Trying to decide between federal student loans vs private student loans? You’re not alone. Sallie Mae’s report How America Pays for College 2020, cites that loans paid 21% of the cost of college for a typical family.That’s why as an undergrad, it’s in your interest to learn how the types of college loans differ. And clear up any confusion about education loan terms. Check out our glossary, below!
There’s also a whole section about the different types of repayment plans available for federal and private student loans. Use this student loan comparison below to choose the perfect option for you.
Types of Student Loans for Undergraduates
There are two main types of student loans that eligible undergraduates may take out:
- Federal student loans: Loans from the U.S. Department of Education. The federal government sets the terms and conditions.
- Private student loans: Loans from private lenders such as a financial institution or credit union. The terms and conditions are set by each private lender.
Keep in mind that, as the charts below show, there are many types of each, all with unique benefits and restrictions.
For instance, many of the federal student loans usually offer a lower interest rate than private loans. Many federal student loans have more flexible repayment terms and options than private student loans.
Check out the table below that compares these different types of federal student loan comparison.
| Characteristic | Direct Subsidized Loans | Direct Unsubsidized Loans | Parent PLUS Loans | Private Student Loans | |
|---|---|---|---|---|---|
| Annual Limits | $5,500 to $12,500 per year | $5,500 to $12,500 | Remainder of your child’s college costs, determined by the school | Loan limits vary between lender, but cannot exceed total cost of attendance | |
| Cumulative Limits | $31,000 | $57,500 for undergrads | Maximum borrowed amount is cost of attendance minus financial aid your child reeceives | Varies by Lender | |
| Cosigner Required? | No | No | Only if borrower has adverse credit history | Most student borrowers will require cosigner if they don’t meet credit criteria | |
| Cosigner Release Option | N/A | N/A | N/A | Varies by Lender | |
| Credit Criteria | None | None | Borrower cannot have adverse credit history | Debt-to-income ratio; minimum income; credit scores; no adverse credit history | |
| Interest Rates Based on Credit Criteria | No | No | No | Yes | |
| Interest Rate Type | Fixed | Fixed | Fixed | Fixed and Variable | |
| Interest Rate | 5% | 4.45% | 4.45% | Depends on credit of borrower and cosigner | |
| Subsidized Interest | Yes | No | No | No | |
| Interest Capitalization | N/A | At Repayment | At Repayment | Varies by Lender | |
| Rate Reduction for Automatic Debit | 0.25% | 0.25% | 0.25% | Varies by Lender | |
| Loan Fees | None | 1.069% Origination fee | 1.069% Origination fee | Varies by Lender | |
| Requires School Certification | Yes | Yes | Yes | Yes | |
| Requires FAFSA | Yes | Yes | Yes | No | |
| Requires Half-Time Enrollment | Yes | Yes | Yes | Varies by Lender | |
| Available for Unpaid Prior School Year Charges | No | No | No | Varies by Lender | |
| Available for Continuing Education | No | No | No | Varies by Lender | |
| Bar Study, Residency, and Relocation Loans | No | No | No | Yes | |
| Borrower | Undergraduate Students | Undergraduate, Graduate and Professional Students | Parents of Depeendent Undergraduate Students | Students and Parents | |
| Lender | U.S. Department of Education | U.S. Department of Education | U.S. Department of Education | Banks, Credit Unions, Financial Institutions, State Agencies, Colleges and Universities | |
| Secured? | No | No | No | No | |
| Student Loan Interest Deduction | Yes | Yes | Yes | Yes | |
| Interest Rate Reduction for In-School Interest Payments | No | No | No | Varies by Lender | |
| In-School and Grace Period Deferment Options | Full Deferment | Full Deferment | Full Deferment or Immediate Repayment | Varies by Lender | |
| Grace Period Length | 6 months | 6 months | 6 months | Varies by Lender (Many offer 6 month grace period) | |
| Forbearance Options | 3 years | 3 years | 3 years | 1 year | |
| Repayment Term | 10 to 30 years depending on the Repayment plan you choose | 10 to 30 years depending on the Repayment plan you choose | 10 to 30 years, depending on the Repayment Plan you choose | Varies by Lender | |
