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Scholarship, grants, and work-study funds are always the prime options for funding your college education. What happens when you still have a balance after all of those things are applied? For many college students, student loans are a reality in order to afford college. If this is your reality, never take more than you absolutely need. Yes, you want the extra money, but paying it back in the future PLUS interest will be less than ideal. There are many different kinds of loans out there. So we are going to break down the most common loan types as well as the lingo you will encounter.  Welcome to the Game of Loans!

Department of Education Loans

Your good ole’ friend, FAFSA (Free Application for Federal Student Aid), must be completed in order for you to qualify for any kind of loan from the Department of Education (DOE). These are called “direct loans.” The majority of students will qualify for either direct subsidized, unsubsidized loans, or a combination of both. Direct student loans typically have the lowest interest rates and the most flexible repayments options. They also have a fixed interest rate. Meaning, the interest rate will never change over the duration of the loan.

Your direct loans can also qualify you for programs such as Public Student Loan Forgiveness. This is a program for students who work in certain governmental agencies or nonprofits. After 120 qualifying payments, students may be eligible for student loan forgiveness. The DOE also offers loans for parents of dependent students (typically under 24 and unmarried). These come through the Direct PLUS (Parent Loan for Undergraduate Students) program. We will cover these more in-depth later.

Direct Subsidized Loans

Direct subsidized loans are offered to students demonstrating a high financial need on their FAFSA application. Subsidized loans are the ideal type of loan because the government doesn’t charge you interest while you are still enrolled in college. They also give you a six month grace period after you graduate. If you have the option to choose subsidized over unsubsidized, ALWAYS choose subsidized! It’s important to note that you typically will enter repayment for these loans six months after graduation or dropping below half-time status.

Direct Unsubsidized Loans

Most students, regardless of financial need, are offered direct unsubsidized loans. These loans begin accruing interest as soon as you receive your loan money (or your school does for tuition). You will also begin to repay these loans six months after graduation or dropping below half-time status. Since interest begins accruing right away, do your future self a favor, if you have the money to make interest-only payments while you are still in school, DO IT!

Direct PLUS Loans (Parent Loan for Undergraduate Students)

If you are a dependent student, your parents may also qualify for loans from the DOE to cover your college expenses. If there is still a gap in aid after financial aid, your parents can apply for a PLUS loan to cover the remainder of your costs. For example, say the cost of attending your college is $10,000 per semester, and your total aid package is $4,000 per semester. Your parents can take out a PLUS loan for the remaining $6,000. The funds will be paid directly to your college or university. 

If there is any money left over, a check will be sent to your parents and they may apply the funds to your school account. Your parent(s) must pass a successful credit check to be eligible for the funds. In the event that their application is denied, they can either request an endorser or you can receive additional direct unsubsidized loans. Repayment for this type of loan typically begins when the loan is paid out, unless a deferment is requested. Since repayment begins immediately, explore your school’s payment plans. Payment plans throughout college are typically interest free.

Private Loans

If you’ve exhausted all of your other aid options, you may find yourself considering private loans through a bank, credit union, or loan company. Be aware that these loans will typically carry a higher interest rate and do not offer as flexible of repayment options as DOE loans. 

Always keep in mind, these companies are in the business of making money. Variable interest rates may sound enticing, but this means it can change at any point throughout the duration of your line. At first, it may be lower than the interest rate of direct student loans. But this number can increase at any point, so that’s a definite risk.

Repaying Your Loans

If you plan to take out loans, it’s important to thoroughly research the terms of the loans and the repayment options. Craft a plan for the monthly payments when repayment time comes around, whether that’s a few months from now or a few years from now. It can be easy to adopt an “I’ll worry about it later” mentality when it comes to students loans, but be sure to keep track of the amount that you owe. You don’t want it to be an unpleasant surprise awaiting you. There are several types of repayment plans you will see, but here are a few of the most popular:

Standard Repayment

Payments are a fixed amount throughout your entire repayment period. You usually have up to 10 years to pay them off with this plan.

Graduated Repayment

Payments are lower at first, and then gradually increase over time (hopefully as your income increases). With this plan, you typically have 10 years to pay them off.

Income-Based Repayment

Payment amounts are based on your income, family size, etc. Usually, your loan payment will be 10-15% of your discretionary income (income after taxes and necessities). This means each year your payment can change as your income or family situation changes. Any remaining debt will be forgiven after 20 or 25 years.

Your college education is an investment. Be sure you are dedicated to finishing your degree. The worst type of loans are those for a degree you never earned. We want to ensure you are aware of all of your financial aid options when it comes to applying to college, so check out all of our advice on financial aid.