Types of Student Loans: Which is Best for You?

Student loans. College can be overwhelming. Trying to find a way to pay for it can be even worse. Most college students or aspiring college students would love to pay for their higher education through scholarships and grants. But the truth is, that most people have to find another way to pay for college. Enter: The different types of student loans.

First, let me state that IF you can find a way to pay for school without borrowing money, DO IT!

1. Choose a school that you can afford.
2. Apply for grants.
3. Work A LOT
4. Start a business or side hustle

But if you find yourself in the same group as the nearly 70% of people in college who don’t have enough to pay for it, read on. Let’s break down the different types of student loans so that you can have a better understanding of what you are getting yourself into.

There are three main types of student loans:

1. Federal Student Loans
2. Private Student Loans
3. Refinance Student Loans

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Federal Student Loans

The first of the different types of student loans are Federal Student Loans.

Federal student loans are exactly what they sound like. This is student debt issued by the federal government. In addition, they are also backed by the federal government and the taxing authority that it has. So in other words, they are backed by the taxpayer (me and you). That means that if you default (a fancy way of saying that you don’t pay) on your student loans, the government will be responsible for them.

These are, by far, the most common types of student loans.

This is both good and bad for you, the borrower. The good is that because these loans are backed by the government they typically come with a lower interest rate. Also, a feature that federal student loans have is that if you die they are forgiven, regardless of the amount. The same is true if you were to become permanently disabled. Whereas if you die with private student loans, they must be paid off. Only once they are paid off can you give money to your heirs.

The process for getting them forgiven upon your death or disability is pretty cumbersome, but it can be done if you can just jump through the bureaucratic hoops. The bad thing is that you cannot get rid of these loans unless you (1) die, (2) become permanently disabled, or (3) pay them off. There are student loan forgiveness programs out there but they rarely work (and are a topic of another article). The point is that the loans will have to be paid off SOMEHOW. Either through you, your employer, or a government entity. This means that federal student debt cannot be discharged in bankruptcy. This is a really big deal and very important to consider when taking out student debt. If you take out too much in student loans and make too little money and can’t pay them off, they will be stuck with you even if you were to file for bankruptcy.

There are four types of federal student debt and now that you know a little bit about how federal student loans work, let’s go over them.

1. Direct Subsidized Loans: These are the best type of federal student loans because of the word “Subsidized”. As soon as you take out student loans they will begin to accrue interest the same way as if you took out a loan on a car, credit card, house, etc. The difference with Direct Subsidized Loans is that the interest that is accruing every day is being paid by the government until after you graduate or leave school. So if you take out a loan for $5,000 for the fall semester of 2017 and start paying it back when you graduate or leave school in the spring of 2020, you will still owe $5,000. In addition, the government will pay the interest for six months after graduating and any time that you defer the loan after graduation. Not everyone will qualify for these based on a number of factors (mainly you or your parent’s income) but if you have to take out student debt at all, take these out first.

2. Direct Unsubsidized Loans: Direct Unsubsidized Loans work the same as Direct Subsidized Loans except that they will accrue interest while you are in school, during the six month period after graduation, and any time they are on any deferment. That is to say that they are not subsidized by the government. Typically, if you apply for these you will get them as long as you haven’t had any big felonies, been dishonorably discharged from the military, or a few other disqualifications.

3. Direct PLUS Loans: Direct PLUS Loans are for students in graduate or professional school. This would be students pursuing a master’s degree, PhD, MD, DVM, JD, etc. These are not available for undergraduate students (students pursuing an associate’s or bachelor’s degree). They are not subsidized (they will accrue interest as soon as you take them out) and they require a credit check. They also typically come with a little higher interest rates than Direct Subsidized or Unsubsidized loans. If you have poor credit, you may not be approved without a qualified cosigner. Direct PLUS Loans come in two flavors:

1. Parent PLUS Loans: Parent PLUS Loans are loans that the parents, adoptive parents, or sometimes step parents take out for their children to go to college. At the end of the day, the parent is the one that is responsible for repaying the loan (NOT THE STUDENT) and a credit check will be required.
2. Grad PLUS Loans: Grad PLUS Loans are the same as the Parent PLUS Loans except that they are taken out in the student’s name. The student’s credit report is pulled (not the parent’s) and the student is the one solely responsible for the loan.

4. Direct Consolidation Loan: A Direct Consolidation Loan is just a loan that takes all of your other loans and puts them into one big loan. A good way to look at this is through our friend Jackie: Jackie took out $4,000 in fall of 2019, $5,000 in spring of 2020, $4,000 in fall of 2020, and $7,000 in spring of 2021. After she graduated and started paying her student loans back she got tired of making four different payments (one for each semester) and decided to consolidate them into one payment. That is what a Direct Consolidation Loan is for. 

