Student loans are a common way to help finance your college education. These loans come in several types, each with pros and cons. Before making a decision, look into all of the different types of student loans to make sure the option you choose is the right one for your circumstances.

Federal student loans come with low fixed interest rates and extensive borrower protection, so it is generally best to consider these loans first. However, private student loans have higher loan amount limits and can be a good alternative if you need to borrow more or do not qualify for federal loans.

The main types of student loans: Federal and private

Understanding the different types of student loans available is an important part of finding the best one for your needs.

There are two main types of student loans: federal and private. Within each type, there are several loan options intended for different types of borrowers. Direct Subsidized Loans, for instance, are available only to undergraduate students with financial need, while Direct PLUS Loans are meant for parents and graduate students.

Direct Subsidized Loan Direct Unsubsidized Loan Direct PLUS Loan Private student loan
Type Federal Federal Federal Private
Interest rate 5.50% (2023-24) 5.50% for undergraduates, 7.05% for graduates (2023-24) 8.05% (2023-24) 4% to 15%
Repayment term Standard term is 10 years Standard term is 10 years Standard term is 10 years 5 to 25 years
Eligible borrowers Undergraduates with financial need; borrowers must be a U.S. citizen or permanent resident and meet other eligibility criteria Undergraduates and graduates; borrowers must be a U.S. citizen or permanent resident and meet other eligibility criteria Graduates and parents; borrowers must be a U.S. citizen or permanent resident and meet other eligibility criteria Undergraduates, graduates and parents; borrowers must have good credit and a steady income
Best for Undergraduate borrowers from low-income families Borrowers who don’t qualify for need-based aid Graduate students who have maxed out unsubsidized loans; parents Borrowers who have maxed out federal loans; borrowers with excellent credit

Each of the student loan types have limits on what you can borrow. For instance, the maximum you can borrow annually with a Direct Subsidized Loan and a Direct Unsubsidized loan is from $5,500 up to $12,500. Graduate or professional students can borrow as much as $20,500 annually using a Direct Unsubsidized loan.

In addition, the Department of Education allows Direct PLUS loans to cover any remaining college costs that have not been taken care of by financial aid.

Types of federal student loans

While there are many ways to pay for college, federal student loans are one of the most popular options. These loans offer flexible payment options and often have low interest rates. The federal Direct Loan Program offers a few loan types.

Direct Subsidized Loans

Direct Subsidized Loans are available to undergraduate students who have demonstrated financial need. These loans do not accrue interest while the borrower is in school, during the six-month grace period or any deferment period afterward.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to undergraduate, graduate and professional students. Borrowers do not need to demonstrate financial need, but these loans accrue interest immediately. This means that you’ll be accruing interest during school, after you graduate and during periods of deferment and forbearance.

Direct PLUS Loans

Direct PLUS Loans are available to graduate or professional students and/or parents of dependent undergraduate students to help pay for education expenses. Direct PLUS Loans (also known as graduate PLUS loans and parent PLUS loans) carry higher interest rates and higher loan origination fees than Direct Subsidized and Unsubsidized Loans.

Unlike other federal student loans, parent PLUS loans are taken out by parents directly. While students can make payments themselves, their parents will still be legally and financially responsible for repaying the full balance of parent PLUS loans. The loan will show up on only the parent’s credit report, not the student’s.

Types of private student loans

Popular private student lenders include Sallie Mae, Discover and Citizens Bank, but there are dozens of additional private student loan companies. Private lenders offer various repayment terms, incentives and consolidation options, and they can also offer incredibly low interest rates for qualified borrowers with good or excellent credit. Unlike federal student loans, which offer only fixed rates, private student loans can have fixed or variable interest rates.

Undergraduate loans

Private student loans geared toward undergraduates often come with various repayment terms and may even give borrowers a discount on their principal once they graduate school. However, unlike federal student loans, undergraduate private student loans often require a co-signer. The co-signer is an adult who agrees to take full responsibility for your student loans if you default. Private lenders almost always require co-signers since undergraduates have not had time to develop a credit history.

Undergraduate private student loans usually have higher interest rates than graduate student loans. They also usually have lower loan amount limits.

Graduate loans

Private student loan lenders may offer specific student loan options tailored to graduate school, law school, medical school and business school. Private loans for graduate or professional students are less likely to require a co-signer than undergraduate loans. They often have higher loan limits, longer repayment terms and lower interest rates.

