What Are the Types of Student Loans?

The two main types of loans for higher education are federal student loans and private student loans.

Federal student loans are provided through the U.S. Department of Education and typically carry lower, fixed interest rates that are not based on the borrower’s creditworthiness.

Private student loans are offered through banks, credit unions and other private entities. Interest rates can vary and are based on the borrower’s creditworthiness. Most undergraduate students do not have extensive credit history and may require a co-signer, such as a parent or guardian, to qualify for a private student loan

Private vs. Federal Student Loans

When deciding how to pay for college, it can be overwhelming to navigate the options available. Understanding the differences between federal and private student loans is a crucial first step.

Federal student loans are provided by the U.S. Department of Education and are accessed by submitting the Free Application for Federal Student Aid, or FAFSA. These loans do not require a credit check and have interest rates set by federal law, which are typically lower than private loan rates.

Private student loans are offered by banks, credit unions and other financial institutions. These loans require a credit check and typically come with either fixed or variable interest rates. Interest rates are determined by several factors, including loan amount, repayment length, credit history and debt-to-income ratio.

Private student loans do not come with the same borrower protections and benefits as federal loans, such as income-driven repayment plans, guaranteed hardship options, loan forgiveness programs and longer default periods. They are often sought when federal loans cannot cover the full cost of education.

Student Loan Interest Rate Basics

If you’re trying to decide which loan type is best for you, the best place to start is with the costs. Borrowers should consider both the short-term and long-term costs of their loan, including any origination fees and interest rates.

Interest rates on federal student loans are determined based on the year of origination and can vary over time. Interest rates for undergraduate federal Direct loans in the 2022-23 academic year were 4.99%. Rates for these loans have fluctuated in the past, however, ranging from as low as 2.75% to more than 5% over the last five years. Graduate students and Parent PLUS loan borrowers generally have higher interest rates compared to undergraduates.

In addition to interest rates, federal student loan borrowers are required to pay an origination fee. Currently, the federal student loan fee is 1.057% for most loans but is a much higher 4.228% for PLUS loans.

Private student loan interest rates can vary more widely. Lenders determine the interest rate and eligibility based on the borrower’s creditworthiness. Private student loan fixed rates typically range between 4.29% and 13.63%, according to a recent U.S News analysis.

There are things you can do to ensure you’re getting the best interest rate on your private student loans, such as maintaining a strong credit score, comparing lenders, shopping around for discounts and using a co-signer.

Enrolling in automatic payments can often reduce rates by 0.25 to 0.5 percentage point, and some lenders may offer additional rate discounts for making consecutive on-time payments or hitting other benchmarks.

If you find it challenging to qualify for a competitive rate on a private student loan, it may be beneficial to work on improving your credit score or consider finding a creditworthy co-signer, such as a trusted relative, to increase your chances of obtaining a better rate.

How To Get a Student Loan

To obtain federal student loans, start by filling out the FAFSA to determine your eligibility for financial aid. After that, you’ll receive a Student Aid Report summarizing your information for review. You will then receive financial aid award letters outlining your aid eligibility for the schools you’ve selected. Once you’ve reviewed your options, contact your chosen school to accept the financial aid offer and determine if additional borrowing is needed.

For private student loans, check your credit score and credit report to assess your eligibility. Good credit and a low debt-to-income ratio are typically required. Check whether the lender offers prequalification so you can see what you qualify for without the need for a hard credit inquiry. If you don’t meet the requirements, consider applying with a creditworthy co-signer.

To find the best private student loans, compare offers from multiple lenders. When comparing offers, consider factors such as fixed vs. variable APRs, repayment terms and hardship options. You can use the U.S. News loan calculator to estimate your monthly payments by inputting the loan amount, repayment length and interest rate.

Once you’ve selected a lender, complete the formal application. Once approved, the lender will communicate with you and your university to certify attendance costs and disburse the funds.

When Should You Refinance Student Loans?

Refinancing student loans with a new lender can sometimes significantly reduce interest rates. For borrowers who cannot qualify for a lower rate on their own, adding a co-signer with good credit could help secure a lower rate.

Student loan refinancing can offer several benefits, but it’s important to carefully consider the pros and cons before deciding to refinance.

Benefits of Student Loan Refinancing:

Potential Drawbacks of Student Loan Refinancing:

Refinancing is worthwhile if you can secure better terms, such as a lower interest rate, based on your credit history and financial situation. Borrowers with a strong credit score and history will have better interest rates and more options for refinancing.
When considering refinancing, there are many factors that can go into choosing a lender. Borrowers should consider interest rates, repayment terms, autopay discounts, hardship options, fees, customer service and forbearance terms.

Remember to carefully evaluate your specific financial situation and loan terms before you decide on refinancing. Refinancing for a longer repayment term and requesting loan modifications can help lower monthly costs but could increase overall repayment costs.

If you do choose to refinance, follow these steps:

Review your credit score and existing loan terms. You’ll want to know where both you and your existing loan stand before applying for a new loan.

Get prequalified from multiple lenders. This will allow you to shop around and compare estimated loan terms, such as interest rates, fees and discounts. Use a loan calculator to crunch the numbers and compare options.

Gather the necessary documents. Make sure you have all the required documentation you need and complete the application.

Keep paying on your existing loan. Make sure you keep making payments on your current loan until the refinancing process is complete.