Federal Student Loans
The two main types of student loans are federal and private. Private loans are loans that you get from private entities such as a bank. Typically, private loans have higher interest rates then federal loans and they don’t have the same benefits, such as student loan forgiveness.
Federal student loans are loans that are given out by the government. The William D. Ford Federal Direct Loan program, also called “Direct Loans”, is the largest federal student loan program. Under this program there are four main types of loans.
In this post we will discuss the difference between subsidized, unsubsidized and PLUS loans. The fourth is a Direct Consolidation loan which you would use to combine the other ones into one single loan. You should become familiar with these loans if you were able to make it through undergrad without loans and are now looking at PA school wondering how you’re going to pay for it, or look at other options in which you can have your schooling paid for you.
Direct Subsidized Loans
A government subsidy is a benefit given by the government to an individual or group to remove some type of burden. For student loans that means the government helps out with paying some of the interest on your loans and other tax benefits. They are given out to students on an as needed basis and your school typically determines the amount you can borrow. The government pays the interest on these loans while you’re in school at least half-time, during your grace period and during a deferment.
Direct Unsubsidized Loans
Unsubsidized loans do not have the extra interest benefits of subsidized loans, which means interest is charged to the loans while you’re in school. There is no requirement to demonstrate financial need and your school determines the amount you can borrow. If you choose not to pay the interest while you’re in school, during a grace period or deferment the interest will accrue and be capitalized; this means that the interest will be added on to the total amount that you borrowed and the total amount will be charged interest on it.
Really simply this means if you have a $100,000 loan with 5% interest when the interest is capitalized the $5,000 is added to the $100,000 so now its like you borrowed $105,000 and that total amount will be charged interest on it. The calculation is more complex than that but this is a real simple example of what it means for it to be capitalized.
Direct PLUS Loans
Direct PLUS Loans are also given by the federal government. They are given to graduate or professional students and parents of dependent undergraduate students to help pay for educational expenses not covered by other financial aid. There are limits to the amount of subsidized and unsubsidized loans that you can get and and your school will determine how much of these you qualify for, once you are tapped out and need more financial aid they will turn to PLUS Loans to help. The maximum amount you can borrow is the total cost of attendance minus any other financial assistance. These loans have higher interest rates compared to the subsidized and unsubsidized loans and have higher fees.
These three are the main types of federal student loans. As mentioned above the federal government also provides consolidation loans that allow you to combine your loans.
Perkins Loans are another type of federal loan, that are actually given by the school but are funded by the government. When you pay back a Perkins Loan you pay your school back. Usually your school will use a loan servicer to collect payments.
Once you’re in school and if you’re applying for financial aid you’ll receive an award letter (They probably should actually call it a death letter, or ball and chain letter might be appropriate. They make it sound like its such an accomplishment to take out student loans. It wasn’t much of an “award” at all, as now I’m paying back all these loans for the rest of my life) to let you know what you qualify for and you can choose to decline any of the financial aid they offer.
Sometimes if you talk with the financial aid office they can help you get more of a certain loan. A ranking of the loans with the best terms are: Perkins Loans, Subsidized Loans, Unsubsidzed loan, then PLUS loans. If you can borrow more of the Perkins Loan and less of the PLUS loans you’ll end up paying less overall, however the limits on the Perkins Loans are less so you can only borrow smaller amounts of these compared to the other loan types.
For more information on federal student loans visit: https://studentaid.ed.gov/sa/types/loans
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