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Choosing a loan

Three steps that can help you get the right loan for you.

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Student Loans: Choosing a loan that's right for you

Why Is it important?

If you're considering student loans to help you pay for school, you're not alone - many students need loans to cover their full cost of attendance. In 2010, 67% of bachelor's degree recipients used loans to pay for their education. But the more money you borrow now, the higher your monthly loan payments will be after you graduate.

If you have to take out student loans, comparing your options can help you find the student loan best suited for your needs.

Key Questions
I have to borrow money for school. What are my options?
What if my grants and federal loans don't cover the cost of attendance?
What should I consider when shopping for a private loan?

If you have to take out student loans, you essentially have two choices: federal student loans and private loans.

For most borrowers, federal student loans are the best option. When you start to pay back your federal loans, the interest rate will be fixed, which will help you predict your payments after graduation. And in some cases, the federal government will pay the interest on your loans while you are in school - these loans are called subsidized loans.

Other student loans are generally private student loans. The most common private student loans are offered by banks. Their interest rates are often variable, which means your interest rates and payments could go up over time. Private loans can also be more expensive - rates have been as high as 16% over the past couple of years. And when it is time to repay, private loans don't offer as many options to reduce or postpone payments.

For most people, federal student loans are a better deal than private student loans, so you'll want to take advantage of federal options first.

If your grants and federal loans are not enough to cover the cost of your education, you should consider the following options:

  • Search for scholarships. Look for state and local grants and scholarships using one of the many free scholarship search options available. Servicemembers, veterans, and their families may be eligible for GI Bill benefits and/or military tuition assistance.
  • Cut costs. Consider getting one or more roommates or a part-time job, possibly through Federal Work-Study.
  • See what your family can contribute. Your parents may be able to get tax credits for their contributions. Parents can also explore the federal Direct PLUS Loan program.
  • Shop around for a private loan. Remember that these loans generally have higher interest rates and less repayment flexibility compared to federal student loans. You generally should turn to private loans only after you have explored all other grant, scholarship, and federal loan options. If you can show you have a very high credit rating, you may find an affordable private student loan, though you will likely need a co-signer, who will be legally obligated to repay the loan if you can't or don't. Look for the one with the lowest interest rate and flexible repayment options.
  • First, make sure you need a private student loan. These loans generally are not as affordable as federal student loans and offer little repayment flexibility.

    Here are some factors to consider:

  • Talk to your school's financial aid office to get a form certifying that you need additional aid to cover the cost of attendance - most lenders require it.
  • Shop for lower interest rates and loans that offer flexibility if you have trouble making payments.
  • Some private lenders may advertise very low interest rates - remember that only borrowers with the best credit will qualify for these rates. Your rate could be much higher.
  • In 2011, over 90% of private student loans required a co-signer, so make sure you have someone like a parent or another relative lined up. Your co-signer will be legally obligated to repay the loan if you can't or don't. You may want to consider loans that offer "co-signer release" after a number of on-time payments.
  • Take action

    1. Fill out the FAFSA. Complete the form and submit it early.
    2. Explore all your federal loan options first.
    3. Shop around if your aid package doesn't cover the full cost of college.
    Download
    action guide
    what are the options?
      Federal Loans Private Loans
    What you need to know
    Take advantage of your federal loan options before seeking private loans. Federal student loans almost always cost less and are easier to repay. Private loans are generally more costly than federal loans and offer little flexibility if you are having trouble making your payments.
    Benefits
    Many federal student loans are subsidized and have fixed interest rates. Most students are eligible, and repayment terms are flexible. You can borrow larger amounts. If you shop around and can show ability to repay, you may be able to find low interest rates.
    Risks
    The amount of money you can borrow is limited, and a portion of your wages and tax refunds could be taken by the government if you neglect repayment responsibilities. Your interest rate and monthly payment could change with little warning, and you have fewer options for when and how much you repay.
    Detailed comparison of Federal and Private loans
      Federal Loans Private Loans
    How to repay

    6-month grace period for undergraduates

    Flexible monthly payments based on income or financial hardship, and possible debt forgiveness for teaching, military service, and other public service work

    6-month grace period for most loans

    Very limited flexibility for those with financial need or hardship

    Interest Rates

    Rates are fixed

    The Subsidized Direct and Perkins Loans have no interest while you're in school

    Interest rates range from 3.86% to 6.41%, depending on the loan program

    There is a 4% loan fee on PLUS loans and 1% fee for other Direct Loans.

