How to Choose the Best Student Loans for You

 December 2, 2020
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It’s no secret that education costs a fortune. The College Board reports that the average bachelor’s degree at a public university will cost you north of $80,000 without accounting for food and housing. At prices like those, student loans are almost unavoidable for all but the very wealthiest of students.

While the best-case scenario is to pay for school with scholarships and grants, this doesn’t mean you’ll get enough to cover all your costs. There’s a good chance you’ll still need at least some help from loans to help pay for your college education.

So, how do you find the best student loans for you? Here are four topics to consider, depending on your situation:

Starting with federal student loans

More protections often come with federal student loans, including the ability to reset or extend grace periods, depending on the type of loan and the reason. You also have more options when it comes to default with a federal loan.

In addition to default and grace period rules, federal loans are also eligible for income-driven repayment, in which your payments are limited to a portion of what you make each month. While some private lenders offer hardship programs, you likely won’t find your payments capped at a percentage of your income. You also won’t be eligible for Public Service Loan Forgiveness (PSLF), which discharges the remainder of your loan balance after 10 years of working in a nonprofit, government or teaching job.

Another reason to begin with federal loans is the fact that you don’t have to worry about your credit situation or about having a cosigner on your loan. With federal loans, you also have more repayment options when you finish your degree, and you don’t have to worry about jumping through as many hoops to apply.

While these might be the best student loans to start with, they don’t always cover all your costs, which is why private loans can be the right next step for some undergraduate students and their families.

Choosing private student loans

With most other types of debt, it’s common to start by comparing interest rates. But for student loans, the lowest rate isn’t always best. When you look at private student loans, you might also consider the types of repayment options.

Also, consider what might happen down the road if you run into financial hardship. With federal loans, protections are fairly easy to get — especially if you turn to income-driven repayment. But you won’t always get that almost-automatic help from private lenders.

Here is a list of some of our favorite lenders for private student loans.

How graduate students and parents can get the best student loans for them

There is an exception to beginning with federal loans, though. If you’re a graduate student or parent thinking about a federal PLUS loan, you may want to consider your private loan options before you commit. If you have a strong credit history and income, you could (at least in some cases) save money with a private loan over a federal PLUS loan.

For undergraduates, federal loan rates for July 2020-July 2021 were set at 2.75%. However, federal PLUS loans came with a rate of 5.30% for that same period.

Depending on your situation and the lender, you might be able to get a private loan for graduate school at a lower rate.

However, before deciding that the interest rate is the most pressing consideration, think about the type of job you’ll have when you graduate. If you know you’ll finish your graduate work and start a career that will qualify you for PSLF, you might want to hang on to your eligibility with a federal loan. A private loan won’t get you access to PSLF.

If you’re getting an education loan on behalf of your child, carefully consider the fact that parent PLUS loans aren’t eligible for some of the income-driven repayment options. It’s possible to to qualify for PSLF with a parent PLUS loan, but you’ll probably need the help of your loan servicer to make it happen.

And then, of course, you’ll still have to meet the eligibility requirements for PSLF.

Planning ahead to reduce your need for student loans

Do what you can to borrow as little as possible for college. Even the best student loans are still debt. Apply for scholarships during high school. You can even get some scholarships after you start at college, so keep looking all through your university years.

It’s also possible to take other steps to reduce the cost of college — and how much you need to borrow:

  • Consider starting at a community college to save money on the first couple of years of your education.
  • Attend school close to home and save money on living costs by staying with your parents.
  • Work part time or start a side hustle to earn money for school.
  • Use a 529 plan or some other account to save money throughout high school (and even during college).

And if you do have to turn to debt to fund your education, carefully compare your options and needs so you get the best student loan for your situation.

Christina Majaski contributed to this report.