With the high costs of attending a four-year college or university, you may need to finance at least part of your education, and you won't be alone. At the end of 2023, outstanding federal student loan debt was at $1.6 trillion, according to the Federal Reserve Bank of New York.
It’s important to learn about student loans to get a handle on how complicated they can be. By understanding how this type of debt works, you’ll be able to save yourself from unpleasant surprises and pay less in student loan interest.
1. Student loans should be a last resort
Don’t turn to loans as your first option to pay for school. You could substantially reduce how much you need to borrow by making choices like these:
- Complete the FAFSA and submit as close to Oct. 1 as possible
- Complete your state’s financial aid application
- Complete the CSS Profile if you’re applying to any private schools that require it
- Apply for scholarships and grants
- Work after school and during the summer
- Choose a lower-cost school, at least for your first two years
2. Don’t borrow more than you can realistically repay
If you don’t know what career you want to pursue, you might end up in a lower-paying job when you graduate — something that requires a college degree but isn’t highly specialized. Borrowing more than you need to earn your degree doesn’t make sense in this situation.
If you’re set on a career path and plan to earn a more specialized degree from a school with a strong program in that area, you could justify borrowing more. For instance, taking out $60,000 in student loans to major in computer science, where you can anticipate earning six figures after graduation, makes more sense.
3. Prioritize federal loans over private
If you have to borrow for college, you should use federal loans first to cover as much of the cost as possible. To qualify for these loans, you must fill out the Free Application for Federal Student Aid (FAFSA) for each academic year.
Only after you’ve exhausted your federal loans should you consider private student loans. What’s more, you should prioritize subsidized federal student loans over unsubsidized ones. Subsidized loans are less expensive because the government pays the interest your loans accrue while you’re in school at least half-time.
Good to know: Federal loans offer benefits private loans don’t. Benefits include income-driven repayment plans, public service loan forgiveness, deferment and forbearance when you’re in school or struggling financially, and discharge if you die or become totally and permanently disabled before paying off your loans.
Learn More: Subsidized vs. Unsubsidized Student Loans: Know the Difference
4. Not all private lenders are created equal
If you must take out a private loan, it’s crucial that you shop around to find the best deal. Unlike federal student loans, which all come from the same source and have the same interest rate (depending on the loan type and disbursement date), private student loans are available from many lenders.
Some private student lenders have more generous policies than others. One might discharge the loan balance when the borrower dies, while another might hold the borrower’s cosigner or estate responsible for the balance.
Perhaps most important, you might qualify for a better interest rate with one lender than another. One lender’s best rate might be 5%, while another’s is 7.5%. Finding the cheapest rate is easy and free, and it could save you thousands of dollars.
The companies in the table below are Credible’s approved partner lenders.
Advertiser DisclosureLoan Amounts
$1,000 up to 100% of the school-certified cost of attendance
Overview
College Ave offers a wide range of in-school loans for nearly every type of degree. There are a number of repayment options, and borrowers can choose a unique eight-year repayment term. Plus, graduate, dental, and medical students receive extended grace periods.
You may get easy funding for multiple years — 90% of undergraduates are approved for additional student loans when they apply with a cosigner. However, it can be difficult to remove a cosigner for your loan later on, as you must complete at least half of your repayment term before becoming eligible. That’s significantly longer than some lenders, which may only require one to two years of payments before releasing a cosigner.
Loan terms
5, 8, 10, or 15 years for most borrowers (law, dental, medical, and other health profession students have up to 20 years)
Loan amounts
$1,000 minimum up to your school’s annual cost of attendance; lifetime limits depend on your degree and credit profile
Cosigner release
After half of the scheduled repayment period has elapsed
Eligibility
Must be a U.S. citizen or permanent resident at an eligible institution. International students with a Social Security number and a qualified cosigner may also qualify. Applicants who can’t meet financial, credit, or other requirements may qualify with a cosigner.
Overview
Ascent offers several unique borrowing options that you don’t typically see with private lenders. In addition to traditional student loans for undergraduate, graduate, and medical programs, college juniors and seniors may qualify for its Outcomes-Based Loan — which doesn’t require established credit or a cosigner. Instead, Ascent reviews alternate factors such as your school, major, and GPA to determine your eligibility.
Ascent also offers a wide range of loan terms and repayment plans to choose from. You may even qualify for its Progressive Repayment plan, which allows you to start with small payments that gradually increase over time. Borrowers who use a cosigner can release them after as few as 12 payments, though international students don’t qualify for this option.
Loan terms
5, 7, 10, 12, 15, or 20 years
Loan amounts
$2,001 minimum up to your school’s annual cost of attendance; lifetime limits of $200,000 for undergrads and $400,000 for graduates
Eligibility
Must be a U.S. citizen or DACA student enrolled at least half time at an eligible institution. International students with a qualified cosigner may also qualify. Applicants who can’t meet financial, credit, or other requirements may qualify with a cosigner.
Loan Amounts
$1,000 to $99,999 annually ($180,000 aggregate limit)
Overview
Powered by Cognition Financial, Custom Choice offers student loans for undergraduate and graduate students starting at $1,000. You can borrow up to $99,999 per year with a total aggregate limit of $180,000.
