How to Choose Student Loans in 4 Steps

When choosing student loans, the best options allow you to borrow enough to pay for your education at a competitive rate and offer repayment flexibility, such as borrower protections and various repayment options. 

This is why most students benefit from choosing federal student loans first and then filling the funding gaps with private student loans. Federal student loans typically offer lower rates and more repayment assistance. However, several factors affect how you choose student loans, like financial need and if you have a co-signer. Here’s a guide to help you get started.

How to choose student loans: 4 key steps

There are four key steps to take when choosing student loans. Within each step are substeps and considerations to make. The four steps are:

1. Start with federal loans
2. Fill the gap with private loans
3. Explore state or nonprofit loan programs
4. Evaluate your long-term repayment strategy

Here’s a closer look at each.

1. Start with federal loans 

We always recommend exploring federal student loans first because of their repayment benefits, such as loan forgiveness and income-driven repayment plans. These loans offer fixed interest rates that are often lower than private ones. 

For some federal student loans, you aren’t responsible for paying interest that accrues during certain periods, such as when you’re enrolled at least part-time in a qualifying school and six months after graduation. This can significantly reduce your overall borrowing costs when you do enter repayment.

There are three types of federal student loans:

1. Direct Subsidized Loans: These loans are available to qualifying undergraduate students based on financial need. The government pays your interest while you’re enrolled in school, six months after graduation, and if you defer your loan. Once you enter the repayment period, you must pay interest, which is currently at 6.53%.
2. Direct Unsubsidized Loans: These loans aren’t based on financial need, so interest accrues even during a loan deferment or while you’re enrolled in school. You’re not responsible for repaying your loan while you’re in school, but you are responsible for the interest that accrues during that period. Undergraduate, graduate, and professional students can apply. The undergraduate interest rate is 6.53%, whereas graduate borrowers must pay 8.08%.
3. Direct PLUS Loans: Parents of undergraduate dependent students or graduate students can apply for this type of unsubsidized loan. The current interest rate is 9.08%, and it is the only federal loan requiring a credit check.

Applying for federal student loans entails completing the Free Application for Federal Student Aid (FAFSA) form. Your information determines the types of loans you’re eligible for (subsidized or unsubsidized) and the amount you’re eligible to borrow. 

Subsidized loans have annual and lifetime borrowing limits. Unsubsidized loans have an aggregate borrowing limit. These amounts may not finance your full education.

Applying for a PLUS loan involves completing a separate application form. PLUS loans can cover up to the full cost of attendance.

2. Fill the gap with private student loans

If you’ve explored your federal loan options and find it’s not enough to help fund your education, you can look next to private student loans. 

Offered by banks, credit unions, and online lenders, these loans don’t typically have the same repayment protections as federal loans, and most require you to meet credit and income requirements to qualify. Having a creditworthy cosigner can help—and is essential in many cases.

Private student loan lenders have their own loan features and minimum qualifying requirements, so comparing multiple private loan offers is important before deciding. Many lenders allow you to get prequalified to see what rates and terms you may qualify for without affecting your credit score.

When shopping around, take the time to compare these features:

Interest rates

Private lenders offer loans with fixed rates, which remain the same throughout the loan, or variable rates, which can fluctuate. In most cases, variable-rate loans start off at a lower rate and can go up over time, whereas fixed rates offer more predictability. 

The right choice for you likely depends on your credit score and the rate you qualify for, as well as how long you plan to repay your loan—the longer you take to repay, the more your payment can fluctuate. Still, the rate you get and how it works is an important factor to consider.

Interest capitalization

Interest capitalization is when the interest accrued during your periods of deferment (while you’re in school, your grace period, etc.) is added to your principal amount. You’re then charged interest on the higher principal balance. 

To avoid this, look for loans that offer in-school repayment options—such as interest-only or flat payments. This allows you to pay some or all of the accrued interest, thus lowering your total costs when your periods of deferment end and you enter repayment. 

Cosigner requirements

Some private lenders require cosigners to qualify for a loan. Lenders also have different policies regarding when to release your cosigner (if at all), such as after you make consistent payments for a period of time. 

Repayment options

See what repayment terms are available, typically from five to 20 years. The longer the repayment term, the lower your monthly payment could be, but you’re paying more interest over time. Lenders may also offer varying repayment terms, such as making fixed or interest-only payments while in school or making payments once you graduate.

To help you in your research, consider the following lenders we’ve rated highly based on factors such as available interest rates, repayment terms, and cosigner benefits. 

