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What are the Different Types of Loans for College?

A loan is a financial instrument that essentially allows a person or entity to acquire funds that they have not yet earned. When we borrow money, we are able to purchase items that are otherwise out of reach in our current financial state. For instance, individuals often borrow money to purchase real estate, educations, automobiles, or even vacations. Businesses borrow money to acquire expensive inventory, equipment, or to provide start-up funds to cover costs prior to full profitability.

The person or entity, usually a bank, who loans the money is essentially making an investment in the person or business in question. For their investment, they expect a profitable return. Their profit is exacted in the form of interest, which is a percentage of the loan that the borrower must pay on top of the principal loan amount.

Since paying cash for tuition is out of reach for most students, they frequently take student loans to finance the cost of education. This type of borrowing has its own set of rules and guidelines, yet these loans enable students to forge careers that might otherwise be out of reach.

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The Free Application for Student Aid (FAFSA) is a form that students use to determine their eligibility for student loans and many other forms of student aid. For instance, your FAFSA form might be used as all or part of an application for a scholarship, grant, or work study program.

When you are accepted to a graduate or undergraduate program and need aid, you should go online to and fill out the application. You will need to state your income, provide your social security number, and select your intended school. Make sure that you submit your application in a timely fashion, however. The website lists all upcoming deadlines. Note that deadlines vary by state.

Private Loan Application

You can also apply for private student loans. This form of assistance is based on your previous credit history. Thus, younger students may need a parental, or other, co-signer on the loan. Not only does your credit score determine eligibility for a loan but it also determines your interest rates.

Sallie Mae, a loan provider, will loan funds to cover undergraduate, graduate, medical school, dental school, law school, dental residencies, an MBA, and more degrees or educational experiences, including study time for the bar exam. You can apply for a Sallie Mae private loan through their website. Make sure, however, that you have exhausted your federal loan options prior to applying.

Loan Types

Federal Loans

Federal loans should be the first you apply for. They are provided by the United States Department of Education and are best suited to student needs. There are many ways to repay your loans, and you have the possibility of having your loans forgiven if you spend approximately ten years working for a government agency, or a non-profit organization.

Federal loan programs can even include work study options that allow you to offset your debts with a campus job. You can even receive a paycheck to help with expenses. Work study jobs also help you build a resume and some students have discovered a career path while working their campus job.

Private Loans

Private loans differ from federal loans in that they are more strictly tied to credit scores. The funds are sourced from private banks and thus have stricter rules. However, you might also have more options in terms of repayment plans, interest rates, and even the types of educational activity they cover. For instance, Sallie Mae has a program that offers law students financing while they study for the bar exam.

Since private loans are not administered by the government there are more options for funding, interest structures, and repayment. While federal loans can be forgiven in certain circumstances, a private loan cannot be discharged as easily, if at all. Generally speaking, you should only apply for a private loan if you have exhausted your other options, including scholarships, grants, and federal loans.

Federal Student Loans

Direct Subsidized Loans

Subsidized loans are made to students who demonstrate a certain level of financial need. Direct subsidized loans are a type of federal student aid that defers payments and interest on the funds until you are out of school. That is, the government will pay the interest on your loan while you are actively enrolled as a part-time or full-time student, and for the first six months after graduation. You can also defer payments on a subsidized loan if you are experiencing a period of financial difficulty. For example, you may need time to land your perfect first job, so you can defer while in this bridge period.

Direct Unsubsidized Loans

Direct unsubsidized loans are federal student funds provided regardless of financial need. Your school will determine how much you can borrow, much like a subsidized loan. However, your loan will start to accrue interest immediately.

These loans are good if you who come from an affluent background, yet still need to take out credit to cover your tuition or other educational costs. They might also be a good choice if you are a working professional with adequate means, but yet you don't wish to pay your complete tuition in cash. If your employer offers tuition reimbursement based on end of term grades, or some other repayment plan, an unsubsidized loan might be a way to cover costs upfront until your employer cuts the check.

Direct PLUS Loans

There are two general types of Direct Plus Loans: those for students who are pursuing graduate or professional degrees and those for the parents of undergraduate students who need more funds to finish a degree. Graduate students take Grad PLUS Loans at a fixed interest rate in order to subsidize their graduate or professional degree programs.

Parent PLUS Loans are often frowned upon, but the federal government offers them as a way for parents to complete the funding for their child's education. These loans do not have any sort of grace period or special repayment plans. In fact, you must start paying the loan back as soon as the loan disburses into your child's student account.

