Know your student loan options

Determining how to pay for college can feel overwhelming, especially given how many different options there are. That’s why we’ve broken out the most common types of loans available for you.

Federal loans are the most common, and you can apply by first filling out the Free Application for Federal Student Aid (FAFSA). The William D. Ford Federal Loan Program includes Direct Subsidized Loans, Direct Unsubsidized Loans and Direct PLUS Loans. There are different ways you may qualify and reasons that you may be offered one over the other:

Direct Subsidized Loans: For High Financial Need

Direct Subsidized Loans, are available to students who show high financial need. Interest rates tend to be lower, and interest doesn’t begin accruing while students are in school (though there is an origination fee). Loan limits are on a sliding scale and range from $$3,500 for a college freshman to $5,500 for college seniors. Your school determines the amount you can borrow.

In order to qualify for this loan, you must be enrolled at least half-time at a school that participates in the Direct Loan Program. You also need to be enrolled in a program that leads to a degree or certificate. These loans are made by the U.S. Department of Education’s Direct Loan Program.

Direct Unsubsidized Loans: For All Students

Direct Unsubsidized Loans are available for all students, no matter their level of financial need. Interest begins accruing when the loan is first distributed, and rates can be higher than subsidized loans. Your school determines how much you can borrow based on other financial aid you receive as well as your cost of attendance. If you find you need more beyond this loan, you will need to explore additional loan options.

Like a Direct Subsidized Loan, in order to qualify for this loan you must be enrolled at least half-time at a school that participates in the Direct Loan Program. You also need to be enrolled in a program that leads to a degree or certificate. Unlike a Subsidized Loan, you do not need to demonstrate need to receive the loan. These loans are made by the U.S. Department of Education’s Direct Loan Program.

Direct PLUS Loans: For Parents, Graduate Students and Professional Students

Direct PLUS Loans can be taken out by parents of dependent undergrad students. These students must be under 24 years old, single and have no dependents themselves. Direct PLUS Loans can also be used by students pursuing a graduate or professional degree or certificate.

In order to qualify, you need to have a pretty clean credit history, and the student must be enrolled at least half-time in an eligible school. These loans are made by the U.S. Department of Education’s Direct Loan Program.

Perkins Loans: For the Greatest Financial Need

Perkins loans are available to students who show the greatest financial need, with most loans awarded to families with annual incomes lower than $25,000. Interest doesn’t begin accruing until repayment starts nine months after graduation.

State Student Loans: For All Students

State student loans differ from state to state. Some don’t offer any student loans, while others offer a plethora. Your FAFSA automatically applies you for some state loans, but other state programs require a separate application.

University Loans/Scholarships: For All Students

Colleges offer different student loans, scholarships, and work-study programs. Scholarships are the best way to pay for college because it can lessen the amount of debt you take on. Think about it: you receive the money and you don’t owe anything once you graduate, except a (very appreciative) thank you note. When researching scholarships, look for opportunities that fit uniquely to you. This includes civic involvement scholarships, community scholarships, race or ethnicity scholarships, etc. Consult the financial aid offices at the colleges you’re considering about what they can offer. You can also use a search tool from the U.S. Department of Labor’s Scholarships finder.

Private Student Loans: For All Students to Bridge the Gap

Even though governmental aid and school-based student aid are the preferred ways to pay for school, many students will also need to consider private student loans. These student loans are designed to cover the remaining cost of your education.

They bridge the gap between your federal/school aid and your remaining expenses. When government loans don’t cover the full cost of your tuition – or if you do not qualify because of the level of your Expected Family Contribution (EFC)  – private student loans are an important option.

When shopping for a private loan, make sure you do not have prepayment fees, origination fees, or higher rates for deferred payments. Some lenders have these fees and higher rates, it’s a big help when they do not. With deferred payments, you can focus on finding the right career after college and not worry about having to make loan payments immediately after graduation.

Katie Pins is a marketer fascinated with finance. Whether the topic is about the psychology of money, investment strategies or simply how to spend better, Katie enjoys diving in and sharing all the details with family, friends and Money Mentor readers. Money management needs to be simplified and Katie hopes she accomplishes that for our readers. The saying goes, "Knowledge is Power", and she hopes you feel empowered after reading Money Mentor.