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Choosing a loan that's right for you

If you're considering student loans to help pay for your education, you're not alone⁠. But the more money you borrow now, the more you’ll have to spend on monthly payments after you graduate.

Before borrowing

If you are going to school next year, make sure you fill out the FAFSA form and submit it as soon as it opens on October 1. Then minimize the amount you need to borrow by cutting costs, applying for grants and scholarships, and considering other options like working part-time or setting up a tuition installment plan.

1. Learn about different loan types

Most students have two main options for student loans: federal (government) loans or private loans from banks, credit unions, and other lenders. You should research all your options for federal loans, also known as Direct loans, before shopping around for private loans.

The types of loans are:

  • Direct Subsidized: A federal loan for undergraduate students. You don’t get charged interest while you’re in school. It is need-based, so whether you qualify depends on your FAFSA information.
  • Direct Unsubsidized: A federal loan that any undergraduate or graduate student can get (as long as you haven’t reached your lifetime borrowing limit). You are charged interest while you are in school. To cut costs, pay the interest as you go.
  • Direct PLUS: Federal loans for the parents of undergraduate students, or for graduate and professional students. You must pass a credit check to get these loans.
  • Private: Loans offered by banks or credit unions. You should shop around for the best offer you can find. Students generally need a parent or other family member to co-sign.

Depending on where you live and other factors, you may have other options. Some states provide low-cost education loans for residents. There are also nonprofits and other organizations that offer low-or zero-interest student loans, often within a specific city or state.

2. Explore your federal options first

For most student borrowers, federal Direct loans are the better option. They almost always cost less and are easier to repay. (This may not be the case if you are a parent or graduate student considering federal PLUS loans, though.)

Here are some advantages of federal Direct loans:

  • Access: Most students are eligible for federal student loans. There is no credit check (except for Parent PLUS loans). You will not need a co-signer, which private loans typically require.
  • Lower interest rates: For most borrowers, federal loans offer lower interest rates than private loans.
    • If you qualify for subsidized loans, use them first. They are your cheapest option, since the government pays the interest while you’re in school.
  • Fixed interest rates: Federal loans have fixed interest rates, meaning the interest rate will never change. Interest rates on private loan are often variable, which means your interest rates and payments could go up over time.
  • Flexible repayment options: Federal borrowers have more options for reducing or pausing payments if they have trouble repaying their debt.

There are some downsides to federal student loans:

  • If you default on your loan by not making any payments for 270 days, then the government can garnish (take) all of your tax refund and/or part of your wages or Social Security income.
  • The amount of money you can borrow is limited. Freshmen can borrow up to $5,500; from your third year onward, the most you can borrow is $7,500.

Steps to getting a federal student loan

  • Make sure your FAFSA form is complete and submitted.
  • If you have selected a school, follow the instructions in the financial aid offer or ask the financial aid office. If you’re still applying to schools or waiting for, hang tight until you choose a school.
  • Before you can get the loan money, you must complete entrance counseling and sign a Master Promissory Note. Learn more from the Department of Education.

3. If you still need a private loan, shop around to find the best deal

First, make sure you need a private student loan. We urge you to be cautious because private loans are generally more expensive than federal loans and offer little flexibility if you have trouble making payments later on. Your private loan interest rate and monthly payment could change with little warning, and you will have fewer options for when and how much you repay.

However, private loans may be a reasonable option for some borrowers, especially if you have strong credit history. Private lenders may allow you to borrow larger amounts, depending on your need and credit history. If you shop around and can show ability to repay, you may be able to find low interest rates relative to certain federal loans.

Steps to getting a private student loan:

  • Talk to your school's financial aid office. Most lenders require a form from the school certifying that you need additional aid to cover the cost of attendance.
  • Line up a co-signer. Most private student loans require one unless the borrower has positive credit history. Co-signers are legally responsible for repaying the loan if the primary borrower doesn’t. You may want to consider loans that offer "co-signer release" after a certain number of on-time payments.
  • Shop around for lower interest rates and flexibility with repayment. Your credit score can take a hit from multiple credit applications, also known as “hard inquiries.” To reduce the impact, try to complete all applications within a 2-week period.
    • Some private lenders advertise very low interest rates, which only borrowers with the best credit will qualify for. Your actual rate could be much higher.
  • Don’t use a credit card. 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.

Considering an income-share agreement to pay for college?

Learn about whether an ISA is the right decision for you.