One of the most important decisions you’ll make in planning for college is how to pay for school. You can borrow money, but there are several different types of student loans to choose from — each of which comes with its own pros and cons.

Federal student loans are usually the first option to consider, due to the low fixed interest rates and consumer protections they provide. But in some cases, private student loans are another good option, since they come with high loan limits.

What are the different types of student loans?

There are two main types of student loans: federal and private. However, within each type, there are several different 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. Each of these options has its own rates, terms and features.

Direct Subsidized Loan Direct Unsubsidized Loan Direct PLUS Loan Private student loan
Type Federal Federal Federal Private
Interest rate 4.99% (2022-23) 4.99% for undergraduates, 6.54% for graduates (2022-23) 7.54% (2022-23) 1% 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

Types of federal student loans

While there are many ways to pay for college, federal student loans are one of the most popular options. Not only do these loans offer flexible payment options, but they often have low interest rates. The federal Direct Loan Program offers a few loan types, each with its own perks.

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 during any period of deferment 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 do 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 a wide variety of 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. Co-signers are almost always required by private lenders, since undergraduates have not had time to develop a credit history.

Undergraduate private student loans usually have higher interest rates than graduate private 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, business school and more. 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.

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 ultimately 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 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 are able to access loan funds without needing a co-signer. In general, borrowers should max out their federal student loans before taking out private 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.