There are many different kinds of loans available to students and each type works differently. Some loans are definitely better than others.
Lender: These loans are offered by the federal government to help families afford college.
Responsible for repayment: Student
Interest: These loans do not accrue interest while you are in college and won’t start until after you graduate. This means that when you graduate these loans will be the same amount as when you first got them. The fixed interest rates for these loans in 2019-20 is 4.53%, which is very low compared to average.
Repayment timing: Start repaying 6 months after graduating from college or 6 months after leaving college.
Deferral: Because they are federal loans, you can apply for Deferral or Forbearance that temporarily “pauses” your payments after graduation if you enter into graduate school, a government-run volunteer organization like AmeriCorps, the military, or have economic hardship.
Application process: No additional application needed. You applied for these loans automatically when you filled out the FAFSA.
Our recommendation: These are the safest kind of loan. If you take out any loans, take out these first before considering any other loan.
Lender: These loans are offered by the federal government to help families afford college.
Responsible for repayment: Student
Interest: These loans start accruing interest while you are in college which means the amount you have to repay will grow while you are in college. The good things about Federal Direct Unsubsidized Loans is that they also have very low fixed interest rates (4.53% in 2019-20).
Repayment timing: Start repaying 6 months after graduating from college or 6 months after leaving college.
Deferral: Because they are federal loans, you can apply for Deferral or Forbearance that temporarily “pauses” your payments after graduation if you enter into graduate school, a government-run volunteer organization like AmeriCorps, the military, or have economic hardship.
Application process: No additional application needed. You applied for these loans automatically when you filled out the FAFSA.
Our recommendation: These are the second safest kind of loan. Always maximize your Federal Direct Subsidized and Unsubsidized loans before considering any other loan.
Lender: These loans are offered by the federal government to help families afford college.
Responsible for repayment: It is legally the parents’ responsibility to repay these loans and they can’t be transferred to the student later in life.
Interest: These loans start accruing interest immediately which means the amount you have to repay will keep growing until the whole loan is repaid. They have a higher interest rate (7.08% for 2019-20) than federal direct loans and have higher added fees.
Repayment: Parents are expected to start repaying these loans while you are still in college, and must apply for a special deferral if they can’t start repaying until you graduate.
Deferral: Unlike federal direct loans, PLUS loans have fewer deferral and forbearance options (for example, repayment cannot be paused if the student enters AmeriCorps).
Application process: Your parent must fill out an application and have a good credit score to receive a Parent PLUS loan.
Our recommendation: Here are a few tips if you are considering taking out Parent PLUS Loans:
Lender: Private loans are offered by banks and loan agencies, not the government.
Responsible for repayment: It depends on the loan but typically students will either need a parent to co-sign the loan or the parent would have to take out the loans themselves. If a parent takes out a private loan, they can typically transfer this loan to their student late in life.
Interest: The interest rates on private loans are usually based on your parents’ credit score or your own, so the lower your credit score, the higher your interest rate. Private loans interest rates vary widely, ranging anywhere from about 6%-18%. However, unlike with federal loans, the interest rate for private loans can be either fixed or variable. If it is variable, it can increase unexpectedly over time.
Repayment: Private loans monthly repayments typically start immediately after taking out the loan.
Application process: You or your parent must research loan providers and fill out an application.
Our recommendation: These are one of the riskiest loan options. Here are a few tips if you are considering taking out Private Loans:
Lender: Payday lenders
Responsible for repayment: Typically, you have to be 18 years old and have an income in order to get a payday loan.
Interest: If you do the math, the interest rates on payday loans can be as high as 400%!
Repayment: Typically these loans are meant to be for two weeks. Payday lenders have access to your bank account and will automatically pull money from your account when your next paycheck arrives.
Application process: Typically these loans are not hard to get but you will need to give the lender access to your bank account.
Our recommendation: These loans are often a trap that leave you stuck in debt for a very long time. These lenders are known for trying to take advantage of people who are desperate for cash. You should absolutely avoid taking out these loans.
Lender: credit card company
Responsible for repayment: credit card holder
Interest: The better your credit score, the lower your interest might be. In general, interest is around 16.5%.
Repayment: Credit card bills arrive monthly. You have to make a minimum payment each month but it is strongly recommended that you don't carry over a balance into the next month.
Application process: Fill out an application for a credit card with your credit score and get approved.
Our recommendation: Credit cards have a higher interest rate than federal loans and may have a higher interest rate than some private loans. Maximize federal loans and research private loans--using a credit card should be one of the last options you consider.
Check the Financial Aid section of your college’s portal website to see a list of the loans you qualify for. Read the loan titles carefully because they can be confusing.
Check out this guide on “Tips for Finding your Financial Aid Award.”
In general, Moneythink recommends taking out no more than $5,500 per year in loans. For most students, this means accepting up to $3,500 in Federal Direct Subsidized loans and $2,000 in Federal Direct Unsubsidized loans.
If you take out up to $5,500 per year in these loan types, you’ll have to make about $54,600 in your first year after graduating college. You’ll pay back $360 per month for 10 years after graduating.
(You’d probably be surprised by how much money the average student at your college makes after graduating.)
Your first college bill will likely be due in July or August--if you plan to use loans to cover part of that bill, you should accept your loans a few weeks before your bill is due.
Check out this guide on “3 Steps to Getting Your Loans on Time.”
Federal loans also offer various different repayment plan options, which can change your minimum monthly payment amount depending on how much money you are earning or how quickly you want to pay them off.
If you are not able to meet your minimum monthly payments, your loan could go into delinquency or default. This can really hurt your credit score. Worst case scenario, the government could start taking payments for loans that are in default out of your monthly paycheck.
If you get really stuck, there are companies that help with managing your loans after college. Here are a few examples: Student Loan Hero, Sofi, Earnest
As a DREAMer, you will not have access to the first three kinds of loans mentioned in this guide: Subsidized Loans, Unsubsidized Loans, & Parent PLUS Loans. In general, your only option may be private loans.
There is one important exception to this! Some colleges are trying to be supportive of DREAMers and may choose to offer you a special kind of loan that is student friendly. If your college is offering you something like this, it likely has better interest and repayment options than a private loan so you should probably take out these loans before considering private loans.
Let your Moneythink coach help.
Text your coach and say “I need help with my loans" if you still have questions about loans.