Types of student loans: Federal and private

The best type of student loan depends on your situation. But for most borrowers, it's a good idea to exhaust federal student loan options before taking out a private student loan. In fact, 85% of student loans in the 2022-23 academic year were federal, according to the College Board. 

• Federal student loans are backed by the U.S. Department of Education and come with federal protections that private lenders don't offer, like access to loan forgiveness programs and income-driven repayment plans.
• Private student loans are issued by private institutions such as online lenders, banks, and credit unions. You can use these loans to fill in any funding gaps after you've exhausted federal loan options.

While you can pay for college with both federal and private loans, it’s important to note that there are several types of student loans within each category. Here’s an overview of your options and how to borrow wisely. 

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Types of federal student loans

There are four main types of federal student loans that can each be accessed by filling out the Free Application for Federal Student Aid (FAFSA). Most types of federal loans don’t require a credit check, and everyone who qualifies for a given loan in the same academic year receives the same fixed interest rate. 

All federal student loans offer a range of protections and benefits for borrowers. Among these are income-driven repayment plans such as SAVE, PAYE, IBR, and ICR, which set your payments at a percentage of your income and can ultimately lead to loan forgiveness. You also have access to temporary relief programs such as deferment and forbearance if you're experiencing temporary financial hardship. 

Direct Subsidized Loans

Direct Subsidized Loans are exclusively available to undergraduate students with proven financial need. These loans are considered the most affordable type of student loan because the government pays for interest while you’re in school and during the six-month grace period after graduating. To determine your eligibility for subsidized loans, you’ll need to submit the FAFSA. Your school will then use the information you provide to assess your financial need. It will take into consideration your family’s income, assets, and state of residence as well as your school’s total cost of attendance. Your credit score and history are not considered. The total amount you can borrow via subsidized loans for your undergraduate studies is capped at $23,000, but annual limits also apply.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are considered the most accessible type of student loan because they’re available to undergraduate, graduate, and professional students, regardless of financial need and credit standing. Unlike subsidized loans, borrowers are responsible for paying interest that accrues daily from the date of disbursement. 

Unsubsidized loans also come with borrowing limits: Dependent undergraduates can borrow up to $31,000 to fund their studies, while independent undergraduates can borrow up to a total of $57,500. Graduate students can borrow up to $138,500, but that includes both undergraduate and graduate loans. Annual limits also apply. 

Check out: Subsidized vs. Unsubsidized Student Loans

Direct PLUS Loans

Direct PLUS Loans have the highest interest rates among federal student loans, but they allow borrowers to cover up to the full cost of attendance, unlike other federal loans. There are two types: Parent PLUS loans for parents of dependent undergraduates, and grad PLUS loans for graduate or professional students. Direct PLUS Loans require a credit check that screens for adverse credit history. However, borrowers with adverse credit may still qualify by securing an endorser or submitting evidence of extenuating circumstances.

Direct Consolidation Loan

If you're juggling multiple federal loans and want to streamline your monthly payments without giving up federal benefits, you can consolidate your federal loans with a Direct Consolidation Loan. You can apply for a Direct Consolidation loan after you graduate, leave school, or drop below half-time enrollment. Once you’ve consolidated, the interest rates on your loans are averaged together and rounded up to the nearest one-eighth of a percent. 

Types of private student loans

If you've maximized your federal student loan options and still need funding, private student loans can bridge the gap. These loans are credit-based and require meeting specific income and credit criteria set by the lender. While private loans offer fewer benefits and protections than federal loans, they may offer lower interest rates if you or your cosigner have strong credit. Unlike federal loans, you can refinance private student loans to potentially reduce your interest rate.

Undergraduate student loans

These loans are designed specifically for undergraduate students. If you have a thin credit profile, (most dependent undergraduates do) you'll likely need to apply with a cosigner. A cosigner is usually a parent or a family member who agrees to repay the loan if you're not able to. When you apply with a cosigner, the interest rate you get will be based on their income and credit score. You may also be able to lower your rate by opting for a shorter repayment term. Private lenders usually offer repayment terms between 5 and 20 years. 

Check out: Best student loans without a cosigner

Graduate student loans

Some lenders offer private loans specifically for graduate students, which may allow higher borrowing limits compared to undergraduate loans. For borrowers with excellent credit, private graduate loans may be a better option than federal grad PLUS loans, since you may be able to secure a lower interest rate. Either way, it’s generally best to start with federal unsubsidized loans for graduate school for their benefits and low-fixed rates. 

Parent student loans

Some private lenders provide parent student loans, which are a competitive alternative to federal parent PLUS loans. That’s because parents with strong credit may find better interest rates in the private market. Consider pre-qualifying with multiple private lenders to get an estimated rate. From there, you’ll be able to determine whether a parent PLUS loan can offer you a better rate.

MBA loans

An MBA loan is an option if you're pursuing a Master of Business Administration degree. You can use federal loans for your MBA, which are generally recommended before private options. Like other private student loans, rates and terms vary. Lenders that offer MBA loans include Sallie Mae, College Ave, Citizens Bank, Ascent, and SoFi. 

Medical student loans

Many lenders also provide specialized medical school loans, often with significantly higher limits to accommodate the higher cost of medical education. For example, Citizens Bank allows medical students to borrow up to $350,000, compared to its $150,000 limit for other graduate degrees. Additionally, some lenders, like College Ave, offer extended repayment terms for medical professionals—up to 20 years, versus 15 years for other student loans, to help manage monthly payments.

Law school student loans

Private law school loans are tailored to students pursuing a legal education. These loans can come in handy when federal loans and scholarships aren’t enough to cover the full cost of your law degree. Private lenders that offer law school loans include Ascent, Sallie Mae, Citizens Bank, SoFi, and College Ave. Some lenders like Sallie Mae and College Ave also offer Bar Study Loans that can help cover exam and test prep fees, as well as living expenses for recent law school grads.

Compare private student loan rates 

Which student loan should I choose?

When to take out federal student loans

Choosing federal student loans is advisable for most students, especially those with little or no credit history. Federal loans typically don’t require a credit check and generally offer lower interest rates than private loans, making them more accessible and affordable for younger students who are just getting their start. Federal student loans also come with protections that private lenders generally don’t provide, such as student loan forgiveness, income-driven repayment plans, and more flexible forbearance or deferment. These can be invaluable if you later need help repaying your loan.

When to take out private student loans

Depending on your total college costs, you may max out your federal loan borrowing limits. In that case, a private student loan can help you bridge any funding gaps and stay enrolled. Additionally, borrowers with excellent credit and a reliable income may qualify for lower rates on the private market. If you don’t have great credit, a well-qualified cosigner — usually a parent or a family member — could help you get approved and lock in better rates.

Check out: Federal vs. private student loans: Which should I choose?