The soaring cost of education makes people seek a student loan, and with many lenders available, which is best?
However, determining which student loan is best depends on various factors, including your financial situation, educational goals, and eligibility criteria.
Over the past decade, tuition and fees at public universities have increased significantly.
According to the Department of Education, students attending public universities in the 2020–21 academic year paid an average of $9,400 per year, while those attending private colleges faced a cost of $37,600.
Given these escalating costs, it becomes increasingly crucial to learn the various types of loans available and find the most suitable for individual circumstances.
Read Also: Which Student Loan Is The Best Overall?
Types of Students Loans
Student loans fall under two groups, Federal and Private. To know which of these loans you should get, let’s take a closer look at them individually:
Federal Student Loans
Federal student loans are loans from the U.S. Department of Education to cover the cost of higher education.
These loans are given to undergraduate and graduate students and offer various benefits compared to private loans.
Federal loans have lower interest rates than loans from private lenders. Also, they offer flexible repayment options.
Types of Federal Loans
With the cancellation of the Perkins loan, Federal loans now fall under three major categories; Direct Subsidized, Direct Unsubsidized and Direct Plus Loans.
1. Direct Subsidized Loans
Direct Subsidized Loans are federal loans designed for undergraduate students. You won’t be charged any interest for this loan while still in school.
Also, you don’t have to worry about interest accumulating during school or deferment periods. Plus, you won’t be required to make any payments until six months after graduation.
It’s important to note that these loans have a fixed interest rate, and the government covers the interest payments while you’re enrolled in school.
However, you must demonstrate adequate financial need to qualify for Direct Subsidized Loans.
2. Direct Unsubsidized Loans
Direct Unsubsidized Loans are federal loans for undergraduate and graduate students as long as they haven’t reached their lifetime borrowing limit.
Unlike Direct Subsidized Loans, with these loans, you are charged interest while you’re still in school.
The interest on these loans is added to the principal amount, or the total loan amount you received, at all times, even during deferment periods.
However, you can defer making payments until six months after school. To save money, you can make interest payments while attending school.
3. Direct PLUS
Direct PLUS Loans allow parents of undergraduate or non-dependent graduate students to borrow money to help with educational expenses.
These loans are known as grad PLUS loans for graduate or professional students, while parents of dependent undergraduates are referred to as parent PLUS loans.
However, the advantage is that you can borrow up to the total cost of attendance. But, the rates on these loans are higher than other federal student loans.
Pros of Federal Student Loans
There are many benefits to getting federal loans. They include the following:
1. Fixed Interest Rates
For federal student loans, the interest rate is fixed throughout the life of the loan. This provides stability and makes it easier to plan for repayment.
2. Income-Driven Repayment Plans
Federal loans offer various income-driven repayment plans that adjust your monthly payments based on your income and family size.
This can make repayment more manageable, especially when facing financial difficulties.
3. Loan Forgiveness Options
Some federal loan programs offer loan forgiveness options for borrowers who meet specific criteria.
For example, Public Service Loan Forgiveness (PSLF) forgives the remaining loan balance for borrowers working in qualifying public service jobs after making 120 qualifying payments.
4. Deferment and Forbearance Options
Federal loans provide options for deferment and forbearance, allowing borrowers to temporarily pause or reduce their loan payments in case of financial hardship, unemployment, or other qualifying circumstances.
Cons of Federal Student Loans
Although federal loans are preferred to private lenders, they come with some drawbacks;
1. Borrowing Limits
Federal loans have borrowing limits, which do not always cover the total cost of tuition and other educational expenses.
Sometimes, students may need to supplement their federal loans with private loans or other funding sources.
2. Interest Accrual
While subsidized federal loans don’t accrue interest while you’re in school or during specific deferment periods, unsubsidized federal loans do accrue interest.
This means the interest increases over time, increasing the total amount you’ll have to repay.
3. Limited Eligibility
Federal loans have specific eligibility requirements, and not all students may qualify for them.
For example, eligibility for need-based loans like Direct Subsidized Loans is determined based on what you fill in the Free Application for Federal Student Aid (FAFSA).
4. Repayment Terms
The standard repayment term for federal loans is typically ten years. While income-driven repayment plans provide flexibility, extending the repayment term may result in paying more interest over time.
Read Also: College Loans Beginner’s Guide: Understanding Your Options
Private Loans
Private loans are loans provided by banks, credit unions, or other private institutions.
When taking out a private loan, it’s essential to compare different options from various lenders to find the best deal.Â
Although, private lenders are becoming more competitive in terms of interest rates.
