The Different Types of Student Loan Debt
The wealthy can afford to pay cash for their children’s education. The rest of us usually need some financial aid, which can take the form of grants and scholarships, and if necessary, student loans. Grants are needs-based, while scholarships are offered on the basis of merit.
Both are “gift aid” – they don’t have to be repaid and thus are more desirable than student loans. Gift aid is available from the federal, state and local governments, businesses, non-profit organizations and other sources. For students who do not qualify for gift aid, or do not receive enough gift aid, student loans are available from the federal government and private lenders.
Student loans help pay the steep price of a college education. For the 2016-2017 academic year, the following average annual costs are representative:
- In-state public colleges: $24,610
- Private colleges: $49,320
These costs include tuition, fees, housing meals, books, supplies, transportation and personal expenses. The average undergraduate in 2017 is heading off with about $28,000 in student loan debt. Moreover, graduate school can significantly increase student loan debt.
Given these realities, it is essential to understand the student loan market so that you can select the right options for your circumstances.
Federal Student Loans
It’s important to understand a few terms before evaluating the different loan programs:
- Grace period: A period of time (six months) after you graduate, drop out or are enrolled for less than half-time, when you don’t have to make student loan payments.
- Accrued interest: This is the interest that accrues on your loan when you are not repaying it. You need not repay your loan while you are attending an eligible school at least half-time, or in grace or deferment (postponement) status, or during certain periods within certain income-drive repayment plans.
- Subsidized loan: A loan that pays the accrued interest on your student loan when you are in a valid period on non-payment. It does not cover delinquent payments.
- Unsubsidized loan: A loan in which the interest must be paid regardless of the loan status. Interest accrues from the date of disbursement and continues until the loan is repaid.
- Independent student: Student who is at least 24 years old, or married, or a graduate or professional, or who is a member of the armed forces, or who meets certain other criteria.
- Dependent student: A student who doesn’t qualify as an independent student.
- Annual loan limits: The maximum amount you can borrow under an unsubsidized or subsidized loan program. Dependent student annual loan limits range from $5,500 to $7,500, depending on your year of matriculation. Independent student annual loan limits range from $9,500 to $12,500 for undergraduates, and $20,000 or graduate or professional students (unsubsidized only).
- Loan fees: An amount deducted from Direct Loan disbursements.
- Loan fee on initial disbursement dates from Oct 1, 2016 to Sep 30, 2017 is 1.069 percent for Direct Subsidized and Unsubsidized Loans and 4.276 percent on Direct PLUS Loans.
- Loan fee on initial disbursement dates from Oct 1, 2017 to Sep 30, 2018 is 1.066 percent for Direct Subsidized and Unsubsidized Loans and 4.264 percent on Direct PLUS Loans.
- Current interest rates: These are the current interest rates on federal student loans. These are fixed-interest loans.
- Direct undergraduate loans: 4.45 percent
- Direct graduate/professional loans: 6.0 percent (unsubsidized only)
- Direct PLUS Loans: 7.0 percent
- Federal Perkins Loans: 5.0 percent
- Repayment periods: Typically, you have from 10 to 25 years to repay your loans, depending on your repayment plan.
Two different federal student loan programs are available from the U.S. Department of Education.
The William D. Ford Federal Direct Loan (Direct Loan) Program
This is the primary federal student loan program. It is composed of four Direct Loan types:
- Direct Unsubsidized Loans: Loans are available to eligible undergraduate, graduate and professional students. You can take out an unsubsidized Direct Loan without proving financial need. Your school determines the amount you can borrow based on your costs to attend and any other financial aid you are given. You can choose not to pay your interest when you are attending school at least half time or are in a grace period. If you postpone paying interest, it accrues and is added to the principal amount of the loan.
- Direct Subsidized Loans: Loans are available to undergraduate students who demonstrate financial need, in amounts determined by your school.
- Direct Consolidation Loans: A loan that combines separate federal student loans into one. The interest rate is the weighted average of the separate loans.
- Direct PLUS Loans: Available to graduate/professional students and to parents of dependent undergraduate students. The risk to parents is that you cannot transfer this loan to your children, so if you have trouble repaying it, it will adversely affect your credit score.
Federal Perkins Loan Program
These loans are made by your school based on exceptional financial need. They are available to undergraduate and graduate students.
Private Student Loans
These are student loans made by private lenders rather than the federal government. They differ from federal loans in several ways:
- Interest rates, fees and repayment terms are set by the lender. The interest rates on these loans are almost always higher than those on federal loans.
- May be fixed- or variable-rate loans.
- You will need to pass a credit check and might need a co-signer.
- You have to begin repaying your loan immediately. These loans are unsubsidized.
- Repayment terms are not flexible and do not provide the options available from federal loans.
- No provision for loan forgiveness for working in certain jobs.