While a college degree can be invaluable, it comes at a cost. And often, that cost is more than the average family can afford on their own. As a result, many people turn to student loans to finance higher education. According to the Education Data Initiative, 42.8 million people have federal student loans in 2024.
And it’s no wonder. With the average cost of college increasing nearly 125% over the past 20 years, many people have to borrow money to cover tuition and fees. If you need to finance your education, you’re not alone. You also have a few options for doing so, including federal student loans, which the U.S. government issues; and private student loans and refinancing loans, which banks and credit unions issue.
Understanding how student loans work will help you decide on the best type of student loan for your situation. Here’s some helpful insight into the 3 types of student loans.
Types of Federal Student Loans
The U.S. government issues federal student loans. These loans have fixed interest rates, meaning the rate won’t increase or decrease over time. The U.S. Congress sets student loan interest rates each year, and rates don’t change based on your financial situation or credit history. For the 2024-2025 school year, federal student loan rates range from 6.53% to 9.08%, depending on your loan type.
Generally, federal student loans are the first and best option to consider if you need to finance your education. They often have lower interest rates than private student loans and come with additional benefits, like the potential for student loan forgiveness and the option for income-driven repayment plans.
If you’re interested in applying for federal student loans, you’ll start by completing the Free Application for Federal Student Aid, or FAFSA. The FAFSA can help determine which types of federal student loans you’re eligible for. Federal loan options may include:
- Direct unsubsidized loans
- Direct subsidized loans
- Direct PLUS loans
- Perkins loans (discontinued)
- Direct consolidation loans
Direct Unsubsidized Loans
The two most common types of federal student loans are direct unsubsidized and subsidized student loans. Direct unsubsidized loans aren’t awarded based on financial need and are available to both undergrad and graduate students. Borrowing limits apply with these loans, and they vary based on your year in school and your dependency status, or whether you’re independent from or a dependent of your parents.
Annual borrowing limits for undergraduates range from $5,500 to $12,500 for direct unsubsidized and subsidized loans combined. Borrowing limits vary depending on your year in school and your dependency status. The annual limit for graduate students is $20,500.
For the 2024-2025 school year, interest rates for unsubsidized and subsidized undergraduate loans are 6.53%. Unlike subsidized loans, interest begins to accrue as soon as you take out a direct unsubsidized student loan, even if you’re still in school.
Direct Subsidized Loans
To qualify for a direct subsidized loan, you’ll need to demonstrate financial need, and the information you share on the FAFSA will help determine your eligibility.
Unlike unsubsidized loans, direct subsidized loans are only available to undergraduate students. And as long as you’re in school at least half-time, interest won’t accrue on your loan. It also doesn’t accrue during periods of deferment or a six-month grace period after graduating college. Interest rates for direct subsidized loans are 6.53% for the 2024-2025 school year.
Depending on your dependency status and school year, you can borrow from $3,500 to $5,500 per year with a direct subsidized loan. As mentioned, these loans aren’t available for graduate students.
Direct PLUS loans
If you need additional financial aid beyond a direct subsidized or unsubsidized loan, a direct PLUS loan could be an option. These loans are offered to graduate students or parents of dependent undergraduate students and can help offset costs that aren’t covered by other types of financial aid. Interest rates for these loans are 8.08% for graduate students and 9.08% for parents for the 2024-2025 school year.
Direct PLUS loans aren’t awarded based on financial need, but you will undergo a credit check when you apply. Borrowers with poor credit may not be eligible for a direct PLUS loan.
Perkins Loans (Discontinued)
While Perkins loans are no longer issued to new borrowers, they were a popular loan option up until 2017. Those with a demonstrated financial need could qualify for a Perkins loan. If you have an outstanding balance on your Perkins loan and work in public service, you could be eligible for loan forgiveness.
Direct Consolidation Loans
It’s common for students to have several federal loans from different servicers, which can make it tricky to manage your payments after graduation. A direct consolidation loan aims to fix this issue by allowing you to consolidate all your federal loans into one.
While federal student loan consolidation can be useful, there are a couple of drawbacks to be aware of. First, depending on the loan, you could end up with higher interest charges and a longer term than your original loan. You might also lose some student loan forgiveness benefits.
