The Types of Federal Student Loans
Before you borrow dollar one, you'll want to understand the types of federal student loans available. These are the most common:
Subsidized student loans
When borrowing via federal student loans, subsidized student loans are by far the best option. Why? You don’t accrue interest while you are at least a half-time student or during other allowed repayment breaks. How much of a difference can this make? Well, a $4,000 loan accrues $260 in interest in one year. These loans are only available to undergraduate students and are based on financial need. Financial aid packages may include a combination of subsidized and unsubsidized loans.
Unsubsidized student loans
Unsubsidized loans are a student loan type available to both undergraduate and graduate students. Interest always accrues, regardless of whether you get an excused repayment break or are on an income-driven repayment plan. Unsubsidized loans do have borrowing limits but they don’t have income limits for qualifying. The maximum borrowing limit per year for a graduate or professional student is $20,500. Junior and senior undergraduates can borrow up to $12,500 annually.
Graduate PLUS loans
These loans are what graduate students utilize if unsubsidized loans don’t cover all expenses. Interest rates are one percent higher than unsubsidized loans for graduate students and two percent higher than unsubsidized loans for undergraduate unsubsidized loans. This is why it can be a bad idea for students to pay off student loans for their undergraduate studies and then borrow for graduate school. Instead, it’s often better to just borrow less and redirect the money you would have used to pay off undergraduate loans toward graduate school expenses. Remember, these loans will cover up to the full cost of attendance including room and board. Approval is not based on income and affordability, so borrow carefully. The good news is these loans do qualify for most income-driven repayment plans as long as they aren’t consolidated post-graduation with parent PLUS loans.
Parent PLUS loans
Parent PLUS loans are basically the same as graduate PLUS loans. The only difference is that if parents consolidate these loans with loans under their own name, the new loan will not qualify for most income-driven repayment plans. Consequently, it’s often a better idea to keep parent PLUS loans separate from your other federal student loans.