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Understanding the Types of Loans
There are multiple ways to finance higher education, but federal and private student loans are the most common options.
Federal student loans are offered by the U.S. Department of Education to help eligible students cover the cost of post-secondary education. These loans are available at most post-secondary institutions including four-year colleges and universities, community colleges, and many trade or technical schools. Federal student loans usually offer lower interest rates, feature more flexible repayment terms, and may offer partial forgiveness in some situations, so consider them first.
There are two types of federal student loans:
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Direct Subsidized Loans: Loans available to undergraduate students who demonstrate financial need. Need is determined by subtracting the FAFSA Student Aid Index from the school’s Cost of Attendance. The government covers the interest while you’re enrolled, so your loan won’t increase during that time. The annual maximum for first-year undergraduates is $3,500, with limits increasing by grade level.
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Direct Unsubsidized Loans: Loans similar to Direct Subsidized Loans, except there is no requirement to demonstrate financial need, and interest accrues while you’re in school. The annual maximum for first-year dependent students is $5,500 minus subsidized loan eligibility, with limits increasing by grade level.
Both loan types offer a six-month grace period after leaving school or dropping below half-time enrollment. Payments aren’t required during this time, but you may choose to make payments.
Private student loans vary widely depending on the lender. These loans, offered by banks, credit unions, or other institutions, are credit-based and often require a credit-worthy cosigner. Interest rates may be fixed or variable and can range dramatically, often depending on the borrower and co-borrower’s credit scores. Repayment terms vary by lender.
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