Everything You Need to Know About Student Loans in the U.S.

If you study in the United States, you may be confused by the different types of student loans. How do you know which one is right for you? How do repayment plans work, and why are there so many of them?

There’s no need to give yourself a headache. We’ve put together a simple, clear summary of everything you need to know about student loans in the U.S.

What are the different types of student loans?

There are two main types of student loans: federal student loans and private student loans.

Federal student loans come from the government, while private student loans come from private sources such as banks or financial institutions.

Federal student loans

Federal student loans are administered by the U.S. Department of Education. They are the largest provider of student financial aid in the United States, with more than 13 million students using them each year.

There are four types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.

If you are an undergraduate student, you can borrow up to $12,500 per year in the form of Direct Subsidized Loans and Direct Unsubsidized Loans.

If you are a graduate student, you can borrow up to $20,500 per year through Direct Unsubsidized Loans, and use Direct PLUS Loans to cover the rest of your college costs.

Still confused? Don’t worry. We’ll go into the different types of loans in more detail below.

Direct Subsidized Loans

Direct Subsidized Loans are available to undergraduate students who can demonstrate sufficient financial need.

If you qualify for a Direct Subsidized Loan, the U.S. government will pay the interest on the loan while you are in school, and you will only begin repaying it six months after graduation, when interest will start to accrue.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to both graduate and undergraduate students. With a Direct Unsubsidized Loan, interest starts accruing as soon as the student receives the loan while in school. However, the student only has to begin repayment six months after graduation.

If you choose not to pay the interest while you are in college, it will accumulate and be added to the total value of your loan.

Direct PLUS Loans

Direct PLUS Loans are available to graduate or professional students, as well as parents of dependent undergraduates.

What sets these loans apart from other federal loans is that Direct PLUS Loans can help cover educational expenses not included in other financial aid, such as housing costs. Interest begins accruing as soon as the loan is disbursed to the school.

You will begin repaying your Direct PLUS Loan six months after graduation, leaving school, or dropping below half-time enrollment.

Direct Consolidation Loans

Direct Consolidation Loans make it easier to manage your student loans because they bring them together in one place, and they may allow you to access government COVID-19 student debt relief.

Instead of making multiple payments, you will only make one payment each month, and converting to a Direct Consolidation Loan opens up a number of different repayment plans.

Private student loans

Private student loans are usually much more expensive than federal student loans, and they often come with higher interest rates.

Lenders are not connected to the government and are free to set their own interest rates and repayment terms, so these vary depending on your student loan provider.

For students looking for additional loans beyond federal student loans, private loans can be a good option. They let you borrow only what you need and choose repayment terms that work for you.

How to apply for student loans

To apply for federal student loans, you first need to fill out the Free Application for Federal Student Aid (FAFSA) to see whether you qualify for federal grants, work-study, and federal loans.

Based on the results of your FAFSA, your university will send you a financial aid offer that includes federal student loans.

How you apply for private student loans depends on your lender. However, to apply for most private loans, you will be asked to share some personal details. The lender will then perform a basic credit check to see whether you qualify. ([Learn how to improve your credit score.]) Then the lender will let you know whether you are eligible for the loan and, if you are, arrange for the funds to be sent.

How to repay your student loans

Students with federal student loans can change their repayment plan once a year for free, as long as the maximum loan term of the new plan is longer than the time you have already been repaying. Trying to charge students a fee to change their repayment plan is a common student loan scam, and students should watch out for it.

Each repayment plan is available for all federal student loans unless otherwise specified.

Private student loan repayment depends entirely on the lender, so you will need to agree to the repayment terms when you take out the loan.

These are the main repayment plans for students with federal student loans.

Standard Repayment Plan

When you take out a student loan, you are automatically enrolled in the standard monthly repayment plan, though you have the option to switch at any time. Under the standard monthly repayment plan, students make equal monthly payments over 10 years.

Under this plan, you will most likely pay off your student loans faster and pay less interest overall.

Graduated Repayment Plan

If you choose a graduated repayment plan, you will still repay your student loans over 10 years, but this type of repayment plan helps keep monthly payments low for recent graduates.

That is because starting salaries are often lower for new graduates, but wages are expected to rise over the 10-year repayment period. Under this plan, the amount you pay each month increases every two years to keep pace with your (hopefully) rising salary.

Extended Repayment Plan

This plan is similar to the graduated repayment plan, but it allows you to extend repayment from 10 years to 25 years. That lowers your monthly payment but increases the total amount of interest you pay.

This plan is available to anyone with more than $30,000 in student loan debt.

Income-Based Repayment Plans

Income-based repayment plans are available to federal student loan holders and can help you get part of your student loan forgiven.

There are four different types of income-based repayment plans:

• Pay As You Earn Repayment Plan (PAYE). Monthly payments are capped at 10% of your post-tax income, and the remaining balance is forgiven after 20 years.

• Revised Pay As You Earn Repayment Plan (REPAYE). Monthly payments are 10% of your post-tax income, and any unpaid balance will be forgiven after 25 years.

• Income-Based Repayment Plan (IBR). Monthly payments are 10% to 15% of your post-tax income, depending on when you received the loan. Any remaining balance will be forgiven after 20 or 25 years, depending on when you first took out the loan, but you may have to pay income tax on the forgiven amount.

• Income-Contingent Repayment Plan (ICR). Monthly payments are 20% of your post-tax income, or a fixed payment adjusted for your income over 12 years. Any unpaid balance will be written off after 25 years.

• Income-Sensitive Repayment Plan

• The Income-Sensitive Repayment Plan is available for any subsidized federal student loan, unsubsidized student loan, federal PLUS loan, or federal consolidation loan.

Under this repayment plan, your monthly payment will rise or fall each year based on your annual income, and you will repay the loan over a maximum term of 10 years.

Can your student loans be discharged?

Yes, but only in extremely rare cases. Student loan discharge is usually decided by a judge.

Your student loans may be discharged for several reasons:

• Permanent disability
• Death
• Identity theft
• Bankruptcy
• False certification of student eligibility
• The college took out the loan on your behalf without your knowledge