Funding

Types of loans: federal, private and bears, oh my!

Most high school seniors have a difficult enough time picking their Bitmoji on Snapchat, so if you told them to pick a student-loan plan, you may not get the best result.

What about if you simply asked them to lay out their options as student borrowers?

It’s no surprise that potential college students are not experts in the different types of student loans. If you’re looking to get a leg up on making a financial plan for college, though, getting a better grasp of the subject is a good place to start. And that means taking a look at all of the different choices on the table.

Although there are fancy names and types of loans available, student loan decisions start with separating things into two distinct options: Federal student loans, provided directly from the U.S. Department of Education or your school, and 2) Private loans provided by a third-party lender.

READ more: Understanding Interest Rates

Fishing for Federal Financing

The primary federal loans are broken down into two different types: Stafford and Perkins.

Stafford are the more common of the two, and come as either subsidized loans, or unsubsidized. Subsidized Stafford loans are available for students with income-based need, and in these loans the government doesn’t just defer interest payments while a student is in school: It pays them.

Unsubsidized loans also come with a government controlled interest rate, and also have an option to defer payments until after school. In this situation, though, the interest accrued while a student in school is added to to loan, so it comes with some strings and details to understand.

The final kind of federal student loan is a Perkins loan, which is a loan taken out through the borrower’s school. It’s still a federal loan since the government initially allocates the money, but the funds are disbursed from the school, and are then paid back to the school after graduation. These loans are also given to students with “exceptional financial need” and come with the potential of cancellation should students work in specific fields after graduation.

In addition to these typical federal loans, there are also other options students and their parents.

PLUS loans are options for students and parents to receive a loan directly from the U.S. Department of Education for the cost of attendance, minus other financial aid. These loans are dependent on having a good credit standing, and are similar to other federal loans in terms of repayment and other details.

For parents that take out a PLUS loan, repayment can often start when the money is fully “paid out” unless a deferment is requested.

One of the major perks of these federal loans are the different options for payments and deferment under certain circumstances. Students can defer payments, including during a six-month grace period after college, and there are also options for deferment or forbearance of loans in certain circumstances. Payments can be postponed in times of financial hardships or in the case of unemployment, per certain conditions, and that gives federal loans a flexibility others do not have.

Read more: Understanding Your Loan Options

Perusing Private Funding

Private loans are another option for students, but should only be used in specific circumstances. Interest rates are based on credit, which makes it harder to compete with federal loans, and private loans can come with tricky interest rate schedules or deceptive repayment options. But in the right circumstances, private loans can be a crucial part of a college plan.

Federal loans are designed to cover cost of attendance and have year-to-year caps on total amounts. That means that some students may have a gap between life costs and what a college lists for cost of attendance, and that’s where private loans can be of use.

Private loans can also help students refinance or consolidate debt out of school. These loans are not specific to student lending, but can be a vital tool in putting together a plan for erasing student debt after school. While federal loans cannot be refinanced as they exist, a private loan can pay off the remaining balance of a federal loan, and give the borrower a more favorable interest rate.

The tricky part of that plan is that private loans do not allow for deferment or a period of forbearance. Refinanced private loans can also come with an extended period of payments, which means you can be accruing interest for longer. So even if you get a better rate, it may not be worth it if you are unable to pay off the balance before the end of the loan term.

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