Types of College Loans

For many students, borrowing money—also known as taking out a loan—is a way to make their college dreams come true. But unlike other types of financial aid, loans have to be repaid. Learn the facts about loans and you can borrow wisely.

Start by understanding some important definitions:

Defer: Some federal loans let you defer—or delay—paying the loan back until after you graduate.

Interest rate: The interest rate is the cost of borrowing money and is usually a percentage of the loan that is added to the amount you borrow. The higher your interest rate, the more you'll owe over time.

Need-based: Aid that is need-based is awarded to students who are determined to have financial need; that is, the amount they are able to pay for college is less than the cost of attending the college. The federal government offers need-based loans to students. Eligibility for these loans is determined by the Free Application for Federal Student Aid (FAFSA).

Subsidized: Some federal loans are subsidized, which means the government pays the interest on the loan while you're in college. Learn more about the rules for subsidized loans on ed.gov.

For more definitions related to loans and other financial aid, see the financial aid glossary.

Types of Loans

Federal and state governments, colleges, and private organizations provide college loans to students and parents. Below is an overview of the types of loans that are available.

Federal Loans

• Federal Direct Subsidized Loans are interest-free while you're in college and have a borrowing limit that increases for each year of school you complete.
• Federal Direct Unsubsidized Loans charge interest but allow you to add the interest fees to the amount you borrow until after graduation. However, doing this means you’ll actually end up owing more. Making interest-only payments while in school helps you reduce the overall amount you will repay.
• Federal Direct PLUS Loans allow parents (or graduate students) to borrow the total cost of college, minus any financial aid received.

The U.S. Department of Education provides comprehensive information about these federal loans including current interest rates and repayment plans.

State Loans

To learn about college loans that may be available from your state, use the contact information on the U.S. Department of Education's list of state higher-education agencies.

Private Loans

• In general, private loans are not subsidized or need-based. They also often require a cosigner—someone who promises to repay the money if the student fails to do so. The interest rates of private loans vary.
• Banks and other financial institutions usually have the highest interest rates.
• Some private organizations and foundations offer lower interest rates. Use our Scholarship Search tool to find these.
• Some colleges offer loans with relatively low interest rates.

Keep in mind that it's important to understand all the terms of any loan before you accept it. Some private loans might offer relatively low interest rates, but their other terms might not be as favorable as those of a federal loan. For example, federal loans generally offer flexible terms and other protections—if you don't have a job or become disabled, you might be able to adjust your payments—while private loans may not be as flexible.

Why Need-Based Loans Are Best

The federal government's Direct Subsidized Loan is a need-based loan that may be offered to eligible students. Federal need-based loans are often the best choices for the following reasons:

• The government supports your education by subsidizing the loan (paying the interest fees while you’re in college).
• These loans often provide low interest rates.
• They allow you to defer repaying any money until you’re out of college and, hopefully, earning an income.
• They don’t require a credit check.
• They may provide better benefits than private loans.

So if you qualify for this type of loan, choose it first.

This article is intended for informational purposes and is not intended as tax or financial advice.