Student loans are a common way to cover the cost of a college education. They help students pay for tuition when it may otherwise be impossible to pay for tuition upfront.
On the flip side, student loans can be very expensive, steer you into a cycle of debt, and make it difficult to achieve other life goals. Let’s take a closer look at the types of student loan options at your disposal so you can make an informed decision for your unique situation.
- Federal student loans are issued by the federal government and offer flexible repayment plans and forgiveness programs.
- Private student loans, which are distributed by private lenders like banks and credit unions, can allow you to borrow as much money as you’d like to pay for college.
- Grants, scholarships, and work-study programs are alternative options to student loans that are certainly worth considering.
Federal Student Loan Options
Federal student loans are issued by the federal government and have basic borrower requirements. Since they come with relatively low interest rates, flexible repayment plans, and multiple loan-forgiveness programs, students often prefer these types of loans.
The major downside of federal student loans, however, is that they impose yearly borrowing limits ($5,500–$20,500). This means you might max out your eligibility for federal student loans and still need more money to cover the cost of your education.
The 2020–2021 loan limits for undergraduates are $5,500 for first-year students, $6,500 for sophomores, and $7,500 for juniors and beyond. Undergraduates can borrow up to $57,500 in total and graduate students can borrow up to $20,500 annually and up to $138,500 in total.
There are three main types of federal student loans:
- Direct subsidized
- Direct unsubsidized
- Direct PLUS
All three loans come directly from the Department of Education. Subsidized are loans for which the government pays the interest while you’re in school, and unsubsidized are loans for which the government does not pay your interest while you’re in school. PLUS loans are available to graduate or professional students, or the parents of dependents who attend college or career school.
In some cases, private student loans have lower interest rates than federal student loans. For borrowers with excellent credit, interest rates on variable-rate private student loans dipped below 2% in 2020, while federal loan rates were 2.75% for undergrads.
Private Student Loan Options
Distributed by private lenders like banks and credit unions, private student loans can pay for most undergraduate and graduate programs or pay for expenses your federal loans can’t cover. The drawback to this is you’ll need to meet a lender’s credit and income requirements, and may need a co-signer to apply. And, in some cases, the interest rate you get from a private lender will be higher than what you'd pay on a federal student loan.
Students from abroad are not eligible for federal student loans. For many international students, private student loans may be the only option to help pay for college.
Since interest rates on private student loans vary, it’s essential to shop around to find a loan with the most favorable terms. Here are a few examples of the private student loan lenders you may come across:
Private student loans are not eligible for federal income-driven repayment plans or federal loan forgiveness programs.
Student Loan Alternatives
There are several alternatives to student loans that are important to understand and consider.
If you’re a low- or middle-income student, you may be eligible for grants, as they are usually based on financial need. Scholarships are another choice if you’ve excelled academically or through extracurricular activities. Both grants and scholarships, which you don’t have to pay back, are often available through colleges and private organizations.
Also, you may qualify for work-study, which is a federal program that can provide you with a full or part-time job so you can cover the cost of your education. Keep in mind that colleges limit work-study hours depending on your financial need and you’re not guaranteed a job placement even if you get approved.
It’s a good idea to look into student loans after you’ve exhausted other funding options like grants, scholarships, work-study, savings, and family contributions.
Determine How Much You Need to Borrow
If you decide to move forward with student loans, subtract any scholarships, grants, work-study earnings, and family contributions from the cost of your college’s attendance. You can typically find the cost of attendance on the financial aid page of your school’s website.
Before you sign on the dotted line, read over the terms of your loan carefully so you know exactly what your repayment schedule will look like and how much interest you’ll pay over the years.