Finding a Student Loan That Is Right For You

The majority of students graduating from high school intend to attend college. Going to college has many benefits, but it is often challenging for students to pay for college tuition. Educational grants and scholarships help reduce the costs, but they usually do not provide as much assistance as student loans. There are multiple types of student loans available, but they are typically categorized either as federal or private loans.

Federal loans come directly from the government. The eligibility for federal loans are the same for all students. Private loans typically have better interest rates, but you may not be able to borrow as much from a private lender. There are several different subcategories of federal loans, while private loans only have two subcategories. Whether you apply for a federal or private loan, you must first complete your Free Application for Federal Student Aid (FAFSA).

Direct Subsidized Loans

Direct subsidized loans are federal loans where you do not make any payments until after you graduate. With a direct subsidized loan, the government pays off the interest rate, so you are only responsible for the direct amount you borrowed. As a result, these are considered the best federal loan, but they are only available to students who demonstrate significant financial hardship.

The maximum amount you can borrow varies depending on what year of college you are attending. In your first year, the maximum is $5,500. Every year, it increases by another $1,000, to a maximum of $7,500. The most you receive during your college career is $31,000. If you are independent, meaning you do not have an expected family income, you are eligible for $9,500 on the first year, which increases by $1,000 to a maximum of $12,500. The exact amount you receive is primarily based on your income and the total cost of tuition.

Direct Unsubsidized Loans

Like subsidized loans, you do not have to make payments until you graduate from college. However, you are responsible for paying the interest rates. Unsubsidized loans have a fixed interest rate. As of writing, it is 2.75 percent for undergraduate students, or 4.3 percent for graduate students. You do not have to meet any minimum financial requirements to apply for unsubsidized loans. The maximum amount you are able to borrow is the same for both subsidized and unsubsidized loans. Unsubsidized loans use a different maximum. You cannot exceed $20,500 a year, unless you are a medical student, in which case you may borrow up to $40,500.

Direct Consolidation Loans

The majority of students need multiple loans to pay for tuition. It is easy to become overwhelmed with multiple loans, since each has a different payment plan and interest rates. Direct consolidation loans combine all of your loans into a single payment. Direct consolidation loans have a fixed interest rate, based on your income and how much you owe. There are no fees to consolidate your loans, but you may only consolidate your loans once. You may only consolidate federal student loans. You are still eligible if you took out both federal and private loans, but the private loans must be paid as normal.

Direct PLUS Loans

PLUS loans are provided by the U.S. Department of Education, but function similar to private loans. PLUS loans do not have the same maximum limitations as other federal loans. You can borrow up to the maximum amount of your tuition, minus whatever other financial aid you currently have. When you apply for a PLUS loan, you must undergo a credit check. If you have a low score, you may be denied or have a maximum placed on how much you may borrow. PLUS loans always have a fixed interest rate of 5.3 percent.

Private Student Loans

Private loans are divided into two categories: loans for students, and parents. With traditional student loans, eligibility is determined by your credit score. With parent loans, your family is allowed to apply for a loan on your behalf, using their credit score.

When you apply for a private loan, you enter into a negotiation with the lender. How much you receive, your interest rate and when your payment plan begins is entirely dependent on your lender. Lenders also set their own eligibility requirements, largely based on your financial history and credit score. For the majority of lenders, you must have at least a credit score of 640 to qualify. Some lenders may offer specialized loans for applicants with lower scores. In some cases, you may be asked to provide collateral when you take out a private student loan.

The biggest advantage private loans have over federal loans is you can borrow more money. The downside is private loans do not have fixed interest rates. Many private lenders also require you to make payments while you are attending school. Because of this, students are encouraged to apply for federal student loans before taking out a private loan.