We know the feeling: You tour a college, fall in love with it… and then see its price tag.

Even if you’ve earned merit and outside scholarships, paying for college is getting harder and harder for many students. In-state tuition, fees, and room and board for a public four-year college averaged $11,600 in 2024-25, while the average topped $58,000 for private four-year institutions.

And with those college costs continuing to rise, many families wonder if they can even afford a four-year degree for their student.

It’s no surprise, then, that parents and students are increasingly turning toward loans as part of their financial aid package.

But while taking out student loans may seem like an easy way to get the money you need to pay for college, you need to remember this is a legal contract that obligates you to pay back the full amount of money borrowed—plus interest. It’s a big commitment, and not one you should take on without serious consideration.

We’ll dive into detail and nuance below, but while student loans seem like a great short-term solution for paying for higher education, we want to emphasize one thing: Your future self will thank you if you minimize student loans whenever possible. The weight of student debt can delay major life milestones—like buying a home, starting a family, or (for your parents) being able to retire. You’ll also want to weigh your likely income from your intended major/career against potential loan amounts—finance majors may have very different starting salaries than elementary education majors—to ensure that paying back loans won’t burden your financial health.

So before you or your parents sign on that dotted line, make sure you fully understand the world of student loans—what they are, how they work, and most importantly, how to minimize them as much as humanly possible.

Below, we’ll cover:

What are student loans?
The difference between federal and private student loans
Student loan borrowing limits
What you can use student money for
How interest on student loans works
Student loan repayment options
How student loan forgiveness works

If you can’t wait to find specific student loan information, just click on the link in the table of contents below to jump to that section.

Let’s get to it!

(click to skip ahead)

What Are Student Loans?

Federal vs. Private Student Loans: What's the Difference?

Student Loan Borrowing Limits

What Can You Use Student Loans For?

How Does Interest on Student Loans Work?

Student Loan Repayment Options

How Does Student Loan Forgiveness Work?

Taking a Balanced Approach to Student Loans

What Are Student Loans?

At their core, student loans are borrowed money that a student uses to pay for higher education. Unlike scholarships and grants, which are “free” money (in the sense that it doesn’t need to be repaid), loans are a financial obligation that can come with significant interest charges and follow you after graduation (and sometimes long after graduation).

The basic process for receiving a student loan is:

You apply for loans (through FAFSA for federal loans or directly with lenders for private loans).
You receive the money, which typically goes directly to your school for tuition, room and board, and fees.
Any remaining funds come to you for other educational expenses, like books and living expenses.
You begin repayment after a grace period (often six months) following graduation or if you stop attending school more than half the time.

Most students don't need to make payments while in school (although interest may still accrue), but the repayment clock starts ticking about six months after you graduate or drop below half-time enrollment.

So: How do you know if you should be looking at federal or private student loans?

Pro Tip: Student loans aren’t the only way to pay for college. Learn more about alternatives in our hour-long “How to Pay for College” webinar.

Federal vs. Private Student Loans: What's the Difference?

If you’re considering taking out student loans, it’s important to understand the differences between the two main types: federal and private.

Federal Student Loans

Federal loans come from the government. If you’re considering taking out loans, you might want to start with federal loans first, because they typically offer more favorable terms, like:

Fixed interest rates that are often lower than those of private loans
No credit check for most federal loans (except PLUS loans)
Flexible repayment plans that adjust your monthly payments based on your income
Direct Consolidation Loans, which let you combine one or more federal student loans into one new loan.
Postponement options, which can be helpful if you’re facing financial hardship and struggling to repay your loans.

You’ll find there are four main types of federal loans:

Direct Subsidized Loans: These loans are need-based, meaning your FAFSA results must demonstrate financial need, and the school determines the amount you can borrow based on factors like the cost of attendance, year in school, and other financial aid received.

Bonus: The government will pay the interest in three instances to help you save money: while you're in school (at least half-time); the first six months after you leave school; and during any deferment periods.