If you apply with a cosigner, you may be able to release them from your loan after 36 on-time payments. You can also receive a 0.25 percentage point discount on your interest rate by setting up autopay, as well as a 2% reduction of your principal balance after graduating.
Custom Choice doesn’t charge application, origination, prepayment, or late fees. It also lets you pause payments through forbearance if you qualify for its natural disaster or unemployment protection programs.
Loan amounts
$1,000 to $99,999 per year (lifetime limit of $180,000)
Eligibility
Must be a U.S. citizen or permanent resident at an eligible institution. You must also meet Custom Choice’s underwriting criteria for income and credit, or apply with a cosigner who does. Eligible noncitizens such as DACA residents can also qualify by applying with a cosigner who’s a U.S. citizen or permanent resident.
Loan Amounts
$1,000 up to 100% of school-certified cost of attendance
Overview
Sallie Mae offers the Smart Option Student Loan to undergraduate and graduate students. You can borrow up to your school-certified cost of attendance and apply just once annually to get the funds you need for the entire academic year. Plus, it may be easy to get reapproved for your future years of study — undergraduates have a 97% approval rate when they return to Sallie Mae with a cosigner.
Through Sallie Mae, you can find a variety of loans designed for specific needs, including loans for MBA programs, law school, bar study, medical school, medical residency, dental programs, dental residency, and other health profession programs. However, this lender no longer offers a career training loan.
Loan terms
10 to 15 years for Smart Option Student Loan; up to 15 years for law school and bar study loans; up to 20 years for medical school, medical residency, dental school, dental residency, and health professions loans
Loan amounts
$1,000 up to school-certified cost of attendance
Eligibility
Must be a U.S. citizen or permanent resident enrolled in an eligible program. Noncitizens may qualify by applying with a cosigner who’s a U.S. citizen or permanent resident.
Loan Amounts
$1,001 up to 100% of school certified cost of attendance
Overview
INvested is an Indiana company that offers affordable student loans exclusively to state residents. Loans are available to Indiana students and parents who can meet income and credit requirements, or who have an eligible cosigner. Borrowers can borrow as little as $1,001 or as much as the school-certified cost of attendance minus other aid.
INvested provides detailed information on eligibility so borrowers can quickly determine whether to apply for a loan — however, there’s no option to prequalify with a soft credit check. Cosigner release is also available after just 12 on-time payments, considerably shorter than many other lenders.
Loan amounts
$1,001 minimum, up to the school certified cost of attendance
Eligibility
Loans are available to Indiana residents only. Borrowers must have a FICO score of 670 or higher, a 30% maximum debt-to-income ratio or minimum monthly income of $3,333, continuous employment over two years, and no major collections or defaults in recent years. Borrowers who do not meet income or credit requirements can apply with a cosigner.
Loan Amounts
$1,500 up to school’s certified cost of attendance less aid
Overview
Massachusetts Educational Financing Authority (MEFA) is a not-for-profit lender that offers low-cost undergraduate and graduate school loans to students nationwide. While only fixed-rate loans are available, interest costs may be lower than what you see with other private loans.
While you can apply with a cosigner to lock in the best rate possible, removing that cosigner later may be tough. Only one repayment plan allows cosigner release, and you must make four years of consecutive on-time payments and meet other credit and income requirements to qualify.
Loan amounts
$1,500 minimum up to school-certified cost of attendance
Eligibility
Must be a U.S. citizen or permanent resident, enrolled at least half time at a degree-granting, nonprofit institution, and must maintain satisfactory academic progress. Must have no history of default on an education loan and no history of bankruptcy or foreclosure in the past 60 months. Applicants who can’t meet the minimum credit and income requirements may apply with a cosigner.
Loan Amounts
$1,000 to $350,000 (depending on degree)
Overview
Citizens offers a variety of student loan types, including loans for undergraduates, graduate students, and parents. Perhaps the most unique feature of Citizens student loans is the option for multiyear approval. If you qualify, you can apply once and borrow for future years with a more streamlined process that only involves a soft credit inquiry.
Student borrowers can defer payments while in school and for six months after graduating. You can also score a 0.25 percentage point reduction on your interest rate for setting up autopay, as well as an additional 0.25 percentage point loyalty discount if you or your cosigner already have a qualifying account with Citizens.
Loan terms
5, 10, or 15 years for student loans; 5 or 10 years for parent loans
Loan amounts
$1,000 minimum, up to a maximum of $150,000 for undergraduate and graduate degrees; $250,000 for MBA and law; and $180,000 or $350,000 for health care student loans, depending on the degree type
Eligibility
Must be a U.S. citizen or permanent resident enrolled at least half-time in a degree-granting program at an eligible institution. International students can apply with a cosigner who’s a U.S. citizen or permanent resident.
Loan Amounts
$1,000 up to cost of attendance
Overview
Education Loan Finance (ELFI) is a division of Tennessee-based SouthEast Bank owned by Education Loan Finance, Inc., a non-profit whose mandate is to provide access to higher education. ELFI launched in 2015 and offers undergraduate, graduate, and parent private student loans as well as student loan refinancing.
