Student Loans – Types of Loans and When to Take Them

Types of Student Loans

When it comes to understanding student loans, there are two things to consider. You need to know “is my loan federal or private” and “is my loan subsidized or unsubsidized?” Answering these questions is the most crucial part of understanding student loans.

Subsidized vs. Unsubsidized

Understanding the difference between subsidized and unsubsidized could make a huge difference. Thousands of dollars worth of difference. The key difference between the two loan types boils down to when the clock starts on the interest.

A Subsidized Loan

Subsidized loans are loans that do not start to accrue interest while the student is in school. Instead, the interest starts following graduation. Subsidized student loans are typically awarded to those in financial need. Payments for subsidized loans typically begin after the grace period – 6 months following graduation. Although, you are able to make payments on the loans while you are in school if capable.

An Unsubsidized Loan

Unsubsidized loans are loans that begin to accrue interest from the first day the money is distributed. Meaning that the amount of money you owe will be greater than the amount distributed when you begin making payments. These loans are typically deferred (the payments are pushed back) until after graduation. However, payments can be made while you are still in school.

Federal vs. Private

Understanding the difference between private and federal loans is crucial when it becomes time to start paying off your loans. We already know the difference between subsidized and unsubsidized so let’s see how that information relates to federal and private loans.

Federal

Federal loans are loans awarded to students by the federal government. They are applied for using the FAFSA – Free Application for Federal Student Aid. Financial aid is determined by a variety of factors. Some of those include: your school’s cost, your family’s income, and your own income. For graduate and professional school, only your personal income and school’s cost is accounted when assessing your financial aid.

After completing the FAFSA, you may be eligible for several loan types. There are currently five different federal loan types offered that I’ll address briefly:

Direct Subsidized Loan:

This is an Undergraduate subsidized loan that is commonly awarded to students with financial need.

Direct Unsubsidized Loan (Undergraduate)

This is an Undergraduate unsubsidized loan that is commonly awarded to students.

Perkins Loan

This is a subsidized loan for students of any qualifying institution. Perkins loans are meant for students with extreme financial need and have a very low interest rate.

Direct Unsubsidized Loan (Graduate/Professional)

This is a Graduate/Professional School unsubsidized loan that is commonly awarded to students. The interest rate for this loan is higher than the undergraduate unsubsidized loan.

Direct PLUS Loan

This is an unsubsidized loan that can only be taken by graduate/professional school students or parents of undergraduate students. This loan does take the borrower’s credit into account.

Private

Private loans are all unsubsidized loans for students. The rate of the loan is determined by the borrower’s credit and the type of school the student will be attending.

Here is a list of GradUAgent’s recommended private loan lenders:

CommonBond Student Loans

Discover Student Loans

College Ave Student Loans

LendKey Student Loans

Additionally, always make sure you check the rates on multiple lenders. This allows you to find the best option available.

 

What This All Means?

The importance of understanding the difference to subsidized and unsubsidized loans is obvious. Subsidized loans do not accrue interest while you’re in school. Unsubsidized loans are accruing interest and increasing the amount of debt while you’re in school. The best choice 9 out of 10 times will be to choose the subsidized loan over the unsubsidized loan. However, understanding the difference between private and federal loans can be a bit more complicated.

As shown above, all private loans are unsubsidized. This means that you’ll always take the subsidized federal loan over a private loan. But what’s the best choice when your options are between an unsubsidized federal loan and private loan? The right answer comes down to two things in this case.

First is the  interest rate and the second is how you intend to pay the loan back. For the first factor, taking the lower interest rate is the key. This will save you the most money since less interest will be accruing over time. The second key depends on whether or not you want to use the federal repayment programs only available to federal loans. There are several repayment programs for federal loans that allow payments of the loan to be limited based on income. This tends to work best for students graduating professional/graduate schools that have a large debt and small salary.

Lastly, even when you’re locked into your loan payments. You’re never truly locked into them for good. There’s always a chance at a better option for repaying your loan through refinancing. Refinancing is the repayment of an existing loan with a new loan at a lower interest rate. The lower rate could save you thousands of dollars over the life of the loan, so if you’re interested you can check our recommended refinancing lenders here.

When to Take Loans

As someone that overcame 75,000 dollars of debt, I can say loans are not fun. At all. Ever. Compounding interest is a powerful force that takes twice the effort to overcome. Using loan money to make a purchase on something that you want – but don’t really need – isn’t a wise investment.

Just as an example, let’s say I used loan money to buy a sweet marker board for my room. The marker board costs 15 dollars. Not a big deal. However, if my loan is unsubsidized and I purchased my marker board my first year of school, that 15 dollars becomes much more. Laying out the numbers of an average 6% interest rate compounded over the 4 years of school and the standard 15 year loan payment plan, that marker board will end up costing me closer to 45 dollars when completely paid off. That’s triple the amount you paid for the marker board in the first place! So think twice about spending loan money on things you want instead of need.

On the contrary, there are many times when loans are needed. Most students don’t have 20,000 dollars out of pocket to pay for their school tuition or housing. Heck, most don’t even have a quarter of that. This leaves the majority of students no choice but to turn to loans. However, take caution: NOT ALL LOANS ARE CREATED EQUAL! Because of this, I’ve compiled a flowchart to guide you through the loan process:

Flowchart