Navigating Different Types of Student Loans

By Will Geiger

Will Geiger is the co-founder of Scholarships360 and has a decade of experience in college admissions and financial aid. He is a former Senior Assistant Director of Admissions at Kenyon College where he personally reviewed 10,000 admissions applications and essays. Will also managed the Kenyon College merit scholarship program and served on the financial aid appeals committee. He has also worked as an Associate Director of College Counseling at a high school in New Haven, Connecticut. Will earned his master’s in education from the University of Pennsylvania and received his undergraduate degree in history from Wake Forest University. Full Bio

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and Gabriel Jimenez-Ekman

Gabriel Jimenez-Ekman is a content editor and writer at Scholarships360. He has managed communications and written content for a diverse array of organizations, including a farmer’s market, a concert venue, a student farm, an environmental NGO, and a PR agency. Gabriel graduated from Kenyon College with a degree in sociology. Full Bio

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Reviewed by Caitlyn Cole

Caitlyn Cole is a college access professional with a decade of experience in non-profit program and project management for college readiness and access organizations.

Updated: June 28th, 2022

In the class of 2020, about 55% of bachelor’s degree recipients took out student debt. With soaring university prices, it has become very common for students to take out debt in order to support their college education. So, if you are among that 55% of students, you are not alone. However, it’s important to remember that not all types of student loans are the same. 

In this article, we’ll help you take out smart loans that work for you. Let’s get into all the different types of student loans and how you should go about making your decisions. First, we’ll go over each type of federal loan. Next, we’ll discuss private student loans. Finally, for those who have already taken out their loans, we’ll discuss the possibility of refinancing. Let’s get into it!

Jump ahead to:

• Federal student loans
  • Direct Loans (Subsidized and Unsubsidized)
  • PLUS Loans (Parent and Grad)
  • Direct Consolidation Loans
  • FFEL Loans
  • Perkins Loans
• Private student loans
  • Navigating the private student loan marketplace
  • Considering ISAs
• Refinancing student loans
• Key takeaways

Federal student loans

When it comes time to take out student loans, federal loans should typically be the first place you turn. For the most part, they have the best interest rates, the most flexible repayment plans, and other federal benefits, such as the possibility of deferment and even forgiveness in certain cases. Let’s get into each type of federal loan.

Direct Loans

Also known as Stafford Loans, Federal Direct Loans typically have the lowest interest rates of any loan on the market. You can take out two forms of Federal Direct Loans: Direct Subsidized and Direct Unsubsidized. Only undergraduate students with demonstrated financial need as determined by successfully completing the FAFSA can qualify for Direct Subsidized Loans. On the other hand, all students who qualify for federal financial aid will qualify for Direct Unsubsidized Loans. You must be enrolled at least half-time to receive Direct Loans. 

Direct Subsidized vs. Direct Unsubsidized

Let’s get into the differences and similarities between these two types of loans.

Takeaways: Federal Direct Loans

Federal Direct Loans should be the first option you consider when it’s time to take out loans. They typically have the best interest rates, the best repayment options, and allow borrowers to go back to school and pause payments. Subsidized Loans are preferable to Unsubsidized Loans, but not everyone can qualify for Subsidized Loans.

Since there is a borrowing limit on Direct Loans, many students have to turn to other federal loans and/or private loans. For a detailed table on the amount you can take out per year, check out this page on the Federal Student Aid website.

PLUS Loans

PLUS Loans come in two forms: Parent PLUS Loans, which parents (biological or adoptive) take out to help finance students’ undergraduate education, and Grad PLUS Loans, which graduate students take out to fill any financial need that is not covered by Direct Unsubsidized Loans. Let’s get into each of these types of loans and explain how they work.

Parent PLUS Loans

Parent PLUS Loans allow parents to help pay for the gap between students’ financial aid and the cost of their school. They typically offer better interest rates and more favorable repayment options than private loans. However, unlike Direct Loans, they do require a credit check. Not all parents will qualify for Parent PLUS Loans. Make sure you have completed the FAFSA before your parent applies for a PLUS Loan. 

