BestColleges’ Guide to Student Loans

With tuition rising consistently over the past decade, most students — or their parents — will need to finance at least part of their education. This makes understanding the different types of loans, their repayment options, and the impact they could have on your long-term finances a crucial first step.

In this guide, we will explore the different types of student loans available, how to apply for each, and what repayment typically looks like after you graduate or leave school.

Student loans are similar to other types of loans such as personal loans: You borrow a sum of money and agree to repay it — with interest — over a set period of time.

However, compared to other loans, student loans tend to have lower interest rates and offer more flexible repayment terms. Also, they’re designed specifically to cover education-related expenses, including tuition, books, and housing, for example.

There are two primary types of student loans: federal and private. We’ll discuss their main differences below.

The primary difference between federal and private student loans is who issues the funds.

Federal student loans are originated and distributed by the Department of Education (ED). The department may use private companies to handle billing and customer service, but the federal government is still the official provider.

Private loans, on the other hand, are offered directly by banks, credit unions, and other for-profit lenders.

There are other differences as well: federal and private loans have different eligibility requirements, interest rates, repayment flexibility, and borrower protections.

Federal student loans offer lower interest rates and more repayment options than private student loans, making them a more preferable option.

Current federal student loan rates range between 6-9%, depending on the type of loan and on whether you’re an undergraduate or graduate student . Private student loan interest rates, by contrast, can vary much more widely and may be as high as 17%, depending on the lender and your credit score.

Federal student loans also have fixed interest rates, meaning the rate stays the same over the life of the loan; private student loans, on the other hand, may offer either fixed or variable rates that can change over time.

In addition to lower rates, federal student loans tend to be more flexible when it comes to repayment. For example, repayment plans will include several options, including income-driven repayment, which takes your income into account when determining your monthly payments.

The most common types of loans offered by the federal government are Direct Loans and Direct PLUS Loans. In addition to these, there are loans meant for specific professions, such as the Health Profession Student Loans. We explain these below.

The Direct Loan Program is the primary federal student loan program for undergraduate and graduate students. If you submit the Free Application for Federal Student Aid (FAFSA) and receive a federal student loan offer, it will typically come through this program.

Within this program, there are two main types of loans: subsidized and unsubsidized.

Direct PLUS loans can be a helpful option when other forms of financial aid don’t fully cover the cost of school. They’re often used to help cover remaining expenses after grants, scholarships, and Direct Subsidized or Unsubsidized Loans are applied.

The Direct PLUS loan program includes two major loan types:

However, Direct PLUS loans have higher interest rates than Direct Loans — often about 1 to 2.55% higher.

Health Professions Student Loans (HPSL) are federally funded and available to students pursuing one of the following degrees:

These are administered by the Health Resources and Services Administration (HRSA) — not the Department of Education — and are offered only in institutions that offer degrees in podiatry, dentistry, optometry, pharmacy, and/or veterinary.

Because the application process varies by school, it’s important that students contact their financial aid office for specific information.

Private student loans are issued by banks, credit unions, and other for-profit lenders. Some of the most popular private student loan lenders include:

These loans can be a useful option, particularly when federal aid doesn’t fully cover the cost of school or if you need extra money for indirect expenses, such as housing, transportation, or books and supplies. They’re also commonly used by international and undocumented students who aren’t eligible for federal student loans.

However, private student loans typically have higher interest rates and less repayment options than federal student loans.

Unlike federal rates, which are set by the government, private loan rates are set by individual lenders. They depend on factors such as your income and credit score, and some lenders also consider the school you’re attending and your field of study.

As a result, rates can vary widely from borrower to borrower. Fixed rates often range from 4% to 13%, while variable rates may range from 5% to 17%.

When it comes to repayment options, private loans generally don’t offer income-driven repayment plans, while federal student loans do. Also, options to pause or lower payments during financial hardship are usually limited, depend on the lender, and often come with stricter rules.

Due to this variability, experts typically advise students to consider private student loans only after exploring all federal aid options.

Applying for federal student loans may sound intimidating, but the process is usually simpler than applying for other types of loans. Private student loans, on the other hand, involve additional steps and considerations.

Experts generally recommend turning to private student loans only after you’ve exhausted all other financial aid options, such as grants, scholarships, and federal student loans.

Still, there are circumstances in which private loans can make sense. For example, if financial aid doesn’t fully cover your education costs and you’re ineligible for federal loans, a private loan may help bridge the gap.

Student loan repayment works differently depending on whether you have federal or private loans. Here’s an overview of your options:

Federal student loans offer several repayment options that affect how long you’ll make payments and how much you pay each month.

Repayment options for private student loans are set by each individual by lenders, which means they can vary widely.

For example, some lenders offer a “grace period” of 6-12 months after graduation before you need to start making payments.Others, on the other hand, require payments as soon as the loan is disbursed, even if you’re still enrolled in school.

Additionally, private student loans don’t typically offer income-driven repayment plans or loan forgiveness options. While some private lenders may offer forbearance or temporary payment relief, interest usually continues to accrue during these periods, which increases the total cost of the loan.

If you’re struggling to make your student loan payments, there are several options you can consider. However, these will depend on whether your loans are federal or private, as private student loans typically offer fewer repayment protections.

If you have a federal student loan, you may be eligible to enroll in an IDR plan. These plans calculate your monthly payment based on your income and family size and typically cap payments at 10% to 20% of your discretionary income — that is, the amount left after paying taxes and essential expenses. In some cases, monthly payments can be as low as $0.

If you’re already enrolled in an IDR plan and your income changes or you lose your job, update your account to have your monthly payment recalculated.

Also, IDR plans only last for one year at a time, so you’ll need to recertify your financial information each year to stay enrolled. If you want to make things easier, you can choose automatic recertification by allowing access to your tax information.

Forbearance and deferment are the two primary ways borrowers can temporarily stop making payments on federal student loans.