ELFI student loans and refinance loans are available to residents in all U.S. states including Puerto Rico. Borrowers can benefit from no application, origination, or prepayment fees. ELFI also offers flexible repayment terms and competitive rates, however there’s no cosigner release option and the lender doesn’t offer any discounts.
Loan amounts
$1,000 - Cost of attendance
Cosigner release
A cosigner may not be taken off a loan, but the borrower can apply for a new loan without their cosigner.
Eligibility
All 50 states as well as Washington DC and Puerto Rico.
5. Learn the details of loan costs and repayment
Many student loan borrowers don’t really understand how their loans accrue interest, and it ends up costing them.
For example: Let’s say your student loan accrues $200 in interest every month, but you only pay $100. Your lender will apply that $100 toward the interest you owe and add the remaining $100 to your principal.
None of your monthly payment will go toward your principal, and your balance will grow by $100. Next month, your loan balance will be even larger because interest will accrue on a greater amount of principal.
In other words, even though you’re making loan payments, you’re not making any progress toward paying off your loan. Instead, your loan amount is increasing and becoming harder to repay.
This is why periods of loan forbearance or deferment often aren’t the gift they appear to be. Your lender might allow you to skip monthly payments without adding late fees or reporting your account as delinquent to the credit bureaus. In the short term, this payment relief seems great, but in the long term, it can dig you into a deeper hole.
Federal student loans require you to complete student loan entrance counseling — and it’s a good idea to take this program seriously. What you learn could motivate you to pay off your loans as quickly as possible. For example, you might decide to pursue public service loan forgiveness or make more than the minimum monthly payment.
Below are a few key terms to be aware of:
| |
|---|
| All new federal student loans and some private student loans have fixed interest rates that don’t change. Private student loans typically have variable rates that fluctuate with the market. |
| Annual percentage rate accounts for both the interest rate and fees on your loan. It’s a better measure of borrowing costs than the interest rate alone. |
Origination, prepayment fees | Origination fees are lender fees for taking out a loan. Prepayment fees are lender fees for refinancing or otherwise paying off your loan early. |
| The loan term is the number of years you have to repay the loan. Private loan terms vary per lender, but typically range between 5 and 20 years.
Federal loans have 10-year terms unless you choose a different repayment option, which can extend the term to 20, 25, or 30 years. |
| The is when you don’t have to pay interest on your loan. Subsidized federal loans have a six-month grace period after you graduate. |
Deferment and forbearance | Both deferment and forbearance allow you to not pay interest or principal for several months or longer due to a qualifying circumstance such as cancer treatment or economic hardship. With some federal loans, interest does not accrue during deferment. |
Income-driven repayment plans | Federal student loans offer payments that adjust up or down based on your income and family size. These plans give you more years to repay your loan and will forgive any remaining balance when the term ends. |
Consolidation vs. refinancing | Consolidating combines two or more federal student loans into one without changing the overall interest rate. Refinancing replaces one or more student loans with a new loan that has a different term and interest rate. |
6. Use loan funds for just the bare necessities
If your lender has given you more money than you need to pay for school, you don’t have to spend it all.
You can repay the excess as soon as you realize you don’t need it. That way, you won’t have to pay interest on it and you’ll graduate with less debt.
7. Get to know your loan servicer
Your student loan servicer is the company you’ll make your payments to. It may not be the entity that loaned you the money, but it will be responsible for issuing monthly statements, approving or rejecting requests for deferment or forbearance, and reporting how much you owe and whether you pay on time to the credit bureaus.
Make sure you know who your servicer is, how to make your payments, and when they’re due. Get familiar with their website and where to find your statements.
8. Make in-school payments if you can
Many students never consider making payments on their loans while they’re still in school. But if you wait until after graduation to make your first student loan payment, you’re missing a great opportunity to save money.
Let’s say you’ve borrowed $10,000 with a 6% interest rate and a 10-year term. Your monthly payment would be $111, $50 would be interest, while $61 would be principal. Let’s also say your loan is not subsidized — in other words, the government is not paying your interest while you’re in school.
By just making the $50 a month interest payment — which you could earn from a couple of hours of tutoring — you would prevent your loan balance from growing each month. After four years, you would have paid $2,880 in interest, but you’d still only owe $10,000 in principal.
If you paid the full $111 each month, you’d only owe $7,000 at graduation. But if you paid nothing for four years, you’d owe more than $12,700.
9. Don’t stop learning about student loans — until your debt is paid off
You don’t have to become a statistic, another graduate who can’t afford to buy a home or who still has student loan debt at retirement.
If you understand how the different types of student loans work, how interest accumulates, and how you can get out of debt faster, you could very well pay off your loans in 10 years or less and enter your early to mid-30s with a clean slate.
Check Out: The Complete List of Student Loan Forgiveness Programs
Meet the expert:
Amy Fontinelle
Amy Fontinelle is a personal finance journalist with work featured in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.
