Types of Student Loans: Which Makes Sense for You?

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Student Loans

Updated Jun 27, 2024

10-min read

Written by Geoff Williams

Written by Geoff Williams

Expertise: Credit cards, mortgages, insurance, saving money, managing cash flow, loans, retirement, estate planning

Learn more about Geoff Williams

Reviewed by Crystal Rau, CFP®

Expertise: Equity compensation, oil & gas investments, education planning, investment planning, student loan planning, retirement

Crystal Rau, CFP®, CRPC®, AAMS®, is a certified financial planner based out of Midland, Texas. She is the founder of Beyond Balanced Financial Planning, a fee-only registered investment advisor that helps young professionals and families balance living their ideal lives and being good stewards of their finances.

Learn more about Crystal Rau, CFP®

College students have several options as they try to navigate the logistics of paying for college. Generally, if you need money for college, the road to your diploma is as follows: Take out federal student loans, and once those are exhausted, you will likely turn to private student loans. Later, you may consider refinancing them.

It may sound overwhelming, but we’ll break it all down for you.

Table of Contents Skip to Section

Federal student loans
Private student loans
Refinance and consolidation
How to choose the right student loan type

Loan type	Rates	Who’s eligible?
Federal	5.50% – 8.05% (depends on loan type)	U.S. citizens or eligible non-citizens pursuing an eligible degree or certificate program & enrolled at an eligible college or career/trade school
Private	Varies (often based on credit score)	Students enrolled in an eligible college or educational institution based on creditworthiness
Refinance	Varies (often based on credit score)	Anyone with a student loan*

*Most banks require the borrower to have completed the degree to refinance the loan.

Federal student loans

Federal student loans are loans offered by the U.S. Department of Education.

Financial aid from the federal government is often your best bet for covering college costs. It’s easier to qualify for, and certain loan amounts are income-driven. Your loans may be forgiven in certain situations (if you go into an eligible public service career, for example).

You must first complete the Free Application for Federal Student Aid (FAFSA) to gauge your federal financing options. The three types of federal student loans available to borrowers are outlined below.

Direct Subsidized Loans

Also known as a Stafford Loan, these are loans based solely on financial need. The federal government issues these to undergraduate students and pays the interest on the loans while the student is in school.

Once you graduate, or if you fall under half-time enrollment (and after a grace period of six months), you’ll begin repaying your loans with interest.

Direct Unsubsidized Loans

The interest on these loans begins accruing immediately. You can still defer payment on that interest while you’re in school, but the interest on Unsubsidized Loans will accumulate and will be due via monthly principal and interest loan payments once your final grace period ends.

You don’t need to demonstrate any sort of need to be eligible for an Unsubsidized Loan.

Direct PLUS loans

Another type of federal student loan is a Direct PLUS Loan. Graduate students (Grad PLUS Loan) and parents of students (Parent PLUS Loan) can take out these loans. They have certain credit history requirements and higher interest rates than other federal financing options.

You (or your child) must attend a school authorized to receive federal aid to be eligible.

Perkins loans (discontinued)

Until several years ago, Perkins Loans were financing options for students who demonstrated high financial need. These loans are no longer available, but students who have old Perkins Loans with outstanding balances can still apply for forgiveness if they’re eligible.

You may qualify for Perkins Loan forgiveness in the following situations:

Your income is low
You entered a career in public service
You’re a full-time teacher in a low-income area
You’re a nurse

How Do Student Loans Work?

Private student loans

If you’ve borrowed up to your federal loan limits or aren’t eligible for a federal loan, you may need to turn to private student loans instead.

Using private student loans can have several advantages. For example, they often offer more flexible loan amounts and the ability to choose fixed-rate or variable-rate options.

Private student loans are based on your ability to repay. Unlike federal loans, which are often granted before you’ve taken any college classes, you’ll need decent credit and adequate income to support your expected payments—or a cosigner who meets these criteria. Private loans don’t offer options for loan forgiveness as federal loans do.

Many types of private student loans are available, including those for specific types of students and degree programs. Here’s a quick list of the types of loans you may be able to choose from:

Loan type	What to know
Conventional student private loans	From private institutions, often banks, credit unions, and online lenders, but sometimes a state agency or the school itself
International student loans	From private institutions (i.e., not the federal government), many international student loans require a student visa and an American cosigner
Bad-credit loans	Several private lenders will lend to students with bad credit, but these private loans tend to be more expensive than federal student loans
State-specific loan programs	Some states offer student loan programs for college, such as the Rhode Island Student Loan Authority and the Georgia Student Finance Commission
Income-share agreements	Some universities and financial institutions offer income-share agreements, contracts in which you agree to share a portion of your income for a certain number of years with the lender after securing a job, but many are considered predatory and should be a last resort
Parent loans	For parents of students, these loans may be from private institutions or the federal government
Refinanced student loans	You can refinance just about any private student loan if you want to consolidate a loan, get a better rate, or lower your monthly payment

More about state student loans:

Best Private Student Loans

Refinance student loans and loan consolidation

If you have a federal income-driven repayment plan, your monthly payments are likely as low as they can go, so refinancing may not be practical. But if you have private student loans, you might consider refinancing them. This can mean consolidating multiple loans into one payment or refinancing in a way that lowers your interest rate or monthly payment.

You can’t convert private student loans into federal loans, but you can refinance almost any private student loan, as you’ll see in this table:

Types of student loans you can refinance	What to know
Conventional student private loans	It makes sense to refinance if the new terms are better for you based on your goals—e.g., lower monthly payments or lower overall cost
International student loans	Refinancing these loans might be difficult, but by the time you consider refinancing, see whether you’ve built credit in the U.S.; if not, look for a creditworthy American cosigner
Bad-credit loans	Having bad credit and refinancing your way to a better deal can be challenging, but some companies specialize in bad-credit borrowers
State-specific loan programs	Certain states provide opportunities for students to refinance loans
Income-share agreements (ISAs)	Office of Federal Student Aid views ISAs as student loans, so you might be able to refinance yours into a conventional loan
Parent loans	Creditworthy parents can refinance; some private lenders allow the parent to refinance into the child’s name

Check out this student loan refinance calculator to see how much refinancing your student loans could save you.

Best Student Loan Refinance Companies

Federal Direct Consolidation Loan

If you take out several federal student loans during your education, you may be able to consolidate them into one loan using the Federal Direct Consolidation Loan program.

This simplifies the repayment process and may also help you qualify for income-driven repayment options or student loan forgiveness as a result of moving to a consolidation loan.

However, a federal Direct Loan Consolidation won’t help you qualify for a lower interest rate; your new rate will be the weighted average of your previous rates.

A federal Direct Consolidation Loan does not require an application fee, and the new rate is fixed for the life of the loan. You may pay a lower monthly payment.

Private student loan refinancing

You can refinance private student loans. You might do this to consolidate multiple loans into one, take advantage of lower interest rates, or extend your repayment term (which can lower your monthly payment).

You have many options to refinance private student loans. Check out our list of the best student loan refinance companies to get started.

Unlike federal Direct Loan Consolidation, private refinancing allows you to qualify for new rates, so it’s a viable option for borrowers whose debt and creditworthiness have improved since they took out their loans.

Parent PLUS Loan refinancing

If you take out a federal Parent PLUS loan to help your child pay for their education, you may be able to refinance that loan with a private lender later. You might do this to lower your interest rate and payment or to transfer the loan to your child.

These lenders are solid options if you’re considering refinancing your Parent PLUS loan. If you find a loan you like, compare it to the Department of Education’s Income-Contingent Repayment (ICR) plan, which the federal government offers.

Medical school refinancing

Refinancing your medical school loans can be a smart move. You might have a high level of debt but a promising career that qualifies you for low rates.

If you have medical school debt and are considering refinancing, take a look at these medical school refinance loans.

More about specific medical loans and refinance options:

How to choose the right student loan type for you

The costs of college continue to rise, but you still have options to pay for your degree. Dozens of federal and private student loan options can help you pay for your education and related costs. We recommend what most experts suggest: Every college student and parent should try to get funding first through federal loans.

Our expert’s take: Private student loan refinancing vs. federal Direct Consolidation

Crystal Rau

CFP®

I will typically recommend refinancing if your goal is to pay down your debt as soon as possible and your income is sufficient or if you’re trying to lower your overall interest rate. There is no reason to drag out payments over decades if you’re just trying to achieve the lowest payment total.

If you have a financial gap after exhausting federal loans, start looking at private student loans. This means comparing the terms of several loan quotes. Consider the cost of the loan over the long run, but keep in mind the monthly payment and whether it’s a fixed or variable rate.

If the monthly payment is too high, you’ll struggle to meet your financial obligations every month, so if this is a concern, consider a loan with a lower monthly payment.
If the monthly payment is low but the loan stretches out 25 years or more, you’ll pay much more to borrow the funds, and you might feel like that’s too long to be in debt. If one of your priorities is paying as little as possible for your loan, look at a standard 10-year repayment plan.

A good rule of thumb is not to borrow more than 1x what you expect your annual salary to be after graduation.

Crystal Rau

CFP®

There’s no right or wrong way to shop for a student loan. Look at four to five lenders so you know your options. Review the terms carefully to ensure you choose a loan you’re comfortable with.

More about specific student loan programs: