The average student graduated with $24,000 in loans in 2009, according to Project Student Debt, so choosing the right loan is critical to a student's finances after college. Student loans come in subsidized and unsubsidized varieties from the federal government and private lenders. Although unsubsidized private loans might have fewer restrictions than subsidized loans -- loans backed by the government -- they are usually the least desirable option.
In general, unsubsidized private student loans have the highest interest rate of any student debt account because the government repays a lender in case the borrower defaults on a subsidized loan. For instance, in the 2011-2012 school year, the unsubsidized Stafford loan has an interest rate of 6.8 percent, but the subsidized Stafford loan has a 3.4 percent rate, according to FinAid. Most private unsubsidized loans have a variable rate, while all federal loans after 2006 have a fixed rate. Overall, private student loans tend to have double the rate of any federal loan.
All subsidized loans are government-backed, so lenders must follow federal guidelines for them. If the borrower with a federal loan has certain hardships, such as unemployment or medical bills, he automatically receives deferment or forbearance on the account -- both modifications delay payment, but the borrower's account accrues interest during forbearance. The government pays interest on a subsidized loan during forbearance or deferment. Private lenders do not have to offer modification.
Private student loans, which are always unsubsidized, depend on a credit check. Only the unsubsidized federal Stafford loan does not depend on the borrower's credit history. If the borrower does not have at least a FICO rating of 620 or a co-signer with good credit, he probably won't qualify for a loan. Only the federal PLUS for parents requires a credit check, and even then only for bankruptcies or other negative public records. If the parent does not qualify for a PLUS loan, the student usually receives an increase to his Stafford award equal to the PLUS loan. All other federal student loans, such as the Perkins loan, do not depend on a credit check.
Ideally, students should not take out loans for college. If the student must take out loans, he should only accept subsidized federal loans. Private loans might be prudent for students who receive little financial aid because federal student loan programs have a limit of a few thousand dollars a year as of September 2011. However, the parent and student should consider all options to reduce the cost of college. For instance, instead of going to an expensive private school, the student might consider completing his core classes at a community college.