3. Explore state or nonprofit loan programs

Almost all states have low-interest loan programs. In most cases, you’ll need to be a resident of the state or attend an in-state school to qualify. Check to see how you can apply for these loans—some may require a separate application, whereas some only need you to fill out the FAFSA (Free Application for Federal Student Aid).

Here are states that offer low-interest programs for qualifying students:

• Alaska: Alaska Supplemental Education Loan
• Arizona: Arizona Teacher Student Loan Program
• Connecticut: CHESLA (Connecticut Higher Education Supplemental Loan Authority)
• Delaware: Delaware State Loan Repayment Program (SLRP)
• Georgia: Loans are available for those entering certain programs
• Maine: Loans are available for those studying certain health professions
• Massachusetts: No Interest Student Loan Program
• Minnesota: SELF Loan
• Mississippi: Forgivable loan programs are available for certain professions
• New Jersey: NJCLASS
• New Mexico: There are several Loan-For-Service Programs (forgivable loans) for those pursuing certain professions. 
• North Carolina: North Carolina Assist
• Pennsylvania: PA Forward Student Loans
• Rhode Island: RISLA
• Texas: College Access Loan
• Vermont: Vermont Advantage Loan
• Washington: Aerospace Loan Program (ALP)

Tip

Financial aid options like grants are also available at the state level and even some nonprofits. Consider these options before looking at loans.

Some nonprofit organizations may offer special loan terms for student loans. These lenders tend to offer rates lower than many private lenders and can help fill in funding gaps if you can’t borrow enough through federal student loans. 

Some examples include:

• RISLA: Students nationwide (not only Rhode Island residents) can take advantage of low interest rates and more flexible repayment options like income-driven repayment plans. 
• Advantage Education Loan: Parents and students can apply for loans from this nonprofit lender. 
• EdvestinU: This New Hampshire nonprofit offers student loans and refinancing 

4. Evaluate your long-term repayment strategy 

Thinking through your long-term repayment strategy can help you better reach your financial goals. The type of loan you choose can affect your preferred monthly payment amount and how long you want to make payments. 

The desire for certain borrower protections and flexibility will also affect what you choose, especially if you anticipate fluctuations in your income. 

Understand monthly payments

Depending on your loan terms, your monthly payments could remain the same if it’s a fixed-rate loan, or fluctuate over time with variable-rate loans. Your interest rate and the amount accrued will affect how much you need to pay back each month. 

Fixed rates can help you budget better because you know your monthly payments. With variable rates, you may be able to take advantage of lower rates depending on fluctuating economic factors, which may require more upfront planning. 

Using a loan calculator can help you estimate your monthly payments based on your interest rate and repayment terms. We also have calculators for other situations, like calculating tax deductions and making extra or additional payments. 

Check repayment terms

Repayment terms can affect your total borrowing cost because the longer the term, the more interest you could pay overall. For example, the standard repayment plan for federal student loans is 10 years, though you may qualify for extended repayment plans that can be as long as 25 years, which could extend the time you pay interest. 

However, federal loans offer income-driven repayment plans based on your income, which can last from 20 to 25 years and could result in your loan being forgiven as long as you meet qualifying requirements. 

With private student loans, repayment terms may be more limited and shorter than those offered by federal loans, which could result in higher monthly repayments. Consider looking for lenders that offer a forbearance plan or other solutions if you want some protections in case you face financial hardship.

I recommend beginning with an in-state college to understand the tuition, fees, living expenses, and other costs of attending the school. This is to find a baseline because students may not know which school they will attend. 

Once this is determined, look at savings set aside for college and the other sources of cost coverage that could be obtained, such as grants, scholarships, work-study programs, benefits for military families, etc. The remaining amount uncovered is the gap that the loan should cover. 

Lastly, I recommend comparing the terms of the student loans available looking at federal loans first and private loans to cover anything the federal loans will not. Additionally, once the student has been accepted to the school or schools, meet with the school’s financial aid director, who may be a valuable resource to uncover additional funding options.

Erin Kinkade, CFP®

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Best Private Student Loans

Special considerations for graduate students or parents 

PLUS loans are best for graduate students or parents of dependent undergraduate students who have exhausted other types of financial aid. It offers some of the same types of benefits as Direct loans, such as extended repayment options and even income-driven repayment plans.

However, a parent PLUS or graduate PLUS loan may have higher interest rates—private lenders offer loans as low as 3.49%. There’s also a fee for taking out a loan, which is a percentage of the amount you borrow. 

Your credit history is also considered—those with adverse credit history may need to provide additional documentation or be denied a PLUS loan. You may be better off looking at other financing options like private student loans, especially if you can qualify for one at a much lower rate.