting easier since you’ll only have one monthly bill.
Borrowers can also choose a new repayment plan when they consolidate their loans. Most federal student loan repayment plans are between 10 and 25 years, but the Direct consolidation loan can extend this term to 30 years.
Types of private student loans
Private student loans are offered by private lenders, such as College Ave. and SoFi. Instead of using the FAFSA, borrowers apply for a private student loan directly through the lender.
Unlike with most federal student loans, borrowers will need to have good credit to be approved for a private student loan. Students often have a slim credit profile, so many may need a cosigner to boost their approval odds or get a manageable interest rate.
Most private student loans don’t have strict loan limits. Instead, you can borrow up to 100% of the cost of attendance, including meals, living and transportation expenses. Although it may seem like easy money now, you might find yourself in over your head if you borrow more than you need. Before taking out a private loan, get an idea of your future monthly payments by using our student loan repayment calculator.
Federal student loans are standardized by the government, but loan terms, interest rates and borrower protections vary widely among private lenders. Before taking out a private student loan, you should ask questions like:
- Are the interest rates fixed or variable?
- Is deferment or forbearance available?
- Is there a cosigner release?
- What kind of repayment plans are there?
Private student loans aren’t inherently bad, but it’s critical that you carefully review loan terms and compare lenders to make sure you’re getting the best deal. Check out our guide to private student loan lenders to shop around.
Undergraduate loans
Private undergraduate loans are for undergraduates enrolled in a university or community college (and most lenders require that the institution be accredited).
Eligibility requirements are set by the lenders. For example, some require borrowers to be enrolled at least half-time, while others don’t. The same goes for loan terms — the typical term is 10 years, but other lenders might have a 25-year option.
Graduate loans
Many private lenders offer specific graduate student loans for medical school, law school, business school, dental school and other advanced education programs. Interest rates for graduate loans tend to be higher than undergraduate loans.
Career training and trade school loans
A Direct subsidized or unsubsidized loan may pay for trade, career or technical school, depending on the field of study and institution.
If a federal loan falls short (or if you or your school are ineligible for one), a private career training or trade school loan could help bridge the gap.
Income-share agreements
Income-share agreements (ISAs) can be a popular choice for those enrolled in programs not eligible for federal student loans, such as some coding bootcamps.
An ISA isn’t a typical student loan — in exchange for funding, the student agrees to pay a percentage of their income to the lender (in some cases, the student’s university) after graduation. These payments continue until the borrower reaches the end of their loan term.
There’s a lot to consider when it comes to ISAs. In a perfect world, your annual income should increase over time after graduation. If it does, your loan payment will go up in tandem (but there is a cap on how high payments can reach). Conversely, if your income drops, so do your payments.
While this feature can be a benefit, high-earning borrowers could end up paying for their loan several times over if they have a high monthly payment cap.
Types of parent student loans
Parents who want to help their child pay for college might be interested in a parent student loan. As with students, parents have the same two options: federal and private.
Direct parent PLUS loan
Parent PLUS is a federal student loan available to biological, adoptive and some stepparents of dependent college students enrolled at least half-time. Parents can borrow up to the cost of attendance (minus other financial aid), but as with grad PLUS loans, they may need an endorser if they have an adverse credit history.
Unlike other federal student loans, parents must make payments while their child is in school. However, deferment is available, which will delay repayment until six months after graduation.
Private parent loans
Between the Direct parent PLUS and private parent loans, the PLUS option is usually the best loan for parents. Parents with excellent credit may find lower interest rates with a private loan compared to federal — at the same time, they’ll still miss out on other benefits like income-driven repayment plans and federal loan forgiveness.
The process of applying for a private parent loan is similar to that of other private student loans. In addition, interest rates, terms and borrower benefits are not standard, so it’s worth taking the time to compare lenders.