IMPORTANT: There is NO application fee for Direct Consolidation Loans. So if you are being called and emailed about consolidating your student loans and there is an application fee to be paid, that company is a private student loan company and does not have an affiliation with the Department of Education. That doesn’t make them bad at all, just know that if you decide to consolidate your loans with a company that charges you an application fee, it is not part of the federal government, it is a private company. (More about private student loans next).

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Private Student Loans

The second of the types of student loans are Private Student Loans.

Private student loans are the opposite of federal student loans, in that, they are financed in the private sector. Private student loans could be through your bank or credit union, a credit card company, a private university, or a lending group. These loans are typically used to cover the cost of college when either the amount of federal student loans that a student can take out is maxed out, to attend a private school, or for some type of graduate or professional program. Private student loans typically come with a higher interest rate than federal student loans. Because of this, you should take out federal student loans before you take out private student loans. 

There are a couple big differences between private and federal student loans. First, private student loans are not backed by the government. This means that they are probably not going to be eligible for a government loan forgiveness program or a government loan deferral program (think of the student loan deferral program within the CARES Act passed in March 2020). Private student loan companies do not have to abide by the deferral, grace period, and interest rate terms that federal student loans do. The second big difference between private and federal student loans is that private student loans typically charge a higher interest rate. One of the similarities between private and federal student loans is that as with federal student loans, there are usually no payments due until you leave school (either by graduating or by dropping out).

Nearly all private student loans will require a credit check. Because most people applying for private student loans are young and likely do not have an extensive (or maybe even have poor) credit history, the borrower will likely require a cosigner. Remember: If someone cosigns on a student loan with you (or any loan for that matter) they are EQUALLY responsible for it. That means that if you get your granny to cosign a loan with you and you don’t make the payments, it will affect your credit and her credit the same. Please remember this when asking someone to be a cosigner. With all that being said, there are some cases where a private student loan can help a student get through school. There are 13 main private student loans out there. Let’s explore them.

1. Undergraduate Private Student Loans: Undergraduate Private Student Loans are the most bland form of student loans. They are primarily used for people going to either out of state or private schools who have exhausted all of the federal student loans that they are eligible for. And as the name states, they are to be used for working towards an associate or bachelor degree.

2. Career Training Private Student Loans: Career Training Private Student Loans are used for students pursuing a certificate in a trade of some kind. These are for students pursuing certificates in culinary arts, welding, auto mechanics, plumbing, etc. These loans are primarily used in community college and technical schools. Typically, these will be among the highest interest rates of all student loans and usually require some type of payment while you are still in school. The payment is usually around $25-50 or you can pay the interest as it accrues monthly.

3. Parent Private Student Loans: Parent Private Student Loans are similar to Parent PLUS loans (discussed above). However the largest difference that these have from Parent PLUS loans is that any adult over 18 can apply for the loan for a student. With Parent PLUS loans, only the parent can apply. With Parent Private Student Loans, any creditworthy individual can apply. Obviously, this means that the adult will have to have adequate credit. Another big difference between Parent Private loans and Parent PLUS loans is that payments must be made while the student is in school. The payments can be either the full payment or just the accrued interest. Also, it is important to remember that these loans are in the name of the ADULT, not the student. The student has no legal responsibility to pay back these loans.

4. K-12 Family Education Private Student Loans: K-12 Family Education Private Student Loans are used to pay for the private school of children in K-12th grade. They typically come with the highest interest rate of all private student loans and the borrowers must start making payments 30 days after the funds have been distributed to the school. It should also be stated that the borrowers of the loan will be adults (usually the parent(s) of the child). This means that the child is not responsible for the repayment of the loan. I wish I didn’t have to say that, but there are some parents who think that they can make their elementary school children pay for their own private school. Seriously…

5. MBA Private Student Loans: MBA Private Student Loans are to pay for a student to obtain a Master’s degree in Business Administration (MBA). MBA private student loans typically have a lower interest rate than most other private student loans. Typically you can choose between making no payments while in school or a small monthly payment of usually $25-50 while in school. Like the other types of private student loans, the borrower (typically the student) will have to have adequate credit to be approved for the loan.

6. Medical School Private Student Loans: Medical School Private Student Loans are used for students who have finished a bachelor’s and/or master’s and have been accepted to medical school. If you are not careful, these loans can become A LOT because of the high cost of medical school as well as the fact that medical school is four years long. The interest rates on medical school private student loans can vary drastically, but typically they are on the lower side of the private student loan spectrum. Usually there are no payments on these loans while you are in school but sometimes you may have to make small payments of about $25/month.

7. Medical Residency Private Student Loans: Medical Residency Private Student Loans may seem a little odd because when someone has graduated medical school and they are a resident, they are making an income. However, often the income that a resident makes is not a lot and may not be enough to pay for board examination fees or living expenses. This is where a medical residency private student loan comes in. Usually the interest rates are higher than those of medical school private loans, but the amount that can be borrowed is lower (usually less than $30,000). Usually there are no payments while you are a resident (that would be counterintuitive) and payments will start a few months after the residency is finished.

