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Types of Loans that Can Help Pay for College
November 11, 2021
by mikkie mills, guest contributor
When it comes to paying for college, sometimes you need a little extra help finding the money to cover tuition. There are tons of different ways to pay for college, and plenty of people turn to student loans when they can't completely cover the cost of college with things like scholarships and grants.
The world of college loans can be tricky, though. There are a plethora of options and all have different interest rates and loan terms that can sound like a foreign language to the layperson. Knowing the basics about the types of loans you can apply for can help you to make the best decision for your situation.
Federal student loans are broken down into four major categories.
- Direct unsubsidized loans. These student loans are available to both graduate and undergraduate students attending a four-year institution, technical college, trade school or community college. Students do not need to prove financial need to qualify for this type of loan, but they will need to fill out a FAFSA form and submit it to their school. In addition, these loans require a master promissory note and the completion of an entrance counseling course, which is usually delivered online and outlines the terms of the loan and how to repay it. This loan has fixed interest rates that accrue while students are in school and is subject to school-determined maximum limits. Payment requirements are deferred until after graduation.
- Direct subsidized loans. This type of loan is offered only to undergraduate students pursuing a degree at a university, college or career school. Students will need to prove financial need to qualify for this loan and do have to fill out their FAFSA, master promissory note, and complete entrance counseling. This loan also has a fixed interest rate, but the U.S. Department of Education makes interest payments on behalf of the student while they are in school. Payment is deferred until after graduation.
- Parent PLUS loans. A Parent PLUS loan is a type of Direct PLUS loan for parents of students attending a higher education institution. Basically, this is a student loan for your parents. To qualify for this loan, parents must have a child enrolled at least part-time in a college, university or career school, as well as have a good credit history and meet the general requirements for federal financial aid. These loans also have a fixed interest rate, but they are typically higher than direct subsidized or unsubsidized loans. Parents can request to defer payment until after their child graduates, but if not, they will be expected to start paying on the loan immediately.
- Graduate PLUS loans. These are PLUS loans available to graduate and professional students seeking a higher degree. They share the same requirements and interest rates as Parent PLUS loans. With these loans, payment is automatically deferred until six months post-graduation, leaving school, or dropping below half-time.
There are also private student loans available to students looking for options outside of federal loans. These loans are subject to the lender, so they can vary greatly based on your situation and what institution or company you plan to borrow money from. The interest rates could be fixed or variable and some might require you to start repayment while still in school.
Many people opt for federal loans because they typically offer lower interest rates and those rates are fixed for the life of your loan. They also offer the option of subsidized loans based on your financial need. Finally, most private loans require some type of credit check and young borrowers might need to find a cosigner in order to get approved for their loan.
Knowing your choices when it comes to taking on loans for school is an important part of making the smart decision for your situation. Consider the different types of federal loans and weigh their characteristics against those of private loans. This will help you know you made a good choice.
Mikkie is a freelance writer from Chicago. She is also a mother of two who loves sharing her ideas on interior design, budgeting hacks and DIY. When she's not writing, she's chasing the little ones around or can be found rock climbing at the local climbing gym.
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