6 Types of Student Loans All Undergraduates Should Consider

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After your acceptance letter, the most important piece of mail you’ll receive as an aspiring college student is your financial aid award package. But it might not be exactly what you expect.

The price of higher education in the U.S. grew by 4% over the last year, ticking up to an average of $10,662 per year for public-in-state schools and $42,162 for private schools, according to a recent study by U.S. News and World Report. That’s a serious chunk of change — and one few students can cover via savings alone. These days, the majority of undergrads end up taking on some kind of student debt during their college career. In 2023, for example, about 52% of undergraduates relied on federal loans, and another 7% of undergrads took out private loans to help cover college costs.

But what do federal and private really mean? And what are the most common types of student loans within these categories? In this guide, we’ll go over all your main loan options and help you choose what’s best for you.

Types of Federal Student Loans

Federal student loans are a form of funding offered by the federal government. They can only be used to cover qualifying education expenses, and they have to be paid back via a series of monthly installments after you graduate.

Your maximum available loan amount will be determined by the information in your Free Application for Federal Student Aid (FAFSA). Both undergrad and graduate students should fill out the FAFSA, even if you think you won’t qualify for a need-based loan. You never know what you might get offered, and federal loans come with generous borrower protections, fixed interest rates, and the potential for loan forgiveness. Your rate will also be determined by the loan option, not your credit score, which makes federal loans a good option for borrowers with limited credit history.

Plus, the information in your FAFSA isn’t just used to determine federal loan options or loan limits. It’s also used to determine your eligibility for any college-based financial aid, scholarships and other aid packages.There are several different types of federal education loans to choose from.

Direct Subsidized Loans

Direct Subsidized loans, also called Subsidized Stafford loans, are one type of loan in the Federal Direct Loan program. Subsidized loans are available only to undergraduate students with financial need. They can be used to help cover the cost of your education, whether at college or at a career-training school.

Direct loans have slightly better terms than unsubsidized loans because the U.S. Department of Education pays the interest as long as you maintain at least half-time enrollment. They also pay your interest during a six-month grace period after you leave school, and during any deferment periods you might qualify for later. After your grace period ends, your repayment plan will begin. Fortunately, Direct Subsidized loans tend to have lower interest rates than some other federal options.

One downside to federal Subsidized Loans is that they have strict borrowing limits. Few students are able to cover their full education via Subsidized Loans alone.

Direct Unsubsidized Loans

These loans, sometimes called Unsubsidized Stafford loans, are available to eligible undergraduate, graduate, and professional students. Unlike Direct Subsidized loans, eligibility for Unsubsidized Loans is not based on financial need.

Because this federal loan isn’t subsidized by the government, you are responsible for paying the interest on your Direct Unsubsidized loan, including the interest that accrues while you are in school and during grace periods, or during periods of deferment or forbearance.

If you choose not to pay interest on the loan while you are in school or during the six-month grace period after you graduate, that interest will capitalize, or be added to the principal amount you owe on your loan. If possible, you may want to pay interest while you are in school to avoid adding to your loan. Like federal Subsidized Loans, Direct Subsidized loans come with both annual and aggregate borrowing limits.

Direct PLUS Loans

The Direct PLUS loan program can be used to cover up to your full cost of attendance. That makes these loans a handy way to bridge the financial aid gap that often remains when you don’t get enough other financial aid.

There are a few different types of student loans in the Direct PLUS Program. Parent PLUS loans are available to the parents of dependent undergraduate students, and Grad PLUS loans are available to graduate and professional students.

One downside: Direct PLUS loans have higher interest rates than any other federal student loan options. However, some borrowers may be eligible for federal forgiveness programs. Others may be able to secure lower monthly payments by applying for a Direct Consolidation Loan further down the line.

Eligibility for Direct PLUS loans is not based on financial need, but a credit check is required. This means the U.S. Department of Education will take a close look at your credit report before approving you for a loan. If you have a low credit score or an otherwise questionable credit history, you may have to loop in an “endorser” — which is similar to a cosigner — to help you qualify. Loan payments will be made directly to the U.S. Department of Education, which will be your lender for the duration of your loan period.

Types of Private Student Loans

Federal loans come with borrowing limits, which means many students don’t get all the funding they need from federal sources alone. Private loans¹ — loans from non-government sources — can be a great way to fill in the gaps. There are a few different types of private loans available.

Institutional Loans

Some colleges and universities will loan education funding to their attendees. This type of private loan is called an institutional loan. You’ll likely receive information about available institutional loans in your financial aid offer letter. If you don’t, it can be helpful to call your school’s financial aid office to ask about available options.

If you end up taking out an institutional loan, you’ll end up making payments to that institution (or the institution’s loan servicer) after you graduate via a series of monthly installments.

Private Loans for Students

Students can also apply for funding from a financial institution, like a bank or credit union, or to a private lender that specializes in student loans. It’s best to shop around first to explore different lenders’ offerings. Some might have lower interest rates, while others may offer flexible repayment options or superior customer service.

Once you find a lender you like, start with a preliminary rate check. Many lenders — including Earnest — let prospective borrowers get a quote with just a soft credit check, a type of credit inquiry that won’t affect your credit score. However, you will have to undergo a hard credit check before you get a final, official rate offer. If you’re applying for a high loan amount, you’ll likely need a good credit score to qualify for low interest rates.

Even if you don’t qualify for low rates, private loans can still be a good option. That’s because you’ll likely be able to refinance² your loan further down the road. Refinancing can land you a lower interest rate and lower monthly payments once your credit has improved³.

Private Loans for Parents

Some private lenders may also allow parents to take out loans to help fund their children’s education. Sometimes called “private parent loans” or “private loans for parents,” these loans can help parents avoid high-cost Parent PLUS Loans. They can also be a good alternative to cosigning your child’s private loan if your lender doesn’t offer a cosigning option or if cosigning isn’t something you’re comfortable with.

Picking the Right Education Loan Option for You

Choosing a loan program is a major decision that can affect your education and your finances for years to come. But the right lender can get you in the door at your dream school, help you save money, and make repayment a breeze.
As you do your research, consider a low-cost student loan from Earnest. Earnest offers flexible loans for both parents and students looking to fill any funding gaps leftover after federal aid. With Earnest, you can choose your own loan terms and loan repayment schedule. We also let you skip a payment⁴ once per year without penalty, and we never charge origination fees. Ready to see how much you could save? Check your rate today. It’s free, it only takes minutes, and it won’t affect your credit score.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

¹ Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities. 2) Next, fill out a FAFSA(R) form to apply for federal student loans. Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if you’re struggling with your payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.gov/.

² Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

³ Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.

⁴ Earnest clients may skip a payment through a one, one-month forbearance during a 12 month period. Your first request to skip a pay can be made once you’ve made at least 6 months of consecutive on-time full principal and interest payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Any unpaid accrued interest may capitalize (added to the principal balance) at the end of the forbearance period by adding unpaid accrued interest to the outstanding principal as permitted by law and the terms of the loan agreement.