Types of Private Student Loans
Private student loans are also worth considering if you need to finance your college education. These loans can help you cover the costs of tuition and fees if federal student loans aren’t enough.
Several banks, online lenders, and credit unions offer private student loans, and eligibility requirements are different from what you’d see with federal student loans. Typically, a lender will determine if you’re eligible for a private student loan by looking at your credit history. To qualify, you’ll likely need good credit.
Those with poor credit may want to consider using a student loan cosigner to increase their chances of approval. A cosigner is someone who serves as support on your loan application, ideally someone with excellent credit. Your lender will consider their credit and yours when you apply.
There are no set interest rates for private student loans; instead, rates vary by lender and can be fixed or variable. While traditional private student loans are common, there are also less common types, including:
- Parent student loans
- Medical school student loans
- Private student loans for bad credit
- Private student loans with no cosigner requirements
Parent Student Loans
Some lenders offer private student loans for parents to help families cover the cost of higher education. These loans can be refinanced later on if you want to transfer student loans to your child.
Medical School Student Loans
There’s no doubt that medical school is expensive. To help offset the high cost, some lenders offer student loans for medical school students. Good news if you’re considering this option: For borrowers with good credit, medical school loans may have more favorable interest rates than federal student loans.
Private Student Loans for Bad Credit
While certain lenders may require that you have good credit to get approved for a private student loan, there are some options for borrowers with poor credit. If you’re looking for a student loan for bad or no credit, some lenders may consider your future earning potential in addition to your credit to help determine your eligibility for a loan.
Private Student Loans Without Cosigner Requirements
Many undergraduate students have limited credit and need to rely on a cosigner to get approved for private student loans. But if you’re wondering how to take out student loans without a cosigner, you may be in luck. To determine if you’re eligible for a loan, certain lenders may consider factors beyond your credit, like your earning potential after college. This eliminates the need for a cosigner.
Types of Student Loan Refinancing
Student loan refinancing could be a smart option for those who want to change their original loan or consolidate student loan debt. The benefits of student loan refinancing may include a longer term, lower interest rate, or simplified monthly payment.
In general, student loan refinancing is a good idea if you want to simplify your monthly payments. By consolidating your existing loans, you’ll have one payment to manage rather than several. You can also refinance your student loan multiple times if you choose.
Here are some common types of student loan refinancing:
- Private student loan refinancing
- Federal student loan refinancing
- Parent PLUS Loan refinancing
Private Student Loan Refinancing
While private student loan refinancing eligibility requirements vary by lender, you’ll typically need good credit to qualify. That said, some lenders may consider other factors when determining if you’re eligible for a refinance loan.
Refinancing private student loans could be a smart move for a couple of reasons. For instance, you might qualify for a lower interest rate on your loans by refinancing. Or you could benefit from consolidating several loans into one for streamlining your payments. After all, one monthly payment is much easier to track than several.
Federal Student Loan Refinancing
Borrowers may also choose to refinance federal student loans with a private lender. However, there’s an important caveat to be aware of if you decide to go this route. You’ll give up the benefits that come with your federal student loans, such as the potential for an income-driven repayment plan or student loan forgiveness.
Still, federal student loan refinancing could be a good choice if you want to lengthen your loan repayment term to create some room in your monthly budget. (Just keep in mind that a longer term may result in higher interest costs over time.) It could also be useful if you find a refinancing loan with a very low interest rate, as a lower student loan interest rate could help you pay off your debt more quickly.
Parent PLUS Loan Refinancing
Parent PLUS loans have a relatively high interest rate of 9.08% for the 2024-2025 school year. For those with good credit, refinancing parent PLUS loans to a lower-rate loan could be worth considering.
For instance, some lenders offer competitive rates as low as 4.94% on fixed-rate refinances. Refinancing from a 9.08% rate to a 4.94% rate could save you a significant amount in interest over time.
There are several types of school loans out there, but if you are looking for private student loans or want to refinance your student loans, ELFI might be able to help. We offer competitive rates, no origination fees, and flexible repayment options. Plus, there’s no penalty for paying off student loans early with ELFI.