In the case that a parent does not qualify for a Parent PLUS Loan, their child may be eligible to take out a higher amount of Direct Loans. Make sure to look into this possibility if your parents do not qualify for PLUS Loans.

Also keep in mind – if you are considering taking our Parent PLUS Loans, it’s worth taking a hard look at your college choice to decide whether it is truly affordable for your family. Try checking out the College Scorecard to look at graduation statistics and earnings information for graduates to get an idea of whether you’ll be able to afford your loan payments after graduation. As a high school-aged student, it’s difficult to make these financial decisions for your future, so it’s important to weigh them carefully before saddling yourself with an unreasonable sum of loans.

Grad PLUS Loans

For graduate students whose Direct Unsubsidized Loans do not cover the entirety of their financial need, your next step should be to investigate Grad PLUS Loans. They typically offer lower interest rates and more favorable repayment terms than private loans. Borrowers can utilize any of the same income-driven and flexible repayment plans with Grad PLUS Loans as they can with Direct Loans.

Though they have higher interest rates than Direct Loans, they still typically beat out the market on private loans. They do require a credit check, but do not weigh credit the same way that private lenders do; rather, they only check for specific red flags such as being over 90 days late on any debt, having no defaults or bankruptcies, or other evidence of substantial financial issues.

Direct Consolidation Loans

You cannot take out Direct Consolidation Loans directly; rather, once you already have taken out your federal loans, you have the option of converting them into Direct Consolidation Loans through the process of consolidation. This can simplify your repayment by putting it into the form of one monthly payment. It also has the benefit of potentially reducing your monthly payments, and might help you qualify for Public Service Loan Forgiveness. 

If you have questions about this or think that consolidation might be right for you, you can talk to your college’s financial aid office or your loan servicer assigned to your loans. Keep in mind – private loans cannot be converted into Direct Consolidation Loans. Only other federal loans are eligible.

FFEL Loans

Federal Family Education Loans (FFEL) are a now-defunct type of loan that has not been offered since 2010. However, for those who have already taken out FFEL Loans, remember that your loans enjoy all the benefits of other federal loans; you have the option of converting them into Direct Consolidation Loans, you can defer them, and you can have them forgiven if you qualify for PSLF or other grounds for federal forgiveness. You can also utilize flexible repayment plans such as income-based repayment.

Perkins Loans

The final Perkins Loans were disbursed in 2018. However, for those, who have already taken out Perkins Loans, keep in mind that your loans enjoy all of the perks of any federal loan; you can qualify for federal loan forgiveness through public service, if you attended a school which has now closed and engaged in malpractice, or under a few other conditions. You can also defer your loans for qualifying reasons, and you can convert your loans to Direct Consolidation Loans. Finally, you can adjust your repayment plans and utilize any federal repayment program.

Private student loans

Typically, students should only turn to private student loans once they have taken out the maximum of Federal loans or if you do not qualify for federal student loans based off of your citizenship status, for example. Private loans usually come with higher interest rates, and do not offer flexible repayment plans, forgiveness, or deferment options. They also require a credit check, and if you are unable to find a cosigner, it may be difficult to secure private loans.

Finding the best private student loans

Although private loans are typically not ideal, it’s important to note that some are much better than others. Unlike federal loans, they do not have uniform interest rates or repayment terms. You’ll want to do a good amount of shopping around to find an option that offers you a low interest rate and favorable repayment terms. Using a student loan marketplace is the best way to compare a wide variety of loans side-by-side and pick out the best one.

Always be sure to read over your contract carefully; don’t make your decision solely based on the interest rate, but also on the possibility of deferment and the different ways that your repayment might have flexibility. It’s impossible to know what may happen in the future, and a bit of flexibility in repayment plans could end up benefiting you greatly in the long run.

