What are the different types of student loans?

Over 92.8 million living Americans have had student loan debt at some point. It’s important to take the time to understand how student loans work, what they can be used for, and how to access your best options.

There are 4 types of federal student loans available to students. Federal loans are provided by the U.S. Department of education and are very common among students.

These 4 types of federal student loans are:

  1. Direct Subsidized Loans: Meant for undergraduate students with financial need, these loans are favorable because the government will cover the cost of interest during certain periods.  When you are in school and during the 6-month grace period after graduation, you won’t have to pay interest.
  2. Direct Unsubsidized Loans: With direct unsubsidized loans, the borrower handles the accrued interest during the life of the loan, even before it enters the repayment period. There is no financial need requirement for unsubsidized loans and graduate students are eligible as well.
  3. Direct PLUS Loans: Graduate students, professional students, or parents of undergraduate students are eligible for PLUS loans. These loans are meant to cover expenses that go beyond what is covered by the two loan types above.
  4. Direct Consolidation Loans: A bit different than other loan types, consolidation loans allow borrowers to combine all of their outstanding loans into one package, with an average interest rate.

Students can also access private loans through banks and other lenders, if necessary, but the interest rates will almost always be higher than with government loans. Configure the student loan calculator above for any of these by selecting Edit Formula.

How are payments calculated on student loans?

Like many other loans, the repayment requirements of your student loans will depend on a number of factors. How much money you borrowed, the type of loans you have, the life of each loan, and the interest rate attached to each will all play a part in your overall monthly payment.

If you take out a $25,000 loan with a 4.5% interest rate and a life of 15 years, you will pay $191.25 per month. Some of that payment will go towards paying off interest, and the rest will go towards the principal loan amount.

What do student loans cover?

Higher education can be extremely costly. On top of tuition, students are required to pay for books, housing, supplies, and other miscellaneous expenses. Student loans are meant to help students will all schooling-related costs, such as:

  • Tuition
  • Housing
  • Transportation
  • Books
  • Supplies
  • Dorm necessities
  • Living expenses

Some loan types will have different requirements for what the loan can and cannot go toward, so be sure to check the fine print.

Which student loan has the lowest interest rate?

The interest rates for federal student loans will change each year, so your rate will depend on when you took out your loan. In the first half of 2022, undergraduate direct subsidized and unsubsidized loans had an interest rate of 3.73%. Direct PLUS loans were at 6.28% and graduate loans were at 5.28%.

If you borrow from a private lender, you’ll likely see higher interest rates than you would with federal loans.

Are student loan payments tax deductible?

Partially, yes! Every year, you will be eligible for a tax deduction for the amount you paid in interest that year. This tax benefit is applicable for all education-related loans, not just federal student loans. The maximum deduction is $2,500 per year.

How long does it take to pay off student loans?

Student loans can take anywhere from 10-30 years to pay off. Borrowers with federal student loan debt are usually enrolled in the Standard Repayment Plan, which is designed to last 10 years. However, you can adjust the repayment plan depending on your income and other factors.

What happens if I don’t pay back my student loans?

As with any loan, failing to make your monthly payments on your student loans could lead to a wide range of issues. If you miss multiple payments, your loan will enter default and start negatively impacting your credit score.

In severe cases, you could lose your eligibility to borrow money in the future, end up in credit collections, and even face potential lawsuits. If you are unable to make the minimum payments, work with your lender to figure out a repayment plan that your income can accommodate.

Will student loans be forgiven?

Though there is a lot of discussion about potential student loan forgiveness programs in the media, it’s unclear exactly how they will pan out. There could be a specific amount that is forgiven for borrowers under a set income limit, or it could be different.

Don’t bank on your student loans being forgiven, instead, plan to pay them off. Then, if they are forgiven, it’s a bonus.