Direct Unsubsidized Loans: While undergraduate and graduate students don’t need to demonstrate financial need for these loans (although they still need to complete the FAFSA), schools still determine the amount you can borrow based on your cost of attendance and other financial aid. Interest starts accruing as soon as the loan is disbursed, and although you don’t have to pay it while you're in school, you can choose to pay it as it accumulates or let it capitalize (get added to your principal balance). Unlike subsidized loans, unsubsidized loans have higher yearly and total borrowing limits.
Direct PLUS Loans: The Department of Education makes Direct PLUS Loans to eligible parents (as Parent PLUS loans) and graduate or professional students (as Grad PLUS loans) through schools participating in the Direct Loan Program. These require a credit check (although you may still be able to get a PLUS loan even with an adverse credit history) and have higher interest rates. The maximum PLUS loan amount is the cost of attendance (which the school determines) minus any other financial aid received.
Direct Consolidation Loans: These allow you to combine multiple federal loans into a single loan. The benefits of these loans include lower monthly payments, fixed interest rates, and forgiveness options, but choosing this loan option can also extend the repayment period (meaning you’re paying your loan off for longer).

It’s important to note that as of April 2025, the future of federal student loans is uncertain. Students and parents should stay current on developments, as changes are likely to impact loan availability, repayment options, and borrower protections.

Private Student Loans

Private loans come from banks, credit unions, and online lenders, and in our opinion, they should generally be your last resort.

There are some key differences between federal and private student loans. Private loans have:

Credit-based approval, which means you'll likely need a cosigner and you can be denied for loans based on your perceived creditworthiness
Variable or fixed interest rates that can be higher than federal loans
No universal borrowing limits or repayment terms
Fewer repayment options and little to no flexibility during financial hardship
No access to federal loan forgiveness programs
May require payments while you're still in school

Each private loan has its pros and cons, so it’s critical that you carefully review the terms before signing. And the variability between loans is one reason we don’t recommend them for students.

That said, there may be rare circumstances in which private loans with a creditworthy cosigner can offer rates better than what Parent PLUS loans offer.

Student Loan Borrowing Limits

The government limits how much you can borrow in federal loans—and that’s actually a good thing, because it helps prevent excessive debt.

For undergraduate students, the borrowing limit each academic year for federal Direct Subsidized and Unsubsidized loans is between $5,500 and $12,500. (The final amount depends on your year in school and if you’re a dependent.)

Graduate students can borrow up to $20,500 in Direct Unsubsidized loans each year ($40,500 for certain medical training), and if you need more, you can consider looking at Grad PLUS loans (subject to credit approval).

There are no fixed annual or aggregate loan limits for Direct PLUS Loans for graduate students and the parents of dependent undergrads; however, you can’t borrow more than the cost of attendance minus other financial aid received.

Private loan limits are a little different: They generally depend on a school's certified cost of attendance minus other financial aid received.

Looking for loan alternatives? Check out our guide on “How to Apply for Scholarships.”

What Can You Use Student Loans For?

You can use your student loans to pay for your educational expenses, which include:

Tuition and fees
Room and board
Books and supplies
Technology equipment
Transportation to and from school
Dependent child care expenses
Study abroad costs (if part of an eligible program)
Professional expenses (like certifications)

If you’re thinking about using your loan money to pay for that Ulta cosmetics haul or to join your friends on the slopes in Breckenridge for spring break… think again.

Using loan funds for noneducational expenses is more than just unwise—it could potentially violate your loan agreement, lead to even more debt, and have legal consequences.

How Does Interest on Student Loans Work?

Here's where things get a bit mathematical, but understanding interest is crucial to grasping the true cost of loans and whether it makes sense for you in the long run.

These loans come at a price: interest is the fee you pay for the privilege of borrowing money and is calculated as a percentage of your loan balance.

Federal student loan interest rates are fixed for the life of the loan and set annually by the government. Private loan rates can be fixed or variable and depend on your credit score.

A sobering reality: When you start repaying your loans, your monthly payment goes to interest first, then principal. This is why many borrowers see their balance decrease painfully slowly, especially in the early years of repayment.

Capitalized interest—when your unpaid interest is added to your loan’s principal amount, and subsequent interest amounts are calculated based on this new total—can be even worse than high interest rates. It’s yet another reason why some students find their loans cost them well over the amount they originally borrowed.

To see how different repayment plans might affect the total cost of your loans and to estimate monthly student loan payments before you take out a loan, check out the Department of Education’s Loan Simulator tool.

Student Loan Repayment Options

Knowing how much money you can borrow is an important part of student loans, but perhaps even more important are the options for paying it back.

The good news? There are several options to fit different financial situations, but the two main categories for repaying federal student loans are fixed payment plans and income-driven repayment (IDR) plans.

