Most students don’t pick a student loan so much as get handed a list of them. Your financial aid offer shows up with a few loan amounts attached, a lender’s ad promises a “low rate,” and a deadline is approaching. The choices you make in that moment can shape your monthly budget for a decade or more.
The good news is that the decision follows a fairly reliable order. If you’re still sorting out the vocabulary, start with our guide to the types of student loans, then come back here to put it into practice.
Step 1: Use Free Money First
Every dollar you get from scholarships, grants, or work-study is a dollar you don’t borrow. Before you look at a single loan, file the FAFSA, apply for scholarships, and see what your school offers. Loans are what’s left after free money runs out, not the starting point.
Step 2: Figure Out How Much You Actually Need
Take your school’s total cost of attendance (tuition, housing, books, and living costs), subtract the grants and scholarships you’ve been awarded, and subtract what you and your family can pay. What remains is your gap.
You don’t have to accept every loan in your aid offer. You can accept all of it, part of it, or none of it, and borrowing less than the maximum is one of the easiest ways to lower your total cost. A common guideline is to keep your total student debt below the salary you expect to earn in your first year after graduation.
Step 3: Start With Federal Loans
For most undergraduates, federal loans should be the first loans you take. They don’t require a credit check or a cosigner, they carry fixed interest rates, and they come with federal repayment protections. Borrow in this order:
- Direct Subsidized Loans, if you qualify based on financial need. The government pays the interest while you’re in school at least half-time.
- Direct Unsubsidized Loans, which are available regardless of need but accrue interest from the day they’re disbursed.
For loans first disbursed between July 1, 2026 and June 30, 2027, the fixed rates are:
- 6.52% for undergraduate Direct Subsidized and Unsubsidized Loans
- 8.07% for Direct Unsubsidized Loans to graduate and professional students
- 9.07% for Parent PLUS Loans
Federal loans also charge an upfront origination fee, deducted from each disbursement (roughly 1% for Direct Subsidized and Unsubsidized loans and over 4% for PLUS loans; check studentaid.gov for the current figures).
Dependent undergraduates can borrow up to $5,500 in their first year, $6,500 in their second, and $7,500 in their third year and beyond, with a $31,000 total cap. Independent students have higher limits.
One thing to keep in mind with unsubsidized loans: interest adds up while you’re in school. At 6.52%, a $5,500 unsubsidized loan accrues roughly $359 in interest per year. If you can afford to pay even part of that while enrolled, it keeps your balance from growing before repayment starts. (For how loans show up on your credit report, see how student loans affect your credit score.)
Step 4: Decide Whether You Need Anything Beyond Federal Loans
If federal loans, grants, and scholarships still leave a gap, you have a few options, and the rules here changed on July 1, 2026.
Parent PLUS Loans are still available, but new borrowing is now capped at $20,000 per year and $65,000 per student. At 9.07% plus a fee over 4%, they’re among the most expensive federal options, so they’re worth comparing against private parent loans before you commit. (More on that in our guide to college loans for parents.)
Graduate and professional students can no longer take Grad PLUS Loans as new borrowers. Federal unsubsidized borrowing is now capped at $20,500 per year and $100,000 total for most graduate programs, and $50,000 per year and $200,000 total for professional programs such as law and medicine. That makes private loans a bigger part of the picture for many grad students than they used to be.
Private loans fill whatever remains. Treat them as the last step, not the first, because they don’t carry the same protections.
Step 5: Compare Private Lenders Carefully
Private lenders set their own terms, so it pays to compare at least two or three. Here’s what to look at:
- Interest rate and type. Fixed rates stay the same for the life of the loan. Variable rates can start lower but can rise. For most borrowers, a fixed rate is the safer choice.
- Fees. Ask whether there’s an origination fee or any other upfront cost, and compare the total cost of each loan, not just the advertised rate.
- Cosigner requirements and release. Most undergraduates need a cosigner. Ask whether the lender offers cosigner release, which removes the cosigner after a set number of on-time payments (often somewhere between 12 and 48 months, depending on the lender).
- In-school payment options. Some lenders let you make small interest-only payments while enrolled, which keeps your balance from ballooning.
- Hardship protections. Ask what happens if you lose your job or can’t pay. Federal loans have deferment, forbearance, and income-based repayment. Private lenders’ options vary and are usually more limited.
- Prequalification. Many lenders let you check your likely rate with a soft credit check that doesn’t affect your score. Use that to compare before you submit formal applications, and keep those applications close together.
Quick Checklist Before You Sign
- Have I applied for every scholarship and grant I can?
- Am I borrowing only the gap, not the maximum?
- Did I take federal loans (subsidized first) before anything else?
- If I’m considering a private loan, have I compared at least two or three lenders?
- Do I understand what my monthly payment will be, and does it fit a realistic first-year salary?
For a full overview of federal programs, repayment, and how to apply, visit our student loans resource hub.
