The complexities around student loans continue to grow and evolve. Whether you're a prospective student, a parent, or an adult considering further education, understanding the different types of student loans is important in order to take action in a beneficial way.
What is a Student Loan?
A student loan is a sum of money borrowed to pay for post-secondary education costs, such as tuition, room and board, and textbooks. This money must be paid back over time, with an added percentage known as interest.
Student loans fall into two main categories: federal loans and private loans.
Federal loans are funded by the U.S. government and usually offer lower interest rates and more flexible repayment options than private loans. There are three main types of federal student loans:
- Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. The government pays the interest while you're in school at least half-time, for the first six months after you leave school and during deferment periods.
- Direct Unsubsidized Loans are available to undergraduate, graduate, and professional students and aren't based on financial need. Interest accrues from the time the loan is disbursed until it's fully repaid.
- Direct PLUS Loans are available to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid.
Private loans are offered by non-government institutions such as banks, credit unions, and some schools. They often have higher interest rates and less flexible repayment options than federal loans. Private loans are typically considered only after exhausting all federal loan options.
Repayment and Forgiveness Options
Repayment options vary depending on loan type. Federal loans offer several repayment plans:
- Standard Repayment Plans require a fixed amount paid each month until the loan is paid in full.
- Graduated Repayment Plans allow for payments to start lower and increase usually every two years.
- Income-Driven Repayment Plans require monthly payment plans that are based on income and family size.
In some cases, you may qualify for loan forgiveness or discharge, where you're no longer required to repay some, or all, of your loan. This can occur if you work in a public service job, for example, or under certain other circumstances, such as the COVID-19 emergency relief provided by the CARES Act.
Private loan repayment options vary by lender, so it's important to understand the terms before signing any loan agreement.
At Central Bank, we understand that student loans are an important step in planning for your or your child's education. By knowing the basics, you can make informed decisions about how to finance this significant investment.