Understanding Your Student Loan Options: What to Consider Before Borrowing
As college tuition continues to rise, student loans can be a necessary piece of the financial aid puzzle. Whether you’re preparing to enter your first year of college or helping your child weigh funding options, understanding the types of student loans available is essential to making informed and financially sound decisions.
Below, we’ll break down the main types of federal student loans, explore the pros and cons of each, and explain why federal loans should typically be your first choice—before turning to private student loans
Federal Student Loans: Your First Option
Federal student loans are funded by the U.S. Department of Education and come with borrower protections, standardized terms, and repayment flexibility. Most students should exhaust these options before considering private loans.
1. Direct Subsidized Loans
Who qualifies:
Undergraduate students with demonstrated financial need
Borrowing limits:
$3,500–$5,500 annually depending on grade level
Pros:
- No interest while in school, during grace periods, and deferment
- Low fixed interest rate
- Eligible for income-driven repayment (IDR) and forgiveness programs
Cons:
- Annual and aggregate limits may not cover full cost of attendance
- Only available to undergrads with financial need
- To be eligible, students must complete and submit FAFSA
Best for:
Students with financial need who want to minimize interest over time
2. Direct Unsubsidized Loans
Who qualifies:
Undergraduate and graduate students; no financial need required
Borrowing limits:
$5,500–$20,500 annually, depending on grade level and dependency status
Pros:
- Available to more borrowers, including grad students
- Low fixed interest rate
- Access to IDR and forgiveness programs
Cons:
- Interest accrues while in school
- Lower limits for dependent undergraduates
- To be eligible, students must complete and submit FAFSA
Best for:
Students who don’t qualify for subsidized loans but still want access to federal benefits
3. Direct PLUS Loans (Parent PLUS and Grad PLUS)
Who qualifies:
Graduate students or parents of dependent undergrads
Borrowing limit:
Up to the full cost of attendance, minus other aid
Pros:
- Can cover remaining education costs
- Fixed interest rate
- Eligible for IDR (Grad PLUS)
Cons:
- Credit check required
- Higher interest rate and origination fee than other federal loans
- Parent PLUS not eligible for some forgiveness options unless consolidated
- To be eligible, students must complete and submit FAFSA
Best for:
Families or grad students who need to bridge a funding gap after other aid
Federal Loan Strategy: What to Take Out First
When borrowing federal loans, you’ll do well following this order:
- Direct Subsidized Loans – lowest long-term cost due to no interest during school
- Direct Unsubsidized Loans – still low interest and access to repayment protections
- Direct PLUS Loans – fill any remaining funding gap if needed
Always borrow only what you need and avoid maxing out PLUS loans unless absolutely necessary.
Private Student Loans: The Final Option
Private loans are offered by banks, credit unions, and online lenders—not the federal government. They can be helpful in specific situations, but they come with fewer borrower protections.
Pros:
- May cover full cost of attendance
- Cosigners can improve access and rates
- Customizable loan terms with some lenders (see our recommended lists for options)
Cons:
- Variable or higher interest rates
- Not eligible for federal forgiveness
- May require a cosigner
Best for:
Students or families with strong credit who have maxed out federal options and still need additional funds. Our list of best student loans may all be good options to bridge the financial gap when federal loans fall short.
Conclusion: Borrow Smarter, Not Just More
Student loans can be an important tool for investing in your future—but not all loans are created equal. Start with federal loans, which offer protections and manageable repayment plans. Only turn to private loans when necessary, and always compare lenders for the best terms.
Understanding your options upfront can help you graduate with less debt, more flexibility, and a stronger financial foundation.
