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What types of student loans are there?

December 09, 2018

Student loans can be grouped into two main types: federal and private.  Federal student loans are funded by the U.S. government, while private student loans are funded by commercial entities such as banks.  As you consider your options, it is important to understand the full range of loan alternatives available to you.

Federal Student Loans

Federal student loans dominate the student loan market.  Not only are the majority of student loans issued by the U.S. government, via the Department of Education, but federal loans offer the widest range of repayment plans.  There are a few different types of federal student loans, described below.

Stafford Loans

Federal Stafford Loans, available to both undergraduate and graduate students, are the most popular type of federal student loan.  Stafford Loans, which are offered by every school that participates in the William D. Ford Federal Direct Loan Program, are insured by the federal government and offer flexible repayment options.  

Stafford Loans may be subsidized or unsubsidized, and students are not limited to just one type or the other. However, students may not exceed the program’s borrowing limits, either annually or in aggregate.

  • Subsidized Stafford Loans are need-based loans. The U.S. government “subsidizes” these loans by paying the interest while the student is in school, in addition to during the six-month grace period after graduation, and also during any periods of deferment (if applicable).

  • Unsubsidized Stafford Loans are not need-based. Eligibility is determined by the student’s year in school, other financial aid received, and the student’s cost of school attendance. Unlike with the subsidized Stafford Loans, students are responsible for all interest that accumulates while they are in school, during the grace period, and during any periods of deferment.

Direct PLUS Loans

Direct PLUS loans, available to both parents and graduate students, are offered to eligible borrowers through schools that participate in the Federal Direct Student Loan Program.  Issued directly by the U.S. Department of Education, students or parents may annually borrow an amount equivalent to the cost of attendance (as determined by the school) minus any other financial aid received.  Direct PLUS loans may be used to cover education-related costs that are excluded by other financial aid packages. The two types of Direct PLUS loans are Parent PLUS and Grad PLUS loans.

Direct Consolidation Loans

Most students receive many different loans, in different semesters and years and from different federal lending programs.  Direct Consolidation Loans enable students to simplify the repayment process by consolidating student loan debt into a single monthly payment owed to just one creditor.  Consolidated loans have a fixed interest rate with flexible payment options, although lower monthly payments almost always extend the overall length of the repayment term.  Longer repayment terms result in higher costs.  In addition, students who consolidate their loans immediately after graduation lose the benefit of the six-month grace period that is normally granted before repayment is required to begin.

HRSA-Sponsored Loans

The Health Resources and Services Administration, an agency of the U.S. Department of Health and Human Services, sponsors a Bureau of Health Workforce loan program for students majoring in the health professions.  This program provides four different types of loans, all of which are need-based and competitive, meaning that students must apply for acceptance into the loan program.

  • Loans for Disadvantaged Students: Qualifying students must be enrolled in a participating school of allopathic, osteopathic, podiatric, or veterinary medicine; dentistry; optometry; or pharmacy.

  • Health Professions Student Loans: Qualifying students must be pursuing a degree from a participating school in dentistry, optometry, pharmacy, podiatry, or veterinary medicine.

  • Primary Care Loans: Qualifying students must be pursuing a degree from a participating school in allopathic or osteopathic medicine.

  • Nursing Student Loans: Qualifying students must be pursuing a degree in nursing from a participating school.

Private Student Loans

Non-government organizations such banks and credit unions issue private loans for education purposes.  Private student loans may also be issued by state-based or state-affiliated organizations. While private student loans are meant to be used for education expenses, they largely resemble personal loans, as private lenders do not stipulate how the funds must be used.  Terms and conditions are set by the lender, which assumes the full risk of non-repayment or default. Private student loans are typically more expensive, with higher interest rates and less flexible repayment options, than federal student loans.