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Choosing a loan

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

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.
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.
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 relative to certain federal loans.
The amount of money you can borrow is limited. Part of your wages and all of your tax refund could be taken by the government if you default on your loan. Your interest rate and monthly payment could change with little warning, and you have fewer options for when and how much you repay. You typically need a co-signer to qualify and any late or missed payments will affect the credit ratings of both you and your co-signer.
Detailed comparison of Federal and Private loans
  Federal Loans Private Loans
How to repay

6-month grace period for loans made to undergraduates. Grad PLUS loans have no grace period, but parent PLUS loan borrowers may request a 6 month deferment.

Flexible monthly payments based on income or financial hardship, and possible debt forgiveness for certain periods of 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.

Subsidized Direct Loans have no interest while you're in school.

Interest rates are set based on the loan program and do not depend on your credit record.

There are also fees associated with Direct Loans. The loan fee is a percentage of the loan amount. Direct Loan fees are deducted from each loan disbursement. The percentage varies depending on the type of loan and when the loan is first disbursed.

Rates are often variable - they can change over time. Fixed rate loans may be available.

You are charged interest while you are in school.

Interest rates vary depending on your credit and other factors.

Some lenders may charge various fees, like an origination fee.

Who is eligible
Almost everyone is eligible for federal loans. Lenders decide eligibility based on your credit and other factors, and undergraduate students typically need a co-signer to qualify or obtain better terms.

How much you can borrow varies, depending on the type of loan, whether you are an undergraduate or graduate student, your year in school, and dependency status. Your borrowed amount cannot exceed the cost of attendance minus any other aid you receive.

Generally, undergraduate limits range from $5,500 per year for dependent freshman to $12,500 per year for independent students who are juniors or beyond. Most graduate students can borrow up to $20,500 per year.

There are no set dollar limits on Parent PLUS Loans or Graduate PLUS Loans but the amount may not exceed the cost of attendance minus any other aid received.

More info on federal loan limits is available from the Department of Education at

How much you can borrow varies, depending on your credit and other factors, but generally, you should only borrow what you need and 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.

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

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.

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.

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.