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Student Loans

Types of Student Loans: Which School Loan Makes Sense for You?

Updated Jan 08, 2024   |   9-min read

Most college students need help financing their college degrees—especially as higher education costs rise. Fortunately, there are several types of student loans that can help. Are you struggling to pay your way through college? This guide will break down your options.

In this guide:

Federal student loans

Federal student loans are loans offered by the U.S. Department of Education.

Financial aid from the federal government is generally your best bet for covering college costs, as it’s easier to qualify for, loan amounts are income-driven, and it can even be forgiven in some cases (if you go into an eligible career of public service, for example).

To gauge your federal financing options, you’ll have to fill out the Free Application for Federal Student Aid, or FAFSA form. There are four types of federal student loans, all outlined below.

Direct subsidized loans

Also known as Stafford loans, these are loans based solely on your level of financial need. They’re issued by the federal government to undergraduate students, and the government also pays the interest on your loans while you’re still attending school.

Once you graduate or fall under half-time enrollment (and after a grace period of six months), you’ll then start paying back your loans, plus interest.

Direct unsubsidized loans

With unsubsidized loans, interest begins accruing immediately. While you can still defer payment on that interest while you’re in school, it will continue to accumulate and will be due via monthly loan payments once your final grace period ends.

You don’t have to demonstrate any sort of need to be eligible for an unsubsidized loan.

Perkins loans (discontinued)

Up until a few years ago, Perkins loans were financing options for students who demonstrated very high financial need. These loans are no longer available; however, students who have old Perkins loans with outstanding balances can still apply for forgiveness if they’re eligible.

You may qualify for Perkins loan forgiveness if:

  • Your income is very low
  • You entered a career in public service
  • You’re a full-time teacher in a low-income area
  • You’re a nurse

Direct PLUS loans

The last type of federal student loan is called a Direct PLUS loan. These can be used by both graduate students (Grad PLUS Loan) or parents of students (Parent PLUS Loan). They come with certain credit history requirements, and they typically have higher interest rates than other federal financing options out there.

You (or your child) must attend a school authorized to receive federal aid in order to be eligible.

>> Read more: How Do Student Loans Work?

Private student loans

If you’ve borrowed up to your federal loan limits or aren’t eligible for a federal loan, you may need to turn to private student loans instead.

Using private student loans can come with several advantages. For example, they offer more flexible loan amounts, and you can usually choose from either fixed-rate options or variable-rate ones.

On the downside, private student loans are based on your ability to repay, so you’ll need decent credit and adequate income to support your expected payments. There are also no options for loan forgiveness as there are with federal loans.

There are many types of private student loans available, including loans for specific types of students and degree programs. Here’s a quick list of the types of loans you may be able to choose from:

Refinance student loans and loan consolidation

If you already have student loans, there may come a time when you may want to consider refinancing them. This can consolidate multiple loans into one single payment or even help you lower your interest rate (and monthly payment).

However, refinancing may not be the right option if you’re on a federal income-driven repayment plan, as your costs are probably already as low as they can go.

To see how much refinancing your student loans could save you, check out this student loan refinance calculator.

Federal Direct Consolidation Loan

If you take out several federal student loans over the course of your education, you can actually consolidate them into one single loan using the Federal Direct Consolidation Loan program.

This simplifies the repayment process, and may also help you qualify for income-driven repayment options or student loan forgiveness as a result of moving to a consolidation loan.

However, a federal Direct Loan consolidation won’t help you qualify for a lower interest rate, as your new rate will be the weighted average of all of your previous rates.

Private student loan refinancing

Similarly, private student loans can also be refinanced. You might do this to consolidate multiple loans into one, take advantage of lower interest rates, or extend your repayment term (which can, in turn, lower your monthly payment).

There are many options for refinancing your private student loans.

Note that unlike federal loan consolidation, private refinancing allows you to qualify for new rates, so it’s a viable option for borrowers whose debt and creditworthiness have improved since taking out their loans.

Parent PLUS loan refinancing

In the event you take out a federal Parent PLUS loan to help your child pay for their education, you may be able to refinance that loan with a private lender later on. You might do this to lower your interest rate and payment or to transfer the loan to your child.

If you’re considering refinancing your Parent PLUS loan, these lenders are good options.

Medical school refinancing

Refinancing your medical school loans can be a smart move, since you probably have a high level of debt and a promising career ahead of you that may qualify you for low rates.

If you have medical debt and are considering refinancing, try these med school refinance loans on for size.

Bottom line: Which type of student loan is right for you?

The costs of college may be rising, but that doesn’t mean you need to break the bank to get your degree. There are dozens of federal and private student loan options that can help you pay for your education, as well as the other costs that might come with it.

If you’re opting for a private loan, make sure to explore all your options and shop around for the best lender first. Rates and terms can vary greatly.