The majority (68%) of students who graduated from public and nonprofit colleges in 2015 had some student loan debt, according to the Institute for College Access & Success, an independent and non-profit group, and those borrowers had an average debt of $30,100.
It’s safe to say student loans are a common route to a college diploma, but there are many kinds of student loans, with different benefits and repayment options, so it’s important to know what your options are before you borrow.
What Are the Different Student Loan Programs Out There
The majority of student loan borrowers have federal student loans, and the most common loans come from the William D. Ford Federal Direct Loan Program. The Education Department lends federal Direct loans, and there are four main kinds.
- Direct Subsidized Loans: Undergraduate students with a financial need may qualify for Direct Subsidized Loans, meaning the government pays the interest accrued on the loans while the student is enrolled at least half-time in school, during a the grace period (six months after graduation) and during a period of deferment. How much you can borrow depends on your year in school, whether or not you’re a dependent or independent student and how much your school determines you qualify for. You can borrow no more than $23,000 in Direct Subsidized Loans for your undergraduate education, and borrowing a Direct Subsidized Loan does not require a credit check.
- Direct Unsubsidized Loans: Direct Unsubsidized Loans are available to undergraduate and graduate students. You do not need to demonstrate financial need to receive a Direct Unsubsidized Loan. The interest that accrues on the loan while the borrower is not in repayment will be capitalized (added to the principal balance of the loan). How much you can borrow depends on your year in school, whether or not you’re a dependent or independent student and how much your school determines you qualify for. You can borrow no more than $31,000 in Direct Unsubsidized Loans for your undergraduate education, and borrowing a Direct unsubsidized loan does not require a credit check.
- Direct PLUS Loans: Direct PLUS loans are available to graduate and professional students, as well as parents of dependent undergraduate students. You can borrow up to the cost of attendance, as determined by the school, and you must not have an adverse credit history. The aggregate loan limit of federal student loans for graduate students is $138,500, which includes any outstanding balances of federal loans obtained as an undergraduate.
- Direct Consolidation Loan: You may apply to consolidate eligible federal loans into a single loan payment with one loan servicer after you leave school or drop your schedule to below half-time enrollment.
To qualify for any federal Direct loan, you must fill out the Free Application for Federal Student Aid (FAFSA). Once your form is reviewed, you will learn what federal loans you qualify for through a school’s financial aid award letter.
Federal Perkins Loans
Perkins loans are low-interest federal student loans for students who demonstrate “exceptional financial need,” according to the Education Department. Both undergraduate and graduate students may qualify. Because schools lend Perkins loans, how much you qualify for will depend on the funds that are available at your school, in addition to your individual financial need.
Undergraduates can borrow a maximum of $5,500 per year for a total limit of $27,500. Graduate students can borrow up to $8,000 per year for a total limit of $60,000.
Private Student Loans
Education loans you apply for at a bank, online lender or credit union are private student loans. These loans require a credit check, and the terms vary. Some private student loans have variable interest rates (as opposed to the fixed interest rates offered by the current federal student loan programs and some private loans), and repayment options may be less flexible than those available to federal loan borrowers. At the same time, if you have good credit, you may be able to qualify for a student loan with an interest rate lower than what the federal loan programs offer.
How to Repay Your Student Loans
Federal student loan borrowers have several options for repaying their loans. The standard repayment period for federal Direct loans is 10 years (up to 30 years for consolidation loans), but you can choose a different repayment program, if you qualify. Repayment programs for federal student loans include the graduated repayment plan, the extended repayment plan, income-based repayment (IBR), income-contingent repayment (ICR), income-sensitive repayment, Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE) and public service student loan forgiveness.
You may also apply for a deferment or forbearance, if you are temporarily unable to repay your student loans. You can read more here about repaying your student loans.
Things to Consider Before Taking Out a Student Loan
Whether you’re opting for a federal or private student loan, remember that it’s never a good idea to borrow more than you need. Keep in mind you’ll need to repay the loan whether or not you complete your education or get a job in the field you planned to work in, so do the math and think carefully about how much you can afford to borrow.
Making student loan payments on time can help you build a good credit score, but missing student loan payments or defaulting on your student loans can wreck your credit. On top of that, getting a student loan discharged in bankruptcy is very difficult (though not impossible). You can see how your student loans affect your credit by reviewing two of your credit scores for free on Credit.com. They’re updated every 14 days.
You should also know student loans aren’t the only way to pay for college. If you can’t pay for school using your savings or income you get from working part-time, it’s a good idea to explore other options for financial aid.
Primary Sources of Financial Aid for Students
- Loans: Loans must be repaid (usually in monthly installments over the course of 10 to 20 years) beginning when the student graduates or when the grace period ends (typically six months after graduation).
- Grants: Grants are gift money that does not need to be repaid. They are often provided by non-profit organizations and are usually tax-exempt. Students usually must give or submit a report regarding the project for which the grant money was issued.
- Scholarships: Scholarships are awarded based on financial need or on merit, and they do not need to be repaid. Non-profit and for-profit institutions may provide them. Usually the student must maintain a certain level of academic performance to receive or continue receiving the scholarship money. Scholarships are not usually tax-exempt.
- Work Study: Part of campus-based financial aid. If a student has work-study, the student works part-time on campus to help fund college expenses.
Primary Avenues Students Should Explore When Applying for Financial Aid
- Federal Aid: The FAFSA form must be filled out annually for the student to be eligible for federal student loans, as well as need-based federal grants.
- State Government Grants, Scholarships & Loans: Many states offer aid to residents attending in-state institutions, but the type of assistance varies from state to state, and much of it is awarded on a first-come, first-served basis. Most require you to fill out the FAFSA, and some states’ deadlines are much earlier than the federal deadline, so check with your state’s education agency for specifics.
- Campus-Based Financial Aid: Schools may offer scholarships, work study and grants, including Perkins loans and the Federal Supplemental Educational Opportunity Grant (FSEOG). Most states and schools use the FAFSA to determine eligibility for other non-federal aid.
- Scholarships: You can find out about school-based scholarships on a college or university’s website, in addition to researching local scholarships and national scholarships.