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Student Loans

How to Choose Student Loans

Unless you’re exceptionally gifted or exceptionally privileged, funding your college education will likely require taking on some form of debt. For most borrowers, that means taking out student loans.

Student loans can essentially be divided into three categories: federal, state, and private. Each can be useful in different situations, and there are numerous loan options within each category. Student loans can be further categorized by who the borrower is. In many cases, the student is the borrower, but parents can also borrow to send their children to college.

Choosing the right loan type will make the repayment process more convenient while potentially saving you thousands or even tens of thousands of dollars.

In this article:

Difference between federal, state, and private student loans

While students can use federal, state, and private loans to pay for similar education expenses, the loan types have many differences.

Federal student loans are government-distributed and are more popular than private student loans, in part because they may have better terms, including flexible repayment plans and possibly lower rates. For the 2022-23 school year, the interest rate is 3.73% for undergraduate students and either 5.28% or 6.28% for graduate and professional students, depending on the loan type.

Interest rates for private student loans range from 1% to 13%, but exact rates depend on the student’s credit score, income, loan amount, major, and if they have a cosigner.

Most private student loan companies require a cosigner, an adult legally required to assume the student loan balance if you default. Private loans often ask for a cosigner because most college students don’t have enough income or high enough credit scores to qualify independently. Most students ask a parent or other relative to act as a cosigner.

There are some lenders on the market that don’t require a cosigner, but they usually have higher interest rates than other private lenders.

Federal student loans also provide more repayment options than private student loans and these repayment plans can be changed during repayment. Borrowers with federal loans qualify for loan forgiveness programs, so those who work in certain professions or those who cannot pay their loans off over an extended repayment period may not have to repay their entire loan balance. Private loans do not offer any kind of loan forgiveness.

Federal loans also come with income-driven repayment (IDR) plans, which calculate your monthly payment based on your income, family size, and location. IDR plans can make repayment much easier for borrowers, but private loans don’t offer any income-driven repayment options.

Some states have their own loan programs. In some cases, these loan programs may simply involve one or more private lenders who the state has identified as preferred. In other cases, states have created direct student lending programs which might include different repayment plans and lower costs than private lenders. These programs can be for state residents or for out-of-state student who attend schools in that state.

Student borrowers should always max out their federal direct student loans before turning to private loans because federal direct loans offer so many more repayment and forgiveness programs. For example, during the COVID-19 pandemic, borrowers with federal loans had their payments and interest paused. Borrowers with private loans could apply for deferment, but interest still accrued during this time.

Federal student loan vs. private student loan comparison

Federal Student LoansPrivate Student Loans
Type of interest rateFixedFixed or variable
APR range3.73% for undergrads

5.28% or 6.28% for grads and professionals
Generally 0.99% to 13%
Income-driven repaymentFive different plansNone
Access to loan forgivenessYesIn rare cases
Deferment or forbearanceYesDepends on lender

State loan terms vary by state and only certain states have programs.

How to choose federal student loans

To apply for a federal student loan, you must fill out the Free Application for Federal Student Aid (FAFSA) form. The FAFSA form asks questions about your family’s financial situation, including your parents’ income and assets. You have to submit the FAFSA form every year that you want to take out federal student loans.

Even if you don’t think you’ll receive need-based financial aid, you should still fill out the FAFSA. Students can still take out unsubsidized federal direct loans regardless of the need for financial aid.

There is an annual limit for federal student loans ranging from $5,500 to $12,500 a year. The exact limit depends on your year in college and whether you’re a dependent or independent student.

Dependent students can receive between $5,500 and $7,500 in federal student loans, while independent students can receive between $9,500 and $12,500 in federal student loans. Dependent students are those who rely on their parents for financial support, while independent students do not.

To officially qualify as an independent student, you must meet at least one of the following criteria:

  • Age 24 or older
  • Married
  • Attending a professional or graduate school
  • Veteran or current member of the military
  • Orphan or a ward of the court
  • Have legal dependents other than a spouse
  • Emancipated minor
  • Homeless or at risk of becoming homeless

Direct Loans

The Direct Loan program is currently the main federal loan program. There are two subtypes of Direct Loans: subsidized and unsubsidized. Subsidized loans are only available to students who qualify based on need, while unsubsidized loans are available to all students. Interest rates are the same for subsidized and unsubsidized loans.

The main difference between subsidized and unsubsidized loans is that subsidized loans do not accrue interest while you’re in school and during deferment. Unsubsidized loans will always accrue interest, including while you’re in school and during all deferment periods.

Important note: Unsubsidized student loans are not currently accruing interest during the COVID-19 pause on student loan payments. This pause has been extended until August 31, 2022.

