Start with federal student loans before considering private options. Federal loans offer fixed interest rates, flexible repayment plans, and borrower protections that private lenders rarely match. The only time private loans make sense as a first choice is when you’ve maxed out your federal borrowing limits or when your credit profile qualifies you for a significantly lower interest rate from a private lender.
Choosing the right student loan comes down to understanding what types are available, what they cost, and how repayment will work after you graduate. Here’s how to evaluate your options.
Fill Out the FAFSA First
Every student loan decision starts with the Free Application for Federal Student Aid. The FAFSA determines your eligibility for federal loans, grants, and work-study programs. Even if you think you won’t qualify for need-based aid, filing the FAFSA unlocks access to federal loans with protections you can’t get elsewhere. Your school’s financial aid office will use the results to build an aid package that shows exactly how much federal borrowing is available to you.
Once you see your aid package, you’ll know how much of your costs federal loans can cover and how large a gap, if any, remains. That gap is the only portion you should consider funding with private loans.
Understand Federal Loan Types
Federal student loans come in a few varieties, and the differences matter for both cost and eligibility.
Direct Subsidized Loans are available to undergraduates who demonstrate financial need. The government pays the interest on these loans while you’re enrolled at least half-time, during your six-month grace period after leaving school, and during certain deferment periods. This is the cheapest borrowing option available to students because interest isn’t accumulating while you’re in school.
Direct Unsubsidized Loans are available to both undergraduates and graduate students regardless of financial need, and they don’t require a credit check. Interest begins accruing the moment the loan is disbursed. If you don’t pay that interest while you’re in school, it gets added to your principal balance (a process called capitalization), which increases the total amount you’ll repay.
Direct PLUS Loans are available to graduate students and parents of undergraduates. These require a credit check, and the interest rate is higher than other federal loans. For loans disbursed between July 1, 2025, and July 1, 2026, the PLUS rate is 8.94%, compared to 6.39% for undergraduate Direct Loans and 7.94% for graduate Direct Unsubsidized Loans.
If you qualify for subsidized loans, accept those first. Then use unsubsidized loans to cover remaining costs before turning to PLUS loans or private lenders.
Why Federal Protections Matter
Federal loans come with benefits set by law that can save you thousands of dollars or keep you out of default if your financial situation changes after graduation.
Income-driven repayment plans cap your monthly payment at a percentage of your discretionary income, typically 10% to 20% depending on the plan. If your income is low relative to your debt, your payment could drop to zero. After 20 or 25 years of qualifying payments on an income-driven plan, any remaining balance is forgiven.
Public Service Loan Forgiveness forgives your remaining federal loan balance after 120 qualifying monthly payments (about 10 years) if you work full-time for a qualifying employer, such as a government agency or nonprofit organization. You need to be on an income-driven repayment plan to benefit from this program.
Deferment and forbearance let you temporarily pause payments during periods of economic hardship, unemployment, or a return to school. Subsidized loans don’t accrue interest during deferment, which can provide real financial relief.
Private lenders may offer some form of forbearance, but it’s limited. Some allow up to 24 months total, while others cap it at 12. Private loans generally don’t offer income-driven repayment or loan forgiveness of any kind.
When Private Loans Make Sense
Private student loans become relevant in two scenarios: you’ve exhausted your federal borrowing limits and still have a tuition gap, or you (or a co-signer) have strong enough credit to qualify for a lower interest rate than the federal rate.
Some private lenders offer rates below the federal undergraduate rate of 6.39% for borrowers with excellent credit. These are typically variable-rate loans, meaning the rate can increase over time as market conditions change. A variable rate that starts at 4% could climb to 9% or higher over a 10-year repayment period. Fixed-rate private loans offer more predictability, but they tend to start higher than the variable options.
If you’re confident you’ll repay the loan quickly and don’t expect to need income-driven repayment or forgiveness programs, a lower-rate private loan can save money. But you’re trading away a safety net to get that savings.
What to Compare Across Private Lenders
If you do shop for private loans, compare these specific terms across at least three or four lenders:
- Fixed vs. variable rate: Fixed rates stay the same for the life of the loan. Variable rates are tied to a benchmark index and can rise or fall. Ask what the rate cap is on a variable loan so you know the worst-case scenario.
- Co-signer release: Many students need a co-signer to qualify. Some lenders allow you to remove the co-signer after a set number of on-time payments (often 24 to 48), while others don’t offer release at all. This matters because your co-signer is equally responsible for the debt until they’re released.
- Repayment options while in school: Some lenders let you defer all payments until after graduation, while others require interest-only payments or a small fixed amount while enrolled. Making even interest-only payments prevents your balance from growing.
- Fees: Federal loans charge origination fees (a small percentage deducted from each disbursement), but most private lenders don’t. Check for late payment fees and whether there’s a penalty for paying off the loan early.
- Hardship options: Ask what happens if you lose your job or face a financial emergency. Look for lenders that offer forbearance periods and understand exactly how many months of relief are available.
- Death and disability provisions: Federal loans are discharged if the borrower dies or becomes permanently disabled. Not all private lenders offer the same protection, which could leave your co-signer responsible for the full balance.
How Much to Borrow
The most important decision isn’t which loan to pick. It’s how much total debt to take on. A useful benchmark: try to keep your total student loan debt below your expected first-year salary after graduation. If you’re pursuing a degree in a field where entry-level salaries average $45,000, borrowing $80,000 will create significant financial strain for years.
Look up median starting salaries for graduates in your intended major. Your school’s career services office or the Bureau of Labor Statistics Occupational Outlook Handbook can give you realistic numbers. Then work backward from that salary to determine what monthly payment you could afford, keeping in mind that under the standard 10-year repayment plan, a $30,000 federal loan balance at 6.39% means roughly $340 per month.
Before borrowing the maximum amount offered, calculate whether you can reduce the amount by working part-time, applying for scholarships, choosing a less expensive housing option, or attending a lower-cost school. Every dollar you don’t borrow is a dollar plus interest you won’t have to repay.
Choosing a Repayment Plan
For federal loans, you’ll select a repayment plan after graduation. The standard plan spreads payments evenly over 10 years, and it’s the default if you don’t choose otherwise. This option costs the least in total interest but comes with the highest monthly payment.
If the standard payment is too high relative to your income, income-driven plans are available. Under the Income-Based Repayment plan, your payment is either 10% or 15% of your discretionary income, depending on when you first borrowed. The Pay As You Earn plan caps payments at 10% of discretionary income for borrowers who took out their first loan after October 2007 and received a disbursement after October 2011. The Income-Contingent Repayment plan charges the lesser of 20% of discretionary income or what you’d pay on a fixed 12-year plan adjusted for income.
You can switch between repayment plans at any time without a fee. Starting on an income-driven plan when your salary is low, then switching to the standard plan as your income grows, is a perfectly reasonable strategy.
For private loans, repayment terms are set by your lender and typically range from 5 to 20 years. Shorter terms mean higher monthly payments but less total interest. Longer terms reduce your monthly obligation but increase what you pay overall. Some private lenders allow you to refinance later if your credit improves, potentially lowering your rate.