Student Loan Explainer

By Katie Beth Nichols, Hailey Ruiz, Samantha Van Dyke and Caitlin Lane

Many students do not know understand the details or long-term consequences of student loans, let alone the different types of loan offerings.

Autumn Jester, a junior at the UofA, said that she wished she had done more research before taking out loans before entering college.

“Freshman year, I wasn’t aware of subsidized and unsubsidized loans. ” Jester said. “I didn’t know that one accrued while you were in college and one didn’t.”

After learning more details about her existing loans, Jester said she changed borrowing options for the following year to reduce the financial pinch.

Subsidized and unsubsidized loans are federal student loans available to eligible students, according to the Federal Student Aid website. The purpose of the loans is to assist students with the cost of higher education, like at a university or technical school.

Undergraduate Students with financial need can receive direct subsidized loans, according to the Federal Student Aid website. Direct unsubsidized loans are available to undergraduate and graduate students, and there is no requirement to demonstrate financial need.

Repayment of direct subsidized loans is deferred while the student is in college, according to the Drew University website. Yet for direct unsubsidized loans, interest begins accruing as soon as the loan is taken out.

Similarly, private and federal student loans are abruptly different in a few distinct ways.

First, private student loans are offered by private lenders such as local banks, credit unions or national banks. Federal loans, however, are only offered through the U.S. Department of Education, according to the Student Loan Hero website.

Private student loans can also be used to cover both an undergraduate or graduate student’s costs of higher education. They can cover other expenditures such as students who are completing their residency after medical school or law students taking the bar exam.

Many lenders offer private student loans to both students and their parents but students may have a harder time qualifying for a loan on their own if a student does not have a good credit score as proof of income, according to Student Loan Hero. A student could also qualify by having a parent or another person co-sign the loan. 

Private student loans can also have fixed or variable interest rates and vary from lender to lender. Federal loans, however, all come with a fixed set of interest rates. Federal student loans have strict eligibility requirements determined by the Free Application for Federal Student Aid (FAFSA), according to the Financial Industry Regulatory Authority website. Moreover, an undergraduate student can receive only a maximum of $31,000 in federal student loans.

Furthermore, repayment requirements on private loans vary from lender to lender. Most will give between five to 20 years to repay a student loan, according to Student Loan Hero. Meanwhile federal loans have several repayment options, such as a 10-year Standard Repayment Plan or income-driven repayment plan (IDR) that can be set into monthly payments based on a person’s income. Also, and most importantly, private lenders do not offer loan forgiveness programs, whereas federal student loans can be forgiven in certain circumstances.

Knowing the differences between the categories of loans as well as regulations associated with them can better prepare student borrowers when making financial decisions regarding their education.