Types of Student Loan

Posted by nabeelshaukat on February 4th, 2012

Student loan is a type of financial aid for the purpose of paying college fees and other expenses related to education. The similarity between student loans and other loans is that they need to be repaid with interest. Although if it's a government student loan, the interest is usually lower than a traditional bank loan.

Broadly speaking, there are two types of student loans

1.  Federal Student Loans

2.  Private Student loans

Federal Student Loans:

Federal student loans are provided by the government. They have very favorable and lenient loan terms. The interest rates are set by the government. The interest rates are fixed and very low. The eligibility criteria is not very tough and nearly all students can qualify for federal student loans.

Federal student loans are also of different types. Following are the types:

a)  Stafford Loans

Stafford loans are provided by the Department of Education. These loans are available for students who submit an FAFSA and who has a financial need as determined by their school. Stafford loans are of further two types i.e. Subsidized and Unsubsidized.

• Subsidized Federal Direct Stafford Student Loan are need-based student loans. The special feature of these loans is that the interest does not accrue while the student is in school or during the six-month grace period after leaving college.
• Unsubsidized Federal Direct Stafford Student Loan is not need-based. The particular feature of these loans is that the students are responsible for all the interest that accrues on the loan. The loan accrues not only during the grace period but also while the student is in school.

b)  Federal Perkins loan 

These loans are for the students who have special financial needs. Students who have greatest financial needs qualify for Perkins loan. These loans have very low rate of interest (only 5%). Another special feature of these loans is that they have longer grace period and does not have any fees. These loans share many of the features of the Subsidized Stafford loan.

c)  Federal Parent PLUS loans

These loans are available for the parents of graduating students and dependent students. The amount of loan can be equal to the full cost of attending the college. The interest rate is fixed at 8.5% for these loans and it is charged for the entire period. The parents must have a positive credit history for being qualified for these loans.

Private Student Loans

Private student loans are provided by banks and other financial institutions. Usually they are designed to help supplement Federal Student Loans for educational expenses. Students apply for private student loans to cover the rest of the educational costs in addition to federal student loans.

There are many banks, companies and financial institutes that provide these loans. These loans are provided only to those students who have a positive credit history. The rate of interest varies depending on several factors. The rates of interests are favorable for students:

• ·   who have a good credit history and a good credit score,
• who opt for automatic debit payments,
• ·   and who have a a co-signer.