8. Dental School Private Student Loans: Dental School Private Student Loans work the exact same way as medical school private student loans work, except for the interest rates may be slightly different (although not substantially). With dental school private student loans, the borrower may be able to defer payment until after graduation, be required to make small ($25-50) payments while in dental school, or be required to pay the interest accrued while in dental school.

9. Dental Residency Private Student Loans: Dental Residency Private Student Loans work the exact same way as medical residency private student loans work. The interest rates may be somewhat different (but again, not substantially). Typically, there are no payments until after the residency has finished. These are usually capped at $30,000 just like the medical residency private student loans are as well.

10. Health Professionals Private Student Loans: Health Professional Private Student Loans are for students pursuing a graduate degree in the health professions such as physical therapy, occupational therapy, nurse practitioner, nurse anesthetist, PharmD, etc. These are not meant for students pursuing MD’s, DO’s, RN’s, or BSN’s. The interest rates are similar to that of medical or dental school private student loans. Also, the payments can either be deferred until after graduation, the accrued interest can be paid while in school, or small monthly payments of typically $25-50 can be made while in school.

11. Law School Private Student Loans: Law School Private Student Loans are meant to (you guessed it) pay for law school. Law school private student loans are for students who have been admitted to law school. The interest rates are similar to that of medical, dental, or health professional school private student loans. Also, the payments can either be deferred until after graduation, the accrued interest can be paid while in school, or small monthly payments of typically $25-50 can be made while in school.

12. Bar Study Private Student Loans: Bar Study Private Student Loans are meant to pay for the fees and expenses associated with studying for the bar exam after finishing law school. They work similar to those of medical or dental residency private student loans. A couple of key differences are that bar study private student loans are smaller because they are intended to be used to pass the bar exam, not finish law school. One of the other key differences is that bar study private student loans typically have a higher interest rate than most other private student loans. Not drastically higher, but higher nonetheless. Typically payments are not due until after you have taken (and hopefully) passed the bar exam.

13. Graduate School Private Student Loans: Graduate School Private Student Loans are meant for students who are pursuing a master’s or PhD in a given field not mentioned above. This could include an MS in Finance, MS in Agriculture, PhD in Education, etc. They typically have among the lowest interest rates of private student loans. Also, the payments can either be deferred until after graduation, the accrued interest can be paid while in school, or small monthly payments of typically $25-50 can be made while in school.

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Refinance Student Loans

The next of the different types of student loans are Refinance Student Loans.

There are two main types of refinance student loans: federal and private. There are some similarities and differences between the two that are important to understand before pursuing refinancing or consolidation of already existing student loans. The largest similarity with federal and private student loan refinancing is that the borrower must have already either graduated or left school. You cannot refinance your student loans while still taking them out. Federal refinance student loans are often called consolidation loans. Private refinance student loans are often called refinance loans. Here are some of the big differences between federal and private student loan refinancing.

1. Federal Refinance Student Loans (Consolidation Loans): Federal Refinance Student Loans are often referred to as consolidation loans. So if you have several different federal loans and are tired of paying each one individually, you can consolidate them into one loan and thus, one payment. A few key things to remember: You cannot consolidate any private loans into a federal refinance student loan. If you have a private loan, it will be excluded from the consolidation. Consolidating the loans will usually extend the term of the loan. This means that your monthly payment will go down (which can be good) but the amount of money that you will pay over time will go up (which is bad). Consolidating federal student loans into a federal refinance student loan will not necessarily lower your interest rate. The interest rates on federal student loans change all the time and you will have to check with the company that you choose to consolidate with. Typically, the interest rate is the weighted average of your federal student loans rounded up by ⅛%. (E.g. The weighted average of your loans is 5.02%, your new rate will be 5.125%.)

2. Private Refinance Student Loans (Refinance Loans): Private Refinance Student Loans are often referred to as just refinance loans. Unlike federal student consolidation loans, with private refinance student loans, you can refinance both federal and private student loans. When you refinance your student loans into a private refinance student loan, just like with a federal refinance student loan, you are taking all of your original loans and combining them into one payment. You can have (1) all federal student loans that you refinance into a private student loan, (2) all private student loans that you refinance into one refinance student loan, or (3) any combination of both federal and private student loans. To qualify for a private refinance student loan the borrower must have adequate credit (typically >690), a stable job, and if necessary; a cosigner. There are dozens of private refinance student loan companies and a simple Google search will lead you to them. You will usually pay a little higher interest rate on your private student loans than your federal student loans. You will probably pay a little higher interest rate on your private refinance student loans than your federal loans. Something to consider is that if you refinance your federal student loans into a private student loan, you can never refinance them back into a federal student loan. And thus lose the benefits that federal student loans have. 

Hopefully, by reading this you have learned more about student loans and that has helped to grow your Money Muscle and make you a little more fiscally fit.

To learn more about student debt (and not just the types of student loans), check out my other articles here.