Types of Student Loans

Reviewed: January 21, 2015
By FinanceWeb

Why Student Loans Are Necessary?

The cost of college education in the United States is a major barrier to access to the career and life advantages of higher education. The average costs of college tuition and living expenses in 2014 for all institutions was approximately $22,000 per student year. For the vast majority of college eligible families and students, this amount exceeds available resources. For most students and families, borrowing is a necessary step towards fulfilling college ambitions. In a broad sense, there are three types of student loans for college: Government loans, government-backed private loans, and private loans. The Government discontinued backing private loans in 2010, and they primarily exist now as debts from that era. The current primary source of government loans for college is from the U.S. Department of Education; it administers the William D. Ford federal direct loan program and the Perkins Loan program.

Federal Student Loans

The Ford program offers needs-based and other loans; the Perkins program offers needs-based loan distributed through eligible colleges and universities. Significantly, most Department of Education programs provide funds without the need to pass a credit check. The PLUS program, which lends money to student family members, uses a credit rating to determine terms for participation. The government bases other loan programs on student status and financial needs. The Ford program offers subsidized loans based upon demonstrated need in which the government pays part of the interest amount.

Private Student Loans

Private lenders also provide student loans. These include banks, charitable and philanthropic organizations, credit unions, schools, colleges and universities, and private lenders. Private loans usually require a credit check and lenders base interest rates and other fees on the quality of the credit rating. Private lenders do not subsidize the interest on private loans, and the borrower must pay all fees and costs. The repayment terms may begin while the student is still in school. Interest rates vary with the lender, and the costs will be much higher than federal student aid.

Advantages of Federal Student Loans

Access to funds is the primary and most important advantage of federal student loans. They are available for every eligible student, and the government determines eligibility by attendance at a qualified institution of learning. Students who demonstrate need can get subsidized loans, wherein the government pays part of the interest, and flexible repayment terms such as those keyed to a percentage of the debtor’s income. Federal loans also can qualify for deferral, an extension of time to start repayment, and forgiveness in which part of the debt is wiped out in exchange for public service.

Loan Limits

There are annual and overall limits to the amounts that students can borrow from the federal loan programs. For example, the Perkins program annual limit is $5,500. The direct federal loan program limits range from $5,500 to $12,500 depending on family status and college grade. The institution attended determines the amount of loans, and the school also determines the costs and unmet needs of each student. Federal repayment provisions include repayment terms tailored to the debtor’s income.