Fixed Payment Plans

The Standard Repayment Plan offers fixed payments over 10 years—meaning you’ll pay off your loan with the least total interest.
The Graduated Repayment Plan means that payments start low and increase every two years over a 10-year term.
The Extended Repayment Plan stretches payments over up to 25 years. While this lowers monthly payments, it substantially increases the total amount of interest you pay.

Income-Driven Repayment Plans

SAVE (Saving on a Valuable Education) Plan (ended in 2025). Created by the Biden-Harris administration, this was one of the most popular IDR plans, as it limits federal student loan payments to a percentage of borrowers' earnings and cancels remaining debt after a specified payment period. However, as of July 2025, the Trump administration has ended this as an option for borrowers.
IBR (Income-Based Repayment); likely being phased out. This is the only remaining income-driven repayment plan for borrowers taken out before July 1, 2026. This caps federal direct loan payments at 10% of discretionary income with loan forgiveness after 20 years of payments, but this is expected to be replaced with the new RAP, below.
Repayment Assistance Plan (RAP). This is a proposed federal student loan income-driven repayment plan, expected to roll out in July 2026, that replaces existing income-driven plans. Monthly payments are based on a percentage of your Adjusted Gross Income (AGI), scaling from a $10 flat fee for low earners to 10% of AGI for higher earners, with a $50 monthly reduction per dependent child. Borrowers with large debt-to-income ratios who took out loans on or after July 1, 2026, can access RAP, which has a 30-year repayment term before forgiveness and does not allow switching to other plans once enrolled
PAYE (Pay As You Earn); plan ending. PAYE limits federal direct loan payments to 10% of discretionary income with forgiveness after 20 years, requiring borrowers to demonstrate partial financial hardship and meet specific timeline requirements. This plan is being phased out, with no new enrollments accepted after July 1, 2027.
ICR (Income-Contingent Repayment); plan ending. Payments are capped at either 20% of discretionary income or the amount needed to repay the loan in 12 years (whichever is lower), with forgiveness after 25 years. Enrollment is temporary and will be phased out for most borrowers. This will be replaced by the RAP, above.

Note: The U.S. Department of Education took down the online and paper applications for all income-driven repayment (IDR) plans in February 2025. While the applications did reopen in March 2025, current legal challenges have things up in the air. You can check this page for updates on IDR plans.

How Does Student Loan Forgiveness Work?

Although there’s a lot of talk and speculation in the media about student loan forgiveness, it isn't a magic button that makes debt disappear for everyone (if only, right?).

But here’s the good news: there are some situations in which you can have your federal student loans forgiven. (You might also hear “canceled” or “discharged”—they’re all just fancy ways of saying you don’t have to pay back some/all of your loans.)

While terms “forgiveness,” “cancellation,” and “discharge” each mean essentially the same thing, there are specific programs with specific ways to qualify (e.g., if you are a teacher, work for a nonprofit, have a disability).

But the most common way people have loans forgiven is through Public Service Loan Forgiveness, through which the remaining balance on your Direct Loans is forgiven after you’ve made 120 qualifying monthly payments under an accepted repayment plan or you’re working full time for an eligible employer.

Remember, most forgiveness programs apply only to federal loans. Private student loans are rarely forgiven (except occasionally upon the death or total disability of the borrower)—making it yet another reason to be cautious about private loans.

Taking a Balanced Approach to Student Loans

Student loans might seem like you’re getting a “discount” on your college education, as colleges often include student loans as part of your financial aid offer.

But it’s important to remember that you’re taking on debt that must be repaid after graduation—and that’s why you should use them judiciously.

Before taking on potentially expensive loans, consider these strategies:

Maximize free money first: Apply for every scholarship you qualify for.
Consider your ROI: Research typical starting salaries in your intended field and consider not borrowing more than your expected first-year salary.
Explore affordable pathways: Community college transfers, in-state public universities, or colleges known for generous aid can dramatically reduce costs. Check out our podcast on which schools are the most generous with financial aid.
Work part-time: Taking on a part-time job or a work-study opportunity during college can help minimize borrowing needs.
Borrow incrementally: Just because you're approved for a certain amount doesn't mean you need to take it all. Borrow only what you need each year.

Education is valuable, but your financial freedom is important, too. Make choices today that will balance your educational goals with your long-term financial health.

Looking for more personalized guidance? Get our free “Paying for College in Four Steps” guide for strategies for finding scholarships, understanding financial aid across different types of colleges, identifying affordable options, applying for grants, mastering the FAFSA, and interpreting award letters—all the resources you need to make college financially accessible.