How to Choose a Student Loan

February 07, 2017

With the average cost of college being north of $20,000 for a public in-state school, student loans have become a big part of student’s financial aid packages. The two types of student loans are federal and private. There are important differences between them and knowing the difference can help students make the most informed decision.

Federal student loans are loans made or guaranteed by the government and private loans are essentially non-federal student loans made through lenders such as banks, credit unions, state agencies or schools. With the benefits of federal student loans, comes harsh consequences for default such as wage garnishments, difficulty discharging if you file for bankruptcy, possibly lost tax returns, and even Social Security payments. The three main types of federal student loans are:

Direct student loans, sometimes called direct Stafford loans, have low fixed interest rates and offer a variety of repayment options and forgiveness programs. They have limits as to how much of a loan you can get, which is different for undergraduate and graduate students. There are two basic types of direct student loans:

  • Direct subsidized loans are available to low income undergraduate students. Interest typically does not accrue while the student attends school, during the 6-month grace period after college and if student loan payments are delayed. Loan limits tend to be lower than the loan limits of unsubsidized loans.
  • Direct unsubsidized loans are available to undergraduate, graduate and professional students regardless of financial need. Interest accrues while the students are in school, during the grace period and during any student loan payment delays.

Perkins loans are fixed low interest loans for low-income undergraduate, graduate or professional students with financial needs. Like the subsidized loans, interest doesn’t accrue while you are in school and during your grace period, which is longer than the grace period for direct loans. Perkins offers a ton of cancellation options for a variety of situations and professions. You also have to attend a school that offers Perkins loans and the school determines the loan amounts.

PLUS loans are fixed rate loans for graduate or professional students and parents of dependent undergraduate students. To qualify, the borrower must not have an adverse credit history and interest accrues even when the student is in college. PLUS loans are eligible for nearly all of the repayment options offered by the US Department of Education. Parent PLUS loans are eligible for most of the repayment options.

Private loan interest rates and benefits vary per institution. Some offer a variety of repayment options and programs if you experience a hardship, so compare loans before making a decision. Typically, with private loans:

  • The interest rates tend to be higher than most federal student loans
  • They offer almost no loan forgiveness programs, cancellations or the variety of repayment options offered by federal loans
  • A credit check and possibly co-signing may be needed to get a loan
  • You can generally borrow a higher amount than you can with a federal loan

As you weigh your options consider the following:

Can you demonstrate a financial need? If so, you may qualify for a direct subsidized loan or a Perkins loan, which typically offers the perks of low interest rates, not accruing interest while you’re in school, and a variety of repayment options. However, both loans have limits to the amounts you can borrow.

What degree are you pursuing? If you are pursuing a graduate degree, you generally do not qualify for a direct subsidized loan, so if you have limited finances, a Perkins loan may be a consideration. A direct unsubsidized loan is a consideration if you do not qualify for a Perkins loan and may have adverse credit. A graduate student can also get a graduate PLUS loan, which typically has higher borrowing limits (cost of attendance minus any financial aid) but takes your credit under consideration. The loans offer forgiveness programs and a variety of repayment options

How much money is needed to pay for college? Federal loans typically limit the amount you can borrow. Private loans can offer a higher amount, but they generally come with higher interest rates. Evaluate your needs and if possible, tap into the federal loans before getting private loans.

What are your career aspirations? Perkins loans offers a variety of cancellation options, including options for teachers who serve low-income children, certain medical professionals, and even librarians who work in certain schools and libraries.

Student loans can be confusing. Don’t just take the first one offered though. Researching the features can help you make the best decision.