Different Types of Loans

How to choose the best way to pay for your college education.

School scholarships and grants, which don’t have to be repaid, are a great way to pay for college. But unfortunately, they often don’t provide all the college money you need to cover your tuition, room and board and other college costs.

If you’re considering college loans to supplement the scholarships and grants, you’ll want to learn about the different types of loans so you know which to accept. All college loans have different terms, interest rates and repayment rates, and it’s important to understand what you’re signing up for when you choose a loan.

Remember, you’ll be paying back this loan for years after you complete your college degree, so making good financial aid decisions now will help you as you start your career. Here’s how to understand the different types of college loans you may be offered.

Federal loans vs. state loans vs. private loans:

Federal aid is awarded by the federal government, state loans are granted by states, and private loans can be granted by banks, other financial institutions, private foundations and organizations, and even colleges and universities. Private loans usually have higher interest rates and repayment terms. Take the time to compare student loans to get the most affordable rate. The key difference between these three loan types is that you have to start making payments on your state loans and private loans when you receive them, but you don’t need to repay federal loans until you graduate or attend your college program on a less than half-time basis.

Subsidized vs. unsubsidized loans:

With federal subsidized loans, the government pays any interest that accrues while you’re in school at least half-time. Unsubsidized? Then you pay that interest.

Need-based loans vs. non-need-based loans:

To receive a need-based loan, you need to prove that you don’t have the money for college and will rely on college aid to pay for school. Need-based loans are subsidized, so they’ll be less expensive to repay.

Student vs. parent loans:

Most college loans are created for students. However, the federal government and some schools offer parent loans, which allows parents to borrow money for their kids’ college education. You can learn more about the federal PLUS loan on the Federal Student Aid website, and the financial aid office of each college or university you’re applying to can tell you more about any parent loans they offer.

Federal Loan Options

Now that you understand the key differences between college loans, you’re in a better position to choose what type of money for college you need.

State and private loans vary by state and organization, but here are the basics on the three federal loans:

• Federal Perkins Loans: Fixed-rate, low-interest loan given to students with the greatest financial need. While funded by the government, your college or university is the lender, so you make payments to your school.
• Federal Subsidized Stafford Loans: Fixed interest rates; awarded based on need. The amount you can borrow rises each year of your college degree.
• Federal Unsubsidized Stafford Loans: Fixed interest rates; not based on financial need. While you’re responsible for all interest rates, you can defer your payment if you need to.

Types of Loans Tips & Tactics

• You apply for federal aid using the Free Application for Federal Student Aid (FAFSA) form, which also qualifies you for federal grants, school scholarships and other college money you don’t need to pay back.
• Don’t forget about Federal Work-Study programs to help pay for tuition and other college costs. You also apply to this through your FAFSA, although some schools may ask for additional documents to prove your financial need.
• Interested in a state loan? You’ll find out more about state loan options at the Department of Education website.

Related Guide to Student Loans and Borrowing Articles

Borrowing Tips
How to Keep Debt Low
Different Types of Loans
Managing Your Loan Information
Subsidized Loans vs. Unsubsidized Loans
Options for Paying for College: Federal Financial Aid vs. Private Loans

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