Student Loans 101: All Your Options, From Federal to Private

Learn how federal student loans differ from private loans.

Taking out a loan to pay the tens or even hundreds of thousands of dollars that a quality university education costs isn’t uncommon for the students of today. Numerous types of student loans exist, from federal to private, which are structured in many ways, such as subsidized or unsubsidized.

As with any financial product, you should take a close look at the terms of your loan before you sign because the repayment schedule can sometimes prove to be difficult to maintain. The first step in the financial aid process is to complete an application with a lending institution or fill out the Free Application for FAFSA.

Apply for FAFSA to Get Student Loans

Many applicants are unaware that most students qualify for at least some type of financial aid for college, regardless of income. Grants, work-study programs, scholarships and student and parent loans are some options that might be extended to you after you complete a FAFSA.

Every year, the FAFSA is released October 1. You can complete the application until June 30 after the year you start school. Because aid is limited, however, experts recommend you complete your application as soon as possible.

After factoring in assets you and your parents own, along with other factors such as family size and cost of school attendance, the U.S. Department of Education will calculate your Expected Family Contribution. The EFC, along with other factors, will be used by colleges to calculate how much financial aid you will receive.

Learn More: FAFSA Application — How to Apply for Federal Student Aid

What Are Federal Student Loans and Private Student Loans?

A federal student loan is one offered by the U.S. government. Like any traditional loan, you’ll have to pay back a federal student loan, with interest. Federal loans come in four types:

  • Direct subsidized loans
  • Direct unsubsidized loans
  • Direct PLUS loans
  • Federal Perkins loans

Private student loans are funded by nongovernmental financial institutions, such as banks or credit unions. Individual schools also offer private student loans for college. Here are the main distinctions between federal and private student loans:

                 Federal Student Loans vs. Private Student Loans
Student Loan TypeApplication ProcessCredit HistoryBorrowing LimitFinancial NeedLoan RepaymentInterest RatesFees
Federal FAFSAGenerally not consideredDetermined by FAFSA evaluationMight qualify you for a subsidized loanAfter graduation; loans might be consolidated or adjusted in the futureFixed; generally lower than private loansFrom 1.066 percent  to 4.264 percent
PrivateDirect applicationCredit check requiredDetermined by issuing institutionNot consideredMight begin in school; typically cannot be consolidated or adjustedFixed or variable, depending on lender; rates as high as 18 percentAt the discretion of the lender
Information accurate as of Jan. 20, 2018. 

Related: How to Get the Best Student Loan Interest Rates

Federal Student Loans vs. Private Student Loans

Federal Student Loans: Subsidized vs. Unsubsidized Loans

A direct subsidized loan is one that the U.S. government helps fund by paying the interest and are still attending school. A direct unsubsidized loan, on the other hand, starts accruing interest as soon as you take it out. Only undergraduate students qualify for subsidized loans; graduate students can only apply for unsubsidized loans.

As of July 2017, the interest rate for both subsidized and unsubsidized loans for undergraduates was 4.45 percent. Unsubsidized loans for graduate students carried an interest rate of 6 percent. The subsidized loan maximum is $3,500 for freshmen, $4,500 for sophomores, and $5,500 for juniors and seniors. A graduate student can take out up to $20,500 in unsubsidized loans.

As an undergraduate student, you’ll need to keep at least a 2.0 grade-point average to maintain your financial aid. As a graduate or professional student, your GPA will have to reach at least 3.0, or the minimum standard defined by your degree program.

Private Student Loans

Consider private student loans after you’ve explored scholarships, grants and federal student loans. Private loans are never subsidized. You’re always responsible for paying the interest on your private loan.

 

You can find competitive private student loan interest rates; the rate you’re offered will depend on your credit history and whether you have a cosigner. For example, Sallie Mae offers variable interest rates from 3.62% APR to 10.54% APR and fixed interest rates from 5.74% APR to 11.85% APR.

Federal vs. Private Student Loan Repayment Options

Federal Student Loan Repayment Options

Federal student loans offer numerous repayment options, including the following:

  • Standard repayment plan: Fixed amount of up to 10 years
  • Graduated repayment plan: Payments start lower and increase, typically every two years, for up to 10 years
  • Extended repayment plan: Payments might be fixed or graduated, for up to 25 years

When your income isn’t enough to pay back your loans, you might qualify for a lower payment via an income-based student loan repayment plan, such as the Pay-As-You-Earn plan or the Revised Pay-As-You-Earn plan. With these plans, your payment is a maximum of 10 percent of your discretionary income. Three other income-based repayment plans are also available, the Income-based Repayment Plan, the Income-Contingent Repayment Plan and the Income-Sensitive Repayment Plan.

To save additional money on your loans, apply for direct debit, which is an automated payment service. With direct debit, you’ll qualify for a 0.25 percent interest rate reduction. You can also make additional payments to your student loans anytime you have the funds in order to pay off your loans sooner and save you money on interest.

Private Student Loans

When you have a private student loan, you don’t qualify for any federal repayment plans. Private loans typically offer you three in-school options to pay back your loan:

  • Deferred repayment: Make no scheduled payments if you’re still in school or during the grace period
  • Fixed repayment: Pay $25 each month you’re still in school
  • Interest repayment: Pay interest only if still in school

Certain private lenders, such as Sallie Mae, offer additional options, including a graduated repayment period, student loan deferral or forbearance if you’re having financial difficulty. Also, some lenders offer an interest rate discount for enrolling in automatic payments. For example, Wells Fargo offers a 0.25 percent discount. 

Learn More: 15 Ways to Pay Off Student Loans

Federal vs. Private Loan Refinance, Consolidation and Reduction

Federal Student Loans Forgiveness and Consolidation

Sometimes, student loan payments can get away from you. A high-interest loan and a low-paying job can make it difficult, if not impossible, to handle your debt obligations. Fortunately, there are a number of options to help you reduce or even eliminate your student loan debt.

Working in certain professions, such as teaching, nursing or the military, can qualify you for the forgiveness of a significant amount of your student loan debt if you meet the qualifications. In addition, the Public Service Loan Forgiveness program might wipe away your remaining student loan debt if you work for the government or a qualifying nonprofit organization and make at least 10 years of loan payments.

You might be able to consolidate your student loan debts into a single loan through the federal government if you have more than one outstanding federal student loan. In some cases, you might also be granted an extension of time to repay your debt.

Federal and Private Student Loan Refinancing

Refinancing is another option. Just like you might with a home mortgage or an auto loan, a student loan refinancing involves taking out a new loan to pay off the existing student loan. Whether or not you qualify, and the interest rate you receive will be based on a combination of factors determined by the new lender, such as your credit score, income, debt-to-income ratio and employment status.

Up Next: How to Answer FAFSA Questions and Ace Your Student Aid Application

Paying for college can be an expensive proposition, but numerous federal and private loan programs exist to help you on your way. Do as much research as you can about the FAFSA and the various public and private loan programs available, and talk to a counselor at your school to get the most current and accurate information available. Accepting a loan agreement is a financial step that could impact the rest of your life.