Students usually need a parent or another family member to co-sign the loan. Private loans have different terms and conditions, so it’s crucial to ask about any fees, options for delaying payments, or opportunities to lower the interest rate associated with the loan.
Pros of Private Loans
Private lenders are becoming more competitive with their offerings. Here are some benefits of getting these loans:
1. Flexibility
Private loans offer more flexible borrowing limits and repayment options than federal loans.
2. Higher Loan Amounts
Private loans often allow borrowers to access higher loan amounts, which can be beneficial for covering the total cost of education.
3. Faster Application Process
Private loan applications are typically processed faster than federal loans, providing quicker access to funds.
4. Cosigner Release
Some private lenders offer cosigner release options, allowing borrowers to remove their cosigner from the loan after meeting specific requirements.
Cons of Private Loans
There are several drawbacks to getting private loans, and they include the following:
1. Higher Interest Rates
Private loans generally have higher interest rates than federal loans, which can result in higher long-term costs.
2. Lack of Federal Protection
Private loans do not have the same borrower protections as federal loans, such as income-driven repayment plans, loan forgiveness options, or loan deferment and forbearance options.
3. Credit and Income Requirements
Private lenders often require a good credit score and income, making it difficult for some people to qualify without a cosigner.
4. Cosigner Requirement
Many private loans require a cosigner, putting the cosigner at financial risk and limiting the borrower’s independence.
What Student Loan Should I Get
The best student loan to choose is the one with a low-interest rate, flexible repayment choices, and borrower safeguards.
The direct federal loan meets these criteria, making it an ideal starting point for looking for student loans.
Consequently, choosing the right student loan can significantly impact how you repay your college debt. You want to avoid being in your 50s, still paying off student loans.Â
However, you can consider certain situations and factors before deciding on the type of student loan that best fits your needs.
If you plan to work with government agencies or in the public sector after school, consider Subsidized Direct Loans.
Because aside from their low-interest rates, the remaining balance may be forgiven under certain conditions.
But, if you don’t qualify for Subsidized Direct Loans or need to borrow more than the limit on subsidized loans, go for Unsubsidized Direct Loans.
They are also helpful for students who need to borrow more than the subsidized loan limit.
After exhausting the options for Direct Loans, parents may consider PLUS Loans, especially for private university students.
On the other hand, Private Loans are generally suitable for individuals with good credit and an established credit history who are not eligible for federal aid, scholarships, or grants or have reached their borrowing limits with the government.
Tips on Getting the Best Student Loans
If you wish to get student loans, staying cautious is best. Here are some tips to ensure you don’t fall into years of unwarranted student debt:
Interest Rates
The interest rate can affect the overall cost of borrowing and can significantly impact your repayment journey.
Different lenders offer varying interest rates for student loans. Always compare rates from multiple lenders to find the most favorable option.
Even a slight interest rate difference can lead to you paying thousands of dollars over the life of the loan.
Also, understand the difference between fixed and variable rates. A fixed-rate remains the same throughout the loan term, providing stability and predictability.
On the other hand, variable rates fluctuate based on market conditions, leading to changes in your monthly payments.
The interest rate can affect the overall cost of borrowing and can significantly impact your repayment journey.
Consider Your Repayment Capacity
Before taking on any loan, carefully assess your repayment capacity. Consider your future income potential in your chosen field of study and estimate your monthly loan payments.
Aim to borrow only what you need to avoid excessive debt that may be challenging to repay after graduation.
Seek Professional Advice
Getting professional advice from a financial aid advisor or a student loan counselor is helpful. They can assist you with personalized guidance based on your specific circumstances.
They can also help to clarify the terms and conditions of different loan options and assist you in making an informed decision.
Try Scholarships, Grants, and Work-Study Programs
Explore other educational funding sources, such as scholarships, grants, and work-study programs. These options do not require repayment and can significantly reduce your need for loans.
Read Also: Keiser University Loan Forgiveness Program: How to Qualify and Apply
Final Thoughts
With how student debts are common, it’s best to take crucial steps to make informed decisions and minimize the financial burden of student loan debt.
Always explore different loan options, keep track of interest rate changes, and conduct thorough research before signing on to any student loans.
However, it’s best to avoid borrowing for college to avoid the hardship of repayment.
While private student loans are generally considered a last resort, if this option is pursued, it is advisable to improve one’s credit score before applying and explore multiple banks and credit unions to find the best interest rates.
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