Repayment Plans & Options

  • Standard Repayment Plan:
    The standard repayment plan for student loans creates a payment schedule that is designed to ensure that you pay off your loans in ten years. All federal student loans are eligible for this repayment plan: Direct subsidized and unsubsidized loans, Federal Stafford Loans, PLUS loans, and all consolidation loans.
  • Graduated Repayment Plan:
    This option allows you to start repaying your loans with lower payments that increase every two years or so, until you complete the repayment. It should take you approximately ten years to repay your student loans using this method. If you are repaying consolidation loans, your repayment period may extend up to thirty years.
  • Extended Repayment Plan:
    Direct and Federal Family Education Loan (FFEL) borrowers who owe more than $30,000 may take this repayment option. This method provides for lower payments than under the Standard Repayment Plan option, but you will pay more over time. You may choose between fixed or graduated payments that are structured to accommodate a 25-year repayment period.
  • PAYE and REPAYE Repayment Plans:
    This individualized repayment plan is geared to your income and family debt load to ensure that you are able to meet your payments. The REPAYE system is available for any borrower, allows up to 25 years for repayment, and does not require a high debt-to-income ratio. The PAYE plan requires a high debt-to-income ratio and only allows for a 20-year repayment plan. Both PAYE and REPAYE repayment plans forgive any outstanding debt after their prescribed periods expire.
  • Income-Based Repayment Plan:
    This sort of repayment plan is based on your income. Your monthly payments will be either 10 or 15 percent of your discretionary income but will never exceed any payment you might have made under the Standard Repayment Plan. To qualify for this plan, you must have a high debt-to-income ratio and any remaining debt will be forgiven after 20 or 25 years, depending on the loan origination date. Note that the IRS may consider your forgiven debt as income.

Private Student Loans

Student loans exist to help students achieve a college degree despite their inability to pay in cash. There are federal loans, which are disbursed through the government, and private student loans, which help students once they have exhausted their Federal Student Aid options. These loans function a bit differently than other sorts of lending. Most loans don't begin to accrue interest, or demand payments, for several years after the origination date, assuming the borrower remains enrolled in school on at least a part-time schedule.

Even if your loan does accrue interest upon origination, you likely won't need to start making payments until you have graduated. From that point you can discuss repayment plans that are geared to suit a wide range of financial situations. For instance, lower income people can find relief through deferments and graduated payments that are structured to reflect their specific income.

One major decision that most student loan consumers must face is whether to use a fixed, or variable interest rate plan. A fixed rate plan locks in your interest rate to the current day's rates. Variable rates might rise or fall depending on economic conditions. While your fixed rate might end up being higher in the long run, it can also be lower, in case interest rates rise.

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Additional Resources:

  • Federal Student Aid:
    This website is the comprehensive resource for those seeking federal student aid. You will find full descriptions of repayment plans, loan types, and the FAFSA form. You can even find a vast repository of educational resources related to student loans.
  • Sallie Mae:
    Sallie Mae is a private lender who can help with a wide range of student needs. They write loans for Dental Residencies, Bar study periods, K-12 financing, and Career Training, among many others. You can also set up savings accounts or personal loans to help with credit card debt, or other matters.
  • Career One-Stop Scholarship Finder:
    : If you want to offset some of the student debt you might incur, seek out scholarships as a way to reduce your long-term debt. While many scholarships only pay small amounts, others can finance most, or even all, of a college degree. The site also includes grants that can cover travel, academic research, and more.
  • U.S. Department of Education – Student Loan Forgiveness:
    Your student loan interest payments may be tax deductible. This site provides links to the 1098-E form, the Student Loan Interest Statement.
  • Navient:
    This lender provides private student loans. Navient's financial services can help you when federal funds have gone dry for your education. Private lenders such as Navient still offer creative ways to repay loans so that you aren't overwhelmed when you graduate.
  • National Student Loan Data System:
    It's important to take a thorough accounting of your finances and this is where you can view your loans, grants, and aid payments and overpayments. If you are seeking assistance from a loan servicer, you can authorize their access through the complimentary NSLDS Professional Access site, linked on the home page.
  • Navient Blog:
    To stay up to date on student loan trends, news, and tips, you can subscribe to the Navient blog hosted by Medium. There are articles related to student loan scams, advice for new graduates, college finance, and even job interviews. If you are like most students, you will be dealing with student loan debt for approximately 10 years. This blog will help you stay informed and current.