Types of student loans

Types of student loans
Types of student loans

Types of student loans

Subsidized and Unsubsidized loans refer to as Federal Direct Stafford Loans.

There are two broad types of student loans:

  • Private student loan – Loans issued by a lender such as a bank, credit union, government agency, or school.
  • Federal student loan – funded by the federal government.

    The Free Application for Federal Student Aid (FAFSA) must be completed to check or check eligibility.

    • Federal Perkins loan – low-interest federal student loans
      for undergraduate and graduate students with exceptional financial need
      • Directly subsidized loan – low-interest federal student loans for undergraduates in financial need
      • Direct Unsubsidized loan – low-interest federal student loans for undergraduate and graduate students
      • Direct PLUS loans – federal loans for graduate or professional degree students

        and parents of dependent undergraduate students federal Direct Stafford Loans

Subsidized Loans

A subsidized Federal Direct Stafford Loan is based on financial

need. Valid for undergraduate students only.

The advantage of a subsidized loan is that the federal government – not the student –

pays the student interest in subsequent periods:

  • While the student is enrolled in at least part-time school
  • During the six-month grace period after the student

    graduates leaves school or falls under part-time enrollment

  • During the deferral period (a period during which principal payments are temporarily deferred)

Non Participating Loans

An ineligible credit is awarded to all eligible students, whether unlicensed or licensed.

There is no obligation to demonstrate financial need.

The student is obliged to pay the interest on the loan for the life of the loan.

However, if the student does not want to service the loan at school,

the accrued interest is capitalized, that is, it is added to the outstanding principal.


The eligibility criteria for Federal Direct Stafford Loans, subsidized or unsubsidized, are:

  • US citizens or eligible non-citizens
  • To enroll or be accepted to enroll at least part-time in an eligible program at an eligible school
  • Enrolled in the US Selective Service System (for non-enrollment-exempt men)

Additionally, qualification for subsidized loans requires the student to demonstrate ongoing financial need.

Financial need is the difference between a school’s Cost of Attendance (COA)

and the Expected Family Contribution (EFC). After July 1, 2012, outstanding loans

are no longer available to graduate students; they are for undergraduate students only.

Credit Terms

As explained in the overview, subsidized loans offer the advantage that the government pays the interest while the student is in school.

Each loan also has a grace period of six months.

This is the amount of time after borrowers graduate, drop out, or fall below part-time enrollment

where they don’t have to pay off their federal student loans.

Interest will be accrued on subsidized loans made between 1 July 2012 and 1 July 2014

and on all unsubsidized loans during grace periods. If interest is not paid,

it is added to the main balance of the loan when the repayment period begins.

In addition, Federal Direct loans also include a provision for deferral.

A deferral is a deferral of a loan payment that is permitted under certain

conditions and does not accrue interest on subsidized loans.

Deferred undeferred loans will continue to accrue interest and accrued

unpaid interest will be added to the interest-free balance of the loan at the end of the deferral period.

Interest rate

The interest rates for loans originally paid between July 1, 2012, and July 30, 2013, are as follows:

Loan Type Interest rate
Non-Direct Participating Loan fixed at 6.8%
Direct PLUS Loans (Parents and alumni or vocational students) Fixed at 7.9%
Direct Subsidized Loan fixed at 3.4%
Perkins Credits fixed with 5%

Amount You Can Borrow

For both outstanding and subsidized loans, the amount depends on the Cost of Participation.

For subsidized loans, the student can only borrow an amount equal to the

difference between the cost of participation (COA) and the expected family contribution (EFC).

This chart from the US Department of Education shows the maximum annual and

total credit limits for subsidized and unsubsidized Stafford loans as of July 1, 2012.


Loan fees for federal student loans:

  • 1% for Direct Subsidized Loans and Direct Subsidized Loans
  • 4% for Direct PLUS Loans

Perkins Loans are free of charge. Loan fees are deducted pro-rate from each payment.

This results in the actual amount taken being less than the actual amount borrowed.

The original amount borrowed must be repaid.

How to Apply

To apply for a Direct Loan, you must first complete and submit the Free Application for

Federal Student Aid (FAFSA). Your school will use the information from your FAFSA to determine

how much student aid you can get. Direct Loans are often included as part of your financial aid package.

Comparison between Executor and Trustee

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