| Repayment Plans | Standard, Graduated, Extended, REPAYE, ICR, PAYE, IBR | Standard, Graduated, Extended, REPAYE, ICR, PAYE, IBR | Standard, Graduated, Extended | Varies by Lender | |
| Public Service Loan Forgiveness | Yes | Yes | No | No | |
| Death Discharge | Yes | Yes | Yes | Varies by Lender | |
| Total and Permanent Disability Discharge | Yes | Yes | Yes | Yes | |
| Prepayment Penalties | None | None | None | Varies by Lender | |
| Can be Consolidated? | Yes, but rates do not relock | Yes, but rates do not relock | Yes, but rates do not relock | Varies by Lender | |
| Dischargeable in Bankruptcy | Only through filing a separate action, known as an “adversary proceeding”, in addition to all bankruptcy filings. This shows that repayment would impose undue hardship on you and your dependents. This is very difficult to prove and your creditors (lenders) may challenge your request. | ||||
| Consequences of Default | Entire unpaid balance of loan and any interest becomes due immediately (acceleration); Can no longer receive deferment or forbearance; Lose eligibility for additional federal student aid; Damage to credit score; Tax refunds and federal benefit payments may be withheld; Wage garnishment; May be sued; May not be able to purchase or sell assets (such as real estate); May be charged court costs, collection fees, attorney’s fees, and other collection costs; School may withhold academic transcript until your defaulted student loan is satisfied | Sued by lender for collection costs; May have wage garnishment through court order; Negative credit reports | |||
| Subject to Statutes of Limitations | No | No | No | Yes | |
| Subject to Defense of Infancy | No | No | No | Yes | |
| Truth-in-Lending Act (TILA) Disclosures Required | No | No | No | Yes | |
| Oversight | FSA Ombudsmen | FSA Ombudsman | FSA Ombudsman | FSA Ombudsman |
5 Steps to Apply for Federal Student Loans
Follow these five steps if you plan to apply for a student loan from the federal government.
- Complete the Free Application for Federal Student Aid (FAFSA®).
- Receive Student Aid Report (SAR) which gives your eligibility for financial aid.
- Complete entrance counseling. This is a tool that makes sure you understand your obligation to repay the loan.
- Sign a Master Promissory Note (MPN). It is a form that shows you agree to the terms of the loan.
- Contact the Financial Aid Office at the school you plan to attend for additional questions and details.
What Types of Federal Student Loans Are Available?
If you’re thinking about federal loans, there are four types. These fall under the William D. Ford Federal Direct Loan Program.
Direct Student Loans
These are based on financial need. As an undergraduate student, you could use this kind of loan at college or career school. How much could you borrow? That’s up to your school but cannot exceed your financial need. The U.S. Dept. of Education helps pay the interest on direct student loans based on following criteria:
- While you’re in school at least half time
- For the first six months after you leave school (called a grace period)
- During a period of deferment
Direct Unsubsidized Loans
These may be useful to graduate students and professional students who qualify too. Eligibility is not based on financial need. How much could you borrow? Your school sets the amount you could borrow. It’s based on your cost of attendance and other financial aid that you receive. Direct unsubsidized loans also require you to pay the interest during all periods.
Direct PLUS Loans for Parents and Direct Graduate PLUS Loan
These loans go by other names. Parent PLUS loan is for a parent of dependent undergraduate students. Grad PLUS loan is for a graduate student or professional student.
To be eligible, you cannot have an adverse credit history. That’s because you undergo a credit check. That said, it may be possible to secure this type of loan if you meet other terms. Also, the max amount you could receive is the cost of attendance (set by the school) minus any other financial aid you receive.
Direct Consolidation Loans
Consolidation loans could allow you to combine multiple federal education loans into one and have a single loan servicer. They usually have a fixed interest rate. It is calculated based on the average interest rates of all the loans you merge.
If you’re wondering about the Perkins Loan Program, then the program ended on September 30, 2017.
What Types of Private Student Loans are Available?
