A Quick Overview of the 2 Types of Student-Loan Lenders

On the surface, breaking down the different types of student-loan lenders seems pretty simple. They essentially fall into two categories: federal and private.

But understanding the difference between federal and private lenders — and the different loan types offered within each category — isn’t quite so simple. There are a multitude of student loans available, and each one is aimed at fulfilling the needs of a specific type of borrower.

You don’t need to learn the ins and outs of every type of student loan in order to choose the best option for you, but it helps to have a basic understanding of what’s available. Here’s a breakdown of each lender and loan type, so you can make the most informed decision possible as a borrower.

Loans from the government: Federal lenders

Federal student loans make up the majority of all student loans distributed. Federal student loans usually have lower interest rates and more repayment options than private loans, along with various loan forgiveness programs for students in specific professions.

Borrowers can apply for federal student loans by filling out the Free Application for Federal Student Aid (FAFSA). This form requires your parent’s financial information to determine what kind of financial aid you qualify for.

All students who are citizens or permanent residents and who complete the FAFSA correctly will be eligible for federal student loans.

The types of federal student loans

The federal government offers a variety of student loan types:

Direct subsidized loans 

Only students who have a demonstrated financial need will qualify for subsidized loans. The main benefit of subsidized loans is that interest will not accrue during some deferment periods and while you’re still in school. These loans are only available to undergraduate students.

Direct unsubsidized loans

These loans are available to all students regardless of financial status. Interest will accrue on these loans while the borrower is in school and during any deferment period.  

Direct PLUS and Parent PLUS loans 

Direct PLUS loans are only available to graduate or professional students, like those going to law school or medical school. Parents who need to borrow money for their child’s education can take out Parent PLUS loans.

Direct consolidation loans

If you already have several different student loans, a direct consolidation loan allows you to combine them into one loan to make repayment easier. 

Private Student Lenders 

Private student loans are mostly used by students who have maxed out their federal student loans, who didn’t fill out the FAFSA or who don’t qualify for federal loans.

Your financial aid office might have a list of private lenders they have vetted as reliable, but you should still do your own research because the list may not include all lenders. 

Borrowers can apply for private student loans by going to the lender’s website and filling out an application. Unlike federal loans, which are standardized and look the same for all borrowers, private lenders are allowed to set their own lending requirements and guidelines for loans. Because of this, researching the available options and shopping around for the best rates and terms is an important part of taking out private loans, whereas it’s not really necessary when it comes to federal loans.

Many private lenders require a cosigner to accept legal and financial responsibility if the borrower defaults on the loan. Funding U offers no cosigner student loans so students can borrow money without finding a cosigner.

Private student loan companies can also offer loans with variable or fixed interest rates. Payments on variable-rate loans will change over time, while fixed-rate loans will always have the same monthly payment. Funding U only offers fixed-rate loans.

Other types of financial aid

Loans aren’t the only option to cover the costs of college. In fact, they’re usually the last source you should turn to. 

Before taking out loans, make sure you’re maxing out your options for grants, scholarships and work-study — none of which need to be paid back later. Check out our post on how to pay for college for tips and more helpful info.

No cosigner student loans from Funding U

At Funding U, we make no cosigner student loans directly to college students. We don’t look at your parents’ credit; we look at you, your academic progress, and your financial plan. Apply online.

Check out our latest blog posts for tips and useful info about managing money in college, navigating the job market, and more.

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