In many cases, private graduate student loans also come with features specific to the needs of graduate school — for instance, some lenders offer long grace periods and in-school deferment periods, as well as additional deferment while students complete a residency.

Parent loans

Parents can take out loans to help pay for their children’s education. Like regular student loans, parent loans come in federal and private options.

A common federal option is the parent PLUS loan. A major benefit of the PLUS loan is you can borrow the full cost of your dependent’s attendance, minus other financial assistance. You must be the biological or adoptive parent of the dependent undergraduate, though sometimes stepparents may qualify. You also must have a good credit history and meet the general eligibility requirements for federal student aid, such as being a U.S. citizen or eligible noncitizen. The child must be enrolled in a qualified institution for at least half-time as an undergraduate student.

Parents might also consider looking into a private student loan to see if they qualify for a better interest rate. The current direct PLUS interest rate is 8.05% for loans disbursed on or after July 1, 2023, and before July 1, 2024. It’s a fixed interest rate. Private student loans can run anywhere between 4 to 15% interest rates, and some may have variable rates.

Which type of student loan should you choose?

There are no hard-and-fast rules for deciding which loan option is best for you. The best option comes down to your finances, preferences and risk tolerance. However, as a general rule of thumb, federal student loans should be the first place you look.

Federal student loans

Federal student loans are suitable for every kind of borrower. They offer unique repayment options and longer deferment periods than private lenders, and they’re the only avenue for loan forgiveness programs. Additionally, they don’t have a minimum credit score, so undergraduates can access loan funds without needing a co-signer. In general, borrowers should max out their federal student loans before taking out private loans.

To access federal student loans, you must complete what’s known as the Free Application for Federal Student Aid (FAFSA) application. This application helps determine the amount of aid you’re eligible to receive. This amount can include federal student loans. To find out more, you can visit the Federal Student Aid website.

Private student loans

Private student loans are best for borrowers who don’t qualify for federal student loans because of citizenship status or borrowers who need to borrow far more than what federal student loans provide. Private student loans may also be a good option for borrowers with excellent credit since some lenders offer lower starting rates than the federal government.

Some private student loans come with fixed interest rates, and others have a variable rate. While variable rates can offer a lower introductory rate, the rate can also rise significantly, which means your monthly payments will fluctuate over time.

Shop around when considering private student loans to get the best rate and terms possible for your financial situation. Review the options available from banks, credit unions and lenders like Sallie Mae and read the fine print on the loan offer before making a decision.

The bottom line

A good first step when considering student loans to help finance your college education is to complete the FAFSA and find out what federal aid you may qualify for. This can help you map out the rest of your game plan regarding how much money you’ll need to borrow from other sources. If you need private loans to cover the remaining costs, carefully compare the competition and find the most competitive option.

Frequently asked questions

  • The best choice for your student loans depends on what you qualify to borrow and your financial situation. Remember that federal loans tend to have more flexible repayment options and are likelier to have lower fixed interest rates than many private loan options.
  • Eligibility is not guaranteed, but most borrowers can qualify for a student loan. Federal student loans have unique eligibility criteria, including citizenship or permanent residency. Borrowers must also be enrolled– or accepted for enrollment– as a student in a qualifying degree or certificate program and complete a Free Application for Federal Student Aid (FAFSA). There are some reasons why you may be denied eligibility for federal student loans, including incarceration or defaulting on an existing federal loan. Private student loans have eligibility requirements based on the lender. These may include age minimums and/or creditworthiness.
  • Subsidized loans will save you money in the long run, as the borrower is not charged interest while enrolled in school or during grace or deferment periods. However, not all borrowers will qualify to borrow subsidized loans– you must demonstrate financial need on the FAFSA to be eligible.
  • Personal loans often restrict people from using them to pay for educational purposes, but they could help with living expenses while in school. However, personal loans usually have drawbacks like shorter repayment times and higher interest rates than student loans. Personal loans also often have strict income and credit requirements to qualify.
  • Student loans are designed specifically for educational uses. Payments usually start six months after graduation, when you leave school or drop down to less than half-time enrollment. Federal student loans have specific borrower protections, like deferment or forbearance, loan forgiveness or income-based repayment plans. Some private loans may have similar borrower protections like forbearance of deferment, but terms and fees for postponing payments vary by lender. Student loans also may have more lax credit and income requirements than other loan types because they were designed with younger college students who have not had the time to build credit in mind.