For those who qualify for subsidized loans, the aggregate loan limit is $23,000 for both dependent and independent students. Once students reach that limit, they may take out an unsubsidized loan. The total Direct Loan limit, including both subsidized and unsubsidized loans, is $31,000 for dependent students and $57,500 for independent students.

PLUS Loans

There are two types of PLUS loans: Grad PLUS loans and Parent PLUS loans. Grad PLUS loans are available to graduate or professional students who have maxed out their Direct Loans and still need more money to pay for college.

Parents who want to help their children pay for college can take out a PLUS loan. The annual limit for both Grad and Parent PLUS loans is the annual cost of attendance minus any other financial aid. For the 2022-23 school year, the interest rate for all PLUS loans is 6.28%.

Grad PLUS loans are eligible for the same income-driven repayment plans and loan forgiveness options as Direct loans. Parent PLUS loans are only eligible for one type of IDR plan, but parents still qualify for the Public Service Loan Forgiveness (PSLF) program.

Federal PLUS loan borrowers need to go through a credit check, but there is no income verification. So, borrowers need to be cautious with the amount they borrow.

How to choose state student loans

Some states have their own student loan programs and they vary widely by state. As an example, New Jersey’s program is open to residents who attend college in-state or out-of-state and out-of-state students who attend New Jersey colleges. With NJCLASS loans, either the student or the parent can be the borrower. NJCLASS loans compare favorably with Federal Parent Plus loans with lower interest rates and lower fees. Repayment plans include income-contingent repayment plans.

Other states with loan programs include Connecticut, Alaska, Arizona, Delaware, Georgia, Maine, Massachusetts, Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, Rhode Island, Texas, Vermont, and Washington.

If the state you are a resident of or the state your college is located in offers student loans, make sure to compare those options to federal and private loans.

How to choose private student loans

If you’ve maxed out your federal student loans, private loans can help to fill in the gaps. While federal loans have the same interest rates across the board, private student loans can vary wildly. That’s why it’s crucial to compare lenders.

Here’s what to look for when choosing a private student loan:

  1. Start by looking at several different lenders. Each lender will have its own interest rates and terms which may vary significantly.
  2. Get prequalified for a loan. Select the lenders with the best rates and get prequalified with each of them. You’ll receive an interest rate estimate and a range of repayment terms.
  3. Choose the lender. Go through the lenders and pick the one with the repayment term and interest rate that best fits your budget.
  4. Finalize the loan. You may have to submit official documents like your driver’s license, college transcript, and information about your cosigner.

What to look out for when comparing student loans

When comparing student loans, look at the interest rate and loan term. The interest rate and length of the loan are the biggest factors affecting your monthly payment and the interest you’ll pay over the life of the loan. The lower the interest rate, the lower your monthly payment and the less total interest you’ll pay. The longer the loan, the lower the monthly payment, but the more total interest you’ll pay.

You should also compare the types of interest rates. Private lenders usually offer fixed or variable-rate loans. Payments remain the same with a fixed-rate loan, but payments may fluctuate with a variable-rate loan.

Some borrowers choose a variable-rate loan because they have lower starting rates than fixed-rate loans. Before deciding on a variable-rate loan, you should know how much the payments could change and whether you can afford the highest possible monthly payment. If you prefer a stable monthly payment, go with the fixed-rate option.

Also, different lenders offer various types of repayment options. Some private lenders require you to make payments while you’re still in school, and others let you defer payments completely until you graduate.

How to borrow responsibly

Many students are shocked when their student loan bill comes due. That’s why it pays to understand what repayment will look like before you take out a student loan. A common rule of thumb is not to borrow more than you expect to earn in your first year after graduation.

Here’s how to abide by that rule. Look up information about your future profession’s salary on sites such as,, and Remember to only use salary information for entry-level jobs.

For example, if you’re going to be a registered nurse, the average entry-level salary is $61,728 a year. Therefore, you should avoid borrowing more than $61,000 in student loans.

If you know where you want to live after graduation, research that area’s salary information to get a more accurate figure on how much to borrow.

After graduation, you’ll be required to start student loan payments. All federal loans and most private loans offer a six-month grace period, during which payments are not due. Interest may accrue during this time, depending on your loan type. If interest does accrue during the grace period, you may wish to make immediate payments to lower it.

If you’re struggling to afford monthly payments, contact the loan servicer to ask about alternatives. If you have federal loans, you can switch to an income-driven repayment (IDR) plan. These plans will likely result in a lower monthly payment, but you’ll also pay more interest over time. Still, it’s better to pay more interest than risk missing payments and hurting your credit score. Switching repayment plans requires your loan to be current, so making on-time payments is important.

If you have private student loans and want a lower monthly payment, your best option would be refinancing your student loans with a new lender. When you refinance, you can choose a longer repayment term to lower your monthly payment. Again, you might pay more interest over the life of the loan, but that depends on your interest rate and the repayment term you chose.