Private student loans come in a wider variety than federal loans. Many banks, credit unions, and other lenders are looking to satisfy the needs of different customers. For example, Sallie Mae, Citizens, and College Ave are a few private lenders to compare. However, private student loans may require that you have a good credit score to qualify, or that you have a cosigner who does.
Keep in mind, your cosigner’s credit tends to affect the interest rate that you receive. Whether you choose a fixed rate or a variable APR.
Below is a student loan comparison of private student loans, what they offer and eligibility.
| Private Lender | Loan Types | Loan Terms and Fees | Repayment Options |
|---|---|---|---|
| Sallie Mae | Undergraduate, Graduate, Parents | Fixed or Variable | Interest, Fixed, or Deferred Repayment Options available to students during school |
| Citizens Bank | Undergraduate, Parent | Fixed or Variable | Full or interest only repayments or full deferment until graduation |
| Ascent | Undergraduate, Graduate, International, Bootcamp and DACA | Fixed or Variable | Choose to start making payments now or after leaving school and no penalty if you choose to pay off your loan early. |
| LendingTree | Undergraduate, Graduate, Parent | Fixed or Variable | Payments factor in loan amount, interest rate and loan term |
| Discover | Undergraduate, Graduate, MBA, Law, Residency, Health Professions, Parent, Consolidation | Undergraduate, Graduate, Others | Choose from in school and deferred repayment options |
| College Ave | Undergraduate, Graduate, Parent | Enrolled at least half-time in a Bachelor’s, Graduate, or Professional Degree program at an approved school, usually a 4-year public or private college or university | Deferred or interest only repayment |
Student Loan Glossary
Accrued Interest: Amount of interest that adds up on a loan in addition to the original principle amount borrowed.
Annual Limits: The maximum amount a student can borrow from a certain loan program in a given academic year.
Available for Continuing Education: Many continuing education programs do not award degrees and do not require half-time enrollment, which is why many federal loans don’t offer options for these programs.
Consolidation Loans (Consolidated): Federal loan that combines loans from multiple lenders.
Cosigner Release Options: Some loans offer an option that allows a cosigner to be taken off of the loan. Usually after a certain number of consecutive, on-time payments have been made.
Cumulative Limits: The total amount you can borrow from a specific type of student loan. Many federal loans have these limits. Also, many private loans and loans to parents don’t have any limits.
Forbearance: A period of time which your monthly payments are reduced or suspended entirely due to financial hardships. During this time, the unpaid interest is added to the principle balance (capitalized).
Forbearance Options: The different lengths of time that you may suspend or reduce your monthly payments.
Interest Capitalization: This is when unpaid interest is added to your loan principle. Typically, this happens at specific times during the life of your loan, such as before your first payment if you have chosen full deferment. Any interest that has built up is added to the principle.
Interest Rate Reduction for In-School Interest Payments: Loan terms that allow you to reduce your interest rate for making interest payments while you’re still in school.
In School and Grace Period Deferment Options: The period of time while the student is enrolled at least on a half-time basis. And for a specific amount of time afterward, when the borrower does not have to make any payments on a student loan.
Loan Limit: The max amount you are authorized to borrow.
Loan Payments: The amount you agree to pay each month towards your loan.
Origination Fee: The fee charged to borrowers for taking out a loan.
Public Service Loan Forgiveness: This program allows borrowers who make 120 qualifying monthly payments on federal Direct Loans under a qualifying repayment plan while working full-time for a qualifying public service employer to have their loans forgiven on an annual basis.
- Qualifying public service employers include:
- Section 501(c)(3) organizations if they provide at least one of the qualifying public services
- Licensed or regulated child care, Head Start, and state funded pre-kindergarten programs
- Organizations that receive public funds and whose principal purposes include crime prevention, control or reduction of crime, or the enforcement of criminal law
- Services that provide educational enrichment or support directly to students or their families in a school or school-like setting
- Organizations that employ nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health support occupations
Rate Reduction for Automatic Debit: An option that reduces the interest rate on your loan if you sign up for automatic monthly payments through a debit or checking account.
Repayment Plans: The various options you have in repaying your student loan.
