Education loans are a specific type of loan used to pay for the costs of an academic program. Also called student loans, education loans are offered by the Department of Education and by private lenders. Only students and their parents or guardians can qualify for education loans.
There are different types of education loans, and these loans generally differ from other types of financing in important ways. If you need to borrow money for school, it's important to learn how student loans work and what they offer before you decide to borrow.
Definition and Examples of Education Loans
Education loans are a type of financial aid available to help cover the costs of an academic program such as college, professional school, or career training. Unlike grants or scholarships, education loans must be repaid. Students and parents can apply for education loans from the Department of Education by completing the Free Application for Federal Student Aid (FAFSA). They can also apply for education loans from private lenders.
- Alternate name: Student loans
Direct loans, issued by the U.S. Department of Education, are an example of student loans. Students attending eligible schools can apply for direct loans to cover their higher-education costs. Parents can also apply for direct PLUS loans, which are a type of direct loan available to parents of undergraduates, to graduates, and to professional students.
How Education Loans Work
Education loans can be broadly divided into two categories: federal student loans and private student loans. Both are available only to qualifying students and in some cases, to their parents. Students are not allowed to borrow more than the school-certified cost of attendance for either type of loan.
To apply for federal loans, students need to complete the FAFSA.
Both federal and private loans need to be repaid, although loan forgiveness might be an option for federal loans.
Federal Student Loans
The William D. Ford Federal Direct loan program is the Department of Education’s program for student loans. To be eligible, students typically must be enrolled at least half time in a qualifying program and have a valid Social Security number. Some federal loans, such as direct subsidized loans require demonstrated financial need, but your credit score is not a factor in determining eligibility.
Federal loans may be either subsidized or unsubsidized. Subsidized loans have more favorable terms and are based on financial need (unsubsidized loans are not).
Other loans, such as direct PLUS loans for parents or direct PLUS loans for graduate students are not need based, but they may not be available to borrowers with adverse credit.
Benefits and Terms
Federal student loans come with a fixed interest rate that is generally very competitive, and all students who are approved get the same rate. Plus, federal loans have flexible payoff terms and borrowers can change repayment plans at any time for free, including to income-driven plans, which base your payment on income.
It's also possible for qualifying students to earn forgiveness of some of their federal educational loans. This includes Public Service Loan Forgiveness (PSLF) options for borrowers who work for the government or an eligible nonprofit.
Unfortunately, there is a limit on direct subsidized and unsubsidized loans for both graduates and undergrads. For example, undergraduates can qualify for a maximum of $5,500 to $12,500 annually, depending on what year they’re in school and their dependency status. However, parents may qualify for a direct PLUS loan that covers any remaining college costs.
If you have exhausted your eligibility for direct loans, you may choose to apply for private loans from a bank or other private lender.
Private Student Loans
Private student loans work very differently than federal loans in many ways.
Instead of applying via the FAFSA, students and/or their parents must apply with individual lenders and meet qualifying criteria, including having good credit and proof of sufficient income. Many student borrowers apply with a co-signer, which is usually a parent or guardian.
Benefits and Terms
Private loans have either a fixed or variable interest rate, which can vary between lenders; the rate you’re eligible for is determined based on your financial credentials, including your credit score, or those of your co-signer.
Private loans don't tend to offer income-driven repayment plans. Borrowers make monthly payments, and repayment plans typically don’t change after borrowing, unless you refinance. However, some lenders may allow borrowers to lower their monthly payments through alternate programs. Those programs might include a graduated repayment option that steadily increases the amount of your monthly payment, and an extended repayment option that extends the loan’s term.
Private lenders do not forgive student loan debt even if you work in a public service position. Forgiveness is an option only for federal aid in certain circumstances.
Types of Education Loans
The different types of education loans include the following:
- Direct subsidized loans: These are issued by the Department of Education on the basis of financial need. No interest accrues while in school or during eligible deferment periods. The interest rate is variable, and does not exceed 8.25%.
- Direct unsubsidized loans: The Department of Education offers these loans regardless of financial need. Although they have favorable fixed interest rates and other borrower benefits, interest is not subsidized. The interest rate is variable, and does not exceed 8.25%.
- Direct PLUS loans: Graduate and professional students and parents of undergraduate students can take out PLUS loans to help pay for school. The maximum amount you can receive is the total cost of attendance minus other financial aid. Interest rates do not exceed 9%.
- Direct consolidation loans: These are made by the Department of Education to enable borrowers to consolidate, or combine, existing student loans. Consolidation can result in a change in repayment terms, but your overall interest rate does not change. Interest rates on these loans do not exceed 8.25%.
- Private loans: These are made by private lenders. Compared to federal loans, interest rates may be higher, qualifying may be more difficult, and you won’t likely receive as many borrower benefits. However, students may turn to private loans to help cover additional education costs after exhausting federal loan eligibility.
- An education loan is also called a student loan.
- Student loans may be issued by the U.S. government or by private lenders.
- You can usually take out student loans up to the school-certified cost of attendance.
- Applying for federal student loans requires completing the Free Application for Federal Student Aid (FAFSA).
- It can be easier to qualify for federal student loans than private loans, which generally require a good credit score and proof of income.