Considering ISAs

ISAs, or income-share agreements, are an emerging model in the private loan sphere that may be a great option for some students. Although they are currently only available in some fields, they offer a sense of security that traditional student loans do not.

Rather than signing an agreement to pay back a fixed sum of money to the lender, income-share agreement borrowers sign a contract mandating that upon graduation, they will pay back a fixed percentage of their income for a certain number of years. So, the less they are earning, the less they will pay. In times of economic uncertainty, this can be an attractive prospect. You’ll only be on the hook for your loans if your degree actually leverages you a high-paying position.

Some colleges offer their own ISA programs to students, and some third-party organizations such as Stride offer agreements to students across a wide range of programs. However, it’s important to note that these are still only available to a limited number of fields. Typically, students pursuing a degree with a very predictable career outcome and salary will have the possibility of an ISA. The model is not largely available for those studying humanities, social sciences, or other non-STEM fields.

Refinancing student loans

If you’ve already taken out loans and are in the process of repayment, you may consider the option of refinancing student loans. Refinancing student loans can take the form of striking a new agreement with your current lender, or having another lender buy your debt from your current lender and striking up a new repayment agreement with them.

This process can often lower borrowers’ interest rates or change their monthly payments. Here are a few good reasons why you may consider refinancing your student loans.

Good reasons to refinance your student loans

• Change in co-signer – Whether your current co-signer wants to be released from the obligation, or whether you found a new co-signer who can leverage you better interest rates, this can be a great reason to refinance
• Improvement in credit score – Let’s say that you took out private loans without a cosigner at a young age. Now, you’re five years into repayment and your credit score has increased significantly. It could be that lenders are now offering you better interest rates. You can refinance your loans to leverage your new score to pay less in interest
• Lowered market interest rates – Student loan interest rates rise and fall with the market. If you took out your loans at a time of higher interest rates, you may want to refinance when the rates drop so as to pay back less in interest
• Lowering monthly payments – Refinancing can extend your overall repayment period, which lowers your monthly payments. If you are having trouble meeting your monthly payments, refinancing can help remedy this problem. However, you should remember that extending your repayment time also allows for more time for interest to accrue, meaning you’ll pay more overall

What to consider before refinancing federal loans

Remember – you can refinance federal or private loans, but whenever you refinance, your loans will become private thereafter. As described above, federal loans come with a host of benefits that private loans do not offer. If you expect that you will have to take advantage of flexible repayment options, if you think you may qualify for loan forgiveness, or if you want to defer your loans in the future, you may not want to refinance your federal loans.

It’s a tough trade-off, as sometimes the lower interest rates of refinanced loans can prove alluring. But before you decide to make the plunge, ensure that you are in a period of financial stability and that the lower interest rates are worth foregoing the option of repayment flexibility.

Key Takeaways

• Undergraduate students should turn to Direct Loans first, and if their need for loans exceeds the Direct Loan limits, it’s a good idea to apply for Parent PLUS loans before applying for private loans or to consider more affordable educational options
• Graduate students should also turn to Direct Loans first; they will enjoy higher yearly limits for this type of loan. If their need exceeds these limits, turning to Grad PLUS loans is typically a good idea before resorting to private loans
• Students typically have not had the time to develop a good credit score; for this reason, finding a co-signer can be extremely beneficial when applying for private loans, as it can lead to higher limits and lower interest rates
• Refinancing student loans can help those who have already taken out loans save money on interest. However, be sure to think long and hard before refinancing federal loans into private ones, as you’ll lose out on many federal loan benefits
• Remember to weigh your decisions carefully when taking out loans. Do some research to ensure that you will be able to pay back your debt with the degree you are earning

Final thoughts

Remember, you must pay back all student loans regardless of whether or not you earn a college degree. If you do leave school for any reason, you will still need to pay back all borrowed money. Make sure you do everything possible to earn that degree and increase your earning potential!

Also see: How much student loan debt is too much?