Repayment Terms: The different number of years you have to pay back your student loan, which varies between federal loans and private loans.
Requires Half-Time Enrollment: Many loans require that you maintain at least half-time enrollment, which is usually considered a minimum of six semester hours per academic term.
Subject to Defense of Infancy: This states that minors do not have the legal capacity to enter into contracts, making loans to minors unenforceable. Federal student loans are not subject to the defense of infancy, though private student loans are.
Subject to Statutes of Limitations: The length of time that a creditor has to sue you for an unpaid debt. It applies to private not to federal loans that students take out.
Subsidized Interest: Part of a subsidized loan, this is when the federal government pays the interest of the loan while you are in school, during grace periods, and during deferment periods.
Subsidized Loans: Part of a subsidized loan. This is when the federal government pays the interest of the loan. Either while you are in school, during grace periods, and/or deferment periods.
Truth-in-Lending Act (TILA) Disclosures: For eligible loans, the federal government pays the interest that adds up. This is while you’re in school, during your grace period, during authorized deferment periods, and post-deferment grace periods.
Unsubsidized Loans: The borrower helps pay the interest that accrues while the student is in school, during grace periods, and during deferment periods.
What are the Federal Student Loan Repayment Plans?
There are four main federal student loan repayment plans that students may choose from. But you may change repayment plans at any time.
Standard Repayment Plan (10 to 30 years): All borrowers are eligible for this plan. Payments are a fixed amount that ensures your loans are paid off within 10 years. Within 10 to 30 years for Consolidation Loans. You usually pay less over time with this plan. But it may not be a great option for those seeking Public Service Loan Forgiveness (PSLF).
Graduated Repayment Plan (10 and 30 years): All borrowers are eligible for this plan. Payments are lower at first and then rise, usually every two years, and are for an amount that will ensure your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans). It is not generally a qualifying option for PSLF.
Extended Repayment Plan (Up to 25 years): If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans. Payments may be fixed or graduated, and will ensure that your loans are paid off within 25 years. Your loan repayments each month tend to be lower than under the 10 year Standard Plan or the Graduated Repayment Plan.
Income-Driven Repayment Plans: Have monthly payments set at an amount that is intended to be affordable based on your income and family size. There are four different income driven repayment plans:
- Revised Pay as You Earn Repayment Plan (REPAYE Plan) (20 years for undergraduate): Payment amounts are generally 10% of your discretionary income.
- Pay as You Earn Repayment Plan (PAYE Plan) (20 years): Payment amounts are generally 10% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.
- Income-Based Repayment Plan (IBR Plan) (20 years for new borrowers after July 1, 2014): Your monthly payments will be either 10 or 15 % of discretionary income (depending on when you received your first loans). But never more than you would have paid under the 10-year Standard Repayment Plan.
- Income-Contingent Repayment Plan (ICR Plan) (25 years): Monthly payment amounts are the lesser between 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.
What Repayment Plans for Private Student Loan Should You Choose?
Private student loans don’t have the same repayment options as federal loans and even the specific options may vary from lender to lender. According to Sallie Mae’s study, in 2019 to 2020, almost half of families who use student loans (46%) said they are making payments on them while the student is in school. Of these families, 24% said that the student is making payments while in school and 19% said the parent is currently making payments.
Here are a few repayment plans that private banks, credit unions, and other lenders may offer you to repay your student loans.
- Full Deferment: This option postpones all payments until after you graduate or drop below half-time enrollment (for many loans). Many lenders also offer a grace period, which is included in the deferment. This tends to be the expensive option over the life of the loan because of the capitalized interest. However, it also provides flexibility in your monthly budget while you’re in school.
- Interest Only: Allows you to pay just the interest that accrues every month while you’re still in school. This usually allows you to pay less over the length of your loan, as the interest isn’t capitalized after your deferment period.
- Partial Interest: This option allows you to pay a fixed amount, usually $25, every month while you’re still in school. It helps to reduce the interest that capitalizes after your deferment period and any grace periods.
- Immediate Repayment: This plan allows you to start repaying your loan immediately, while you’re still in school, which reduces the amount of interest you may pay over the life of the loan.