College Loan Breakdown: Federal, State and Private

Learn about the differences between loan types and why some are better than others.

By Ashley Henshaw | April 22, 2014

According to CNN Money, the average student loan debt for the class of 2012 was $29,400. While most students are borrowing thousands of dollars in order to afford college, it’s important to understand exactly what you’re getting yourself into before you commit to taking out a loan. There are three main types of student loans: federal, state and private. Read more about each type of loan so that you can make the smartest decisions when it comes time to borrow.

Federal Student Loans

There are two federal student loan programs. The larger of the two is The William D. Ford Federal Direct Loan Program. These loans are provided by the U.S. Department of Education. There are four types of Direct Loans:

Do your research when choosing your student loans.

  • Direct Subsidized Loans: For undergraduate students with financial need. The U.S. Department of Education pays the interest while you’re in school, for the first six months after you leave school, and during any deferment periods.
  • Direct Unsubsidized Loans: For undergraduate, graduate and professional students regardless of financial need. Interest is not covered by the U.S. Department of Education.
  • Direct PLUS Loans: For graduate students, professional students and parents of dependent undergraduate students to pay for expenses not covered by other financial aid.
  • Direct Consolidation Loans: For any student who wants to combine all eligible federal student loans into a single loan.

The second federal student loan program is the Federal Perkins Loan Program. These loans, which are provided by the school, are available for undergraduate and graduate students with exceptional financial need.

Here is an overview of how much you can borrow through federal student loan programs:

  • Up to $5,500 (for undergraduate students) or $8,000 (for graduate students) in Perkins Loans, depending on your financial need
  • Up to $12,500 in Direct Subsidized or Direct Unsubsidized Loans (for undergraduate students) or up to $20,500 in Direct Unsubsidized Loans (for graduate students)
  • The remainder of college costs not covered by other financial aid in Direct PLUS Loans (for graduate students, professional students and parents of dependent undergraduate students)

When you fill out the Free Application for Federal Student Aid (FAFSA), you’ll automatically apply for all types of federal student loans. You’ll find out which federal loans you’re eligible for (and how much you can borrow) when you receive your award letter.

State Student Loans

Students may qualify for financial aid through their state’s higher education department. The availability of loans for college students depends on each state’s education resources and their lending regulations. Your eligibility and the amount that you can borrow will also depend on these variables.

To find out what student loan options are available through your state, look up your state grant agency on the U.S. Department of Education website. Find out whether you’ll have to apply for these loans separately or whether your FAFSA application will automatically determine your eligibility.

Private Student Loans

Private student loans are non-federal loans provided by a bank, a credit union, a state agency, a school or another lender. You’ll have to apply for these loans through the individual lender. The loan terms, borrowing limits and interest rates will vary depending on the lender, your credit score and whether you can get a cosigner.

Making a Decision

Now that you’re familiar with the three main types of student loans, it’s time to decide which type and how much to borrow. There are several guidelines you should follow when looking for student aid:

  • Place a priority on finding scholarship and grant funds. Unlike loans, this type of student aid doesn’t have to be repaid and is the best way to pay for college expenses.
  • Determine the minimum amount you need to borrow in order to cover your expenses. You should aim to borrow only what you absolutely need in order to minimize your debt.
  • Once you’ve determined how much you need, try to get as much of that covered by federal student loans as you can. There are several benefits to choosing federal over private loans, including lower, fixed interest rates, favorable repayment options and the fact that some loans are subsidized and/or tax-deductible.
  • If you need more financial aid beyond your federal student loans, seek out state aid. Many state student loans have similar interest rates and repayment options as federal student loans.
  • Use private loans as a last resort. Due to higher interest rates, fewer repayment options and, in some cases, payments required while you’re still in school, private loans are considered the least favorable loan option for college students.

Do your research when choosing your student loans. Make sure you understand the interest rates and repayment terms for any loan that you take out, whether it’s federal, state or private.

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