Best and Worst Student Loans: Pros and Cons

Student loan debt has soared in the U.S. to $1.777 trillion at the end of 2024, and many young adults, as well as older borrowers still repaying their education loans, find the debt burden overwhelming.

In 2025, the average cost for in-state students attending a four-year public college while living on campus was $27,146 per academic year. Out-of-state students at public colleges paid an average of $28,386. The average cost of attending a private nonprofit university was $58,628, with $38,421 of that tuition and fees.

With that kind of price tag, it’s no wonder that 85.2% of new undergraduates borrow money to pay for school, and overall, any given year, an average 28.6% of undergraduate students, or their parents, use federal student loans to pay for their education. Some 42.7 million Americans are paying student debt, with the average cost for federal loans $38,375. Add in private student loans and it’s an estimated $41,618.

There are many options for types of loans for students, including federal loans and private loans. What works best for one student may not work for another. It’s important to review loan options, including repayment options, and consider the factors that will come into play when it’s time to make payments.

Smart Strategies to Pay for College

The best financial move for every college student is to explore ways to pay for school without loans. But if you must borrow, take these steps to make borrowing student loans as affordable as possible:

• File a Free Application for Federal Student Aid (FAFSA). You won’t be able to apply for federal grants or federal student loans without it.
• Pay as much of your tuition with grants and scholarships, which you don’t have to pay back. Explore options for grants and scholarships from colleges and nonprofits. There are regional, career-focused, military and many other types of student aid available.
• Take advantage of federal student loan options before turning to private lenders. Funded by the U.S. government, Direct Subsidized and Unsubsidized Loans, and Direct PLUS Loans offer low fixed-rate interest and flexible payment options.
• If you still need a private loan, research your options thoroughly to get the best interest rate and repayment plan available. Avoid ones that you’d have to start repaying while still in school.

What Do Student Loans Cost?

Interest and fees charged on federal student loans are determined by Congress, not by the federal department that oversees the loan programs.

All federal Direct Student Loans have an origination fee. This is a fee to take out a loan, and most private lenders will charge one, too. The fees are a percentage of the total loan amount and are deducted before the money is disbursed, which means what’s paid out will be less that what you actually borrow. You pay interest on the full amount of the loan, including the origination fee. The federal student loan origination rate fluctuates. The rate for Direct Subsidized and Unsubsidized loans dispersed between Oct. 1, 2020, and Oct. 1, 2025, was 1.057%. The rate for Direct PLUS Loans for the same period was 4.228%.

The interest rates in fiscal year 2024 were:

• Direct Subsidized and Unsubsidized Loans, 6.53%, fixed;
• Direct Unsubsidized Loans for Graduate Students, 8.08%, fixed;
• Direct PLUS Loans for parents and graduate students, 9.08%, fixed;

The good news is that student loan interest is tax deductible, with some qualifications.

Private student loan lenders set their own origination fees and interest rates, and determine whether interest is variable or fixed. The amounts will likely depend on your credit score, credit record, debt-to-income ratio and other factors.

Pros & Cons of Student Loan Types

Direct Subsidized Loans

These federal loans have a fixed interest rate and the government pays your interest while you’re in school. You must show financial need.

Pros of Direct Subsidized Loans

• Interest rate is fixed at 6.53% in 2024-2025 for undergraduate students.
• Interest is paid until you graduate.
• Credit history is not a factor.
• Six-month repayment grace period after graduation before making payments.

Cons of Direct Subsidized Loans

• Can only subsidize $3,500-$5,500 a year (can borrow more, unsubsidized)
• Must demonstrate financial need.
• Not available to graduate students.

Direct Unsubsidized Loans

While these also carry a fixed interest rate, once you start making payments, you’re responsible for repaying all the interest that accrues while you were in school.

Pros of Direct Unsubsidized Loans

• No financial need requirement
• Fixed interest rate (6.53% in FY 2024)
• Credit history is not a factor
• Six-month grace period after graduating

Cons of Direct Unsubsidized Loans

• Interest accrues while student is still in school and added to the loan amount unless it’s paid as it accrues
• Loan limits of $5,500-$7,500 each year
• Graduate student interest rate is higher, at 8.08% in FY 2024.

Direct PLUS Loans

Allows parents to borrow money to pay for a student’s education, or for graduate students to borrow beyond their Direct Subsidized Loan limit.

Pros of Direct PLUS Loans

• Parents can help students pay for education
• Interest rate 9.08% fixed in FY 2024
• Six-month payment grace period after student graduates
• Gives graduate students the option to borrow more than Direct Subsidized Loan limit
• Can be included in Direct Consolidation Loan

Cons of Direct PLUS Loans

• Credit history is a factor
• Higher interest rate than federal loans to undergraduate students (9.08% in FY 2024)
• PLUS Loans made to parents are not eligible for some income-driven repayment plans.

Direct Consolidation Loans

Borrowers can consolidate all of their federal loans into one monthly payment.

Pros of Direct Consolidation Loans

• One loan bill to pay each month
• Flexible repayment options
• Often lowers monthly payments, giving borrowers up to 10-30 years to pay loans back, depending on amount.
• PLUS loans made to parents can be included

Cons of Direct Consolidation Loans

• Increasing payment length will increase overall cost of loan
• Interest is weighted average of all loans, so may be higher
• Will lose benefits if it includes Perkins Loan

Private