With so many student loan options available, how do you know which is best for you?
A college education is an investment in your future but can be expensive. Taking out student loans is one way to help pay for school when savings, scholarships, and federal student aid like grants and work-study don’t cover all the costs.
This comprehensive guide examines the pros and cons of different types of student loans to help you make the best choice.
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Federal Student Loans
Federal student loans issued by the government tend to offer the best terms, flexible repayment options, and protections for borrowers.
This makes them preferable over private loans for many students. The two main categories of federal student loans are directly subsidized and unsubsidized loans.
Direct Subsidized Loans
Direct subsidized loans are need-based, meaning they are awarded based on your financial situation and family income.
The government pays the interest on these loans while you are enrolled at least half-time in college and during grace and deferment periods. This helps keep costs down.
The current interest rate on direct subsidized loans for undergraduates is 4.99%. For graduate students, it is 6.54%.
There are also yearly and aggregate limits on how much you can borrow in subsidized loans.
For dependent undergrads, this is $5,500 to $7,500 per year and a lifetime limit of $23,000. Independent undergrads can receive up to $9,500 yearly and $57,500 total.
The main drawbacks of subsidized loans are the limits on how much you can borrow and the fact you must demonstrate financial need.
But not accruing interest while in school makes them one of the most affordable options.
Direct Unsubsidized Loans
Direct unsubsidized loans have higher borrowing limits and no requirement to demonstrate financial need.
This makes them more widely accessible. The current interest rates are also 4.99% for undergrads and 6.54% for graduate students.
However, the government does not cover interest payments on unsubsidized loans while you are in school.
So, interest accrues and capitalizes, adding it to the principal balance. This results in overall higher costs unless you make in-school interest payments.
Dependent undergrads can borrow up to $5,500 to $7,500 per year in unsubsidized loans, while independent students can receive up to $9,500 to $12,500 annually. Graduate students have even higher unsubsidized loan limits.
The trade-off is you can borrow more but at a higher overall long-term cost if interest capitalizes. Making in-school interest payments requires more cash upfront but saves money later.
Federal Perkins Loans
Federal Perkins Loans are low-interest federal student loans for students with exceptional financial needs. These are subsidized loans, so no interest accrues while you are enrolled at least half-time.
Undergraduates can borrow up to $5,500 per year for a total of $27,500, while graduate students have higher limits of $8,000 yearly and $60,000 overall. The fixed interest rate is an extremely low 5%, making repayment more affordable.
However, Perkins Loans have limited availability since schools with Perkins Loan funds award them to students with the greatest demonstrated need. They are also not universally offered, so check with your school’s financial aid office.
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Parent PLUS and Grad PLUS loans allow parents and graduate students to borrow additional funds beyond federal limits at fixed interest rates of around 7%. Eligibility is not based on financial need.
Parent PLUS loans require the parent to be the borrower and have a favorable credit check. The yearly limit equals your total college costs minus any financial aid received.
Grad PLUS loans operate similarly for graduate and professional students with higher credit standards. The totals you can borrow equal your college costs and other aid.
High borrowing limits make PLUS loans more flexible. However, the higher interest rate means more interest costs over time, so only borrow what is truly needed.
Private Student Loans
Private student loans offered by banks, credit unions, and online lenders help bridge gaps when federal loans are insufficient.
Rates and terms vary by lender but are generally based on your credit profile. Those with good credit can potentially qualify for lower rates.
Private loans need more protections and forgiveness programs than federal loans.
You also often need a cosigner like a parent or guardian since undergrads need more credit history. Shop around for the best rates and read all terms carefully before committing.
Private loans play an important role but are best suited for filling small funding gaps rather than fully replacing federal options. Limit borrowing to only what is necessary.
Which Student Loan is the Best for You?
Choosing the right student loans for your situation involves weighing factors like costs, flexibility, loan limits, and eligibility terms.
Keep these guidelines in mind:
- Max out federal loans first. Take full advantage of subsidized, unsubsidized, and Perkins loans. Their low fixed interest rates and protections make them the safest option. Only turn to private loans for any remaining gaps.
- Base choices on financial need. Seek subsidized loans first if you demonstrate a need. Move to unsubsidized if you make too much. Look at PLUS loans if federal limits are insufficient.
- Compare total costs. Don’t just consider interest rates. Project total repayment costs for each loan type based on what you plan to borrow. Capitalized interest on unsubsidized loans may outweigh a lower rate.
- Do the math on repayment. Federal income-driven repayment plans even out monthly costs but add interest over time. Run the numbers at potential future income levels.
- Understand all terms. Carefully evaluate loan fees, origination charges, capitalization of interest, and total borrowing limits to avoid surprises.
- Research private lenders. Banks, credit unions, state loan programs, and online lenders offer private student loans. Shop around for the lowest rates based on your credit.
Other Ways to Reduce Costs
Too much student loan debt can negatively impact your finances for years after graduation.
Beyond smart borrowing, there are other ways to lower college costs:
- Apply aggressively for scholarships – Academic, athletic, community service, and needs-based awards are all available.
- Work during school and summers for extra income.
- Start at community college for two years, then transfer to a 4-year university.
- Become a resident advisor (RA) for discounted room and board.
- Choose the most affordable school that offers your desired program.
- Graduate early through extra classes, credit exams (like AP), and summer enrollment.
- Stick to a tight budget, minimizing discretionary spending.
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Student loans can be manageable with sensible borrowing, lower college costs, and serious budgeting.
Weigh all options carefully and borrow only what you truly require to get the education you want without overburdening your finances.