College can be incredibly expensive, but it's also a valuable investment in your future. That's why a large portion of America's college students finance some or all of their education with long-term student loans that allow them to pay for their tuition bills down the line, after they've translated their time at university into a career.
A college education is an investment in your future, with the average young adult earning nearly two-thirds more in salary if they have a bachelor’s degree and nearly $1 million more over the length of their career. However, in the short term, many American families find the costs of college — from tuition to housing to books and supplies — outside of what they can afford. That’s why many students turn to student loans to pay for the costs of college. These loans typically offer favorable terms and long payback periods, with the intent being to give graduates a chance to turn their valuable degree into a solid job before they have to start making payments.
Student loans are one of the fastest-growing types of debt in America, with the total value of student loans increasing to $1.5 trillion as of 2018.
Types of Student Loans
There are several different sources for borrowing the money necessary to pay for a college education, both from government sources and private lenders. Federal student loans are available through the Federal Direct Student Loan Program and can be applied for with the use of a Free Application for Federal Student Aid, better known as a FAFSA, while private loans are obtained through direct application to the bank or other financial institution issuing the loan.
Stafford loans, named for Republican Senator from Vermont Robert Stafford, are the primary type of loan issued by the federal government. You can apply to them for free, and they have a number of benefits over loans from private lenders. All Stafford loans have a fixed interest rate, and they will frequently offer more options for repayment than you’ll have from private lenders.
Another benefit to Stafford loans is that they don’t factor in individual risk like most any other type of loan. As such, you don’t need a credit check and you won’t pay higher rates for having a lower credit score. In fact, all prospective students will pay the same interest rates, regardless of the school they’re attending or their field of study.
Stafford loans have both subsidized and unsubsidized varieties. Subsidized Stafford loans are based on financial need, with the students of families with lower incomes qualifying for them, and they forego charging interest while the students are in school, for six months after they graduate and during approved periods when payments are deferred. Unsubsidized loans are available regardless of financial need.
There are limits to the total amount that can be borrowed in a given year and overall with Stafford loans, with lower caps on subsidized loans. First-year students can borrow up to $5,500 a year with a maximum of $3,500 being subsidized, your second year sees those limits rise to $6,500 and $4,500, and third year and later has caps of $7,500 and $5,500 respectively. In total, you are limited to $23,000 in total subsidized student loans and $57,500 for total undergraduate loans.
Perkins loans, named for Democratic House Representative Carl D. Perkins of Kentucky, are also backed by the government, but they are issued through the financial aid office of the school you’re attending and are only available to those students in exceptional financial need. Perkins loans have a set interest rate of 5 percent, and you can borrow up to $5,500 a year up to a maximum of $27,500 as an undergraduate or $8,000 a year up to a maximum of $60,000 as a graduate student.
Perkins loans also have the notable distinction of being eligible for cancellation if you’re willing to work in certain government jobs, like teaching in a low-income school district. There are even some options based on eligible volunteer service. They do, however, require that the school you’re attending participate in the program.
PLUS Loans are unsubsidized loans available to the parents of undergraduate students or to independent professional or graduate students. They are credit-based and generally come with higher interest rates than Stafford or Perkins loans. PLUS loans, though, do not have limits, allowing students or parents to borrow large sums of money to pay for tuition or housing and can be attractive to families that don’t have the immediate funds to pay for college. They do, however, require good credit, have less flexible repayment options and can require the first payment as soon as two months after the first disbursement.
Even after exhausting options for federal student loans, some students may still find themselves short of what they need to cover expenses, especially if they’re out-of-state or attending a private university. In these cases, there’s a wide variety of options for potential private lenders, from banks to credit unions to many other financial institutions. These loans aren’t backed by the government and will typically be more stringent in their repayment terms.
Private loans will generally come in the fixed-rate or variable-rate variety. Fixed-rate loans, like Federal student loans, will have a set interest rate in place for the entire length of the loan. Variable-rate loans will have a rate that can shift, usually based on a specific economic factor like the LIBOR (London Interbank Offered Rate).
Taking on private student loans may or may not be the right decision for you, but it’s generally a good idea to exhaust all other options with government loans and scholarships before turning to the private market.