    Rates are often variable - they can change over time

    You are charged interest while you are in school

    Interest rates range depending on your credit and other factors

    May charge various fees, like an origination fee.
    Who is eligible
    Almost everyone is eligible for federal loans; those with financial need will qualify for lower rates Lenders decide eligibility based on your credit and other factors, and you will likely need a co-signer
    Loan 
    limits

    Varies, depending on who you are and the type of loan, but cannot exceed your college costs

    Generally, undergraduates can max out at $5,500-12,000 per year, and graduate students at $8,000-20,500 per year

    More info at studentaid.ed.gov

    Varies, depending on your credit and other factors, but generally, you should not borrow more than your college costs

    Federal Loan Options

    Federal student loans almost always cost less and are easier to repay than private loans. You must complete the Free Application for Federal Student Aid (FAFSA) to be eligible for federal student loans.

    Perkins Loans

    Subsidized with a fixed 5% interest rate, administered through your school, and awarded based on financial need

    If you are eligible, you should take this loan first

    Direct Loans

    Either subsidized or unsubsidized

    Everyone is eligible for the Unsubsidized Direct Loan, and Subsidized Direct Loans are awarded based on financial need

    Parent or Grad PLUS Loans

    Available to graduate students and parents

    Parents with PLUS loans are responsible for repaying those loans

    Private Loan Options

    There are many different private loan options, with different interest rates and costs. Generally, private student loans have higher costs than federal student loans and require a co-signer.

    Borrowing beyond your federal loans could mean high levels of debt. Make sure you have explored all other options including applying for additional scholarships, cutting costs, or getting a part-time job before taking out a private loan. If you are still deciding where to go to school, consider all your options, including finding a low-cost school.

    However if you need a private student loan, you should know that there are some unexpected places to look for deals. It's important to shop around and compare different loan offers.

    State Agency Loans

    Loans offered by states to residents, or for students attending school in the state

    Ask your school's financial aid office for more information about "state sponsored alternative loans"

    Traditional Bank Loans

    These loans come from commercial banks. You may be more familiar with their checking or savings accounts

    Talk to your parent or someone you trust about this option because you will likely need a co-signer

    School Loans

    Some schools have their own loan program for students, which tend to have fixed rates

    Ask your school's financial aid office for more information

    Ask CFPB!
    What's the difference between subsidized and unsubsidized student loans?
    ×

    The government pays the interest on subsidized loans while you are in school. You pay the interest on unsubsidized loans. Subsidized loans are awarded to students based on financial need.

    What happened to Stafford Loans?
    ×

    These are now called Federal Direct Loans.

    How often do student loan rates change?
    ×

    Congress has the authority to change federal student loan rates, but once you agree to a federal student loan, your interest rate remains the same until you have paid it off.

    Interest rates on private student loans are set by the lender that makes the loan and depend on the lender's evaluation of your creditworthiness. Some private loans have variable interest rates, which mean your payment amount could change over time.

    Should I use a credit card to cover my education costs?
    ×

    Don't replace student loan debt with credit card debt - it can be a much more expensive way to finance your education. Credit cards do not provide the flexible repayment terms or borrower protections offered by federal student loans.

    What if I can't repay my private student loan?
    ×

    Contact the company that services your student loan immediately. You might be able to temporarily suspend your payments or work out a temporarily reduced payment. Ask your servicer if it has a program for "forbearance" or "deferment." Learn more about your options to repay your student debt.

    Take action
    1

    Fill out the FAFSA

    You must complete this form to be eligible for any federal student loans or grants. Submit the FAFSA as early as possible. Find your FAFSA deadlines online.

    Even if you are not sure you'll be eligible for any federal aid, you still need the FAFSA - schools often award scholarships and other grant aid using FAFSA information. 

    If you are having trouble filling out the form, contact the Department of Education.
    2

    Explore all your federal loan options first

    If you need to borrow to pay for school, federal student loans almost always cost less than private student loans and have more protections when it's time for repayment. If you are choosing between schools, compare each school's aid offer.
    3

    Shop around if your aid package doesn't cover the full cost of college

    Talk to your school's financial aid office about alternative scholarships or loan options. You may want to ask your parent to consider taking out a PLUS loan. And if you decide a private student loan is your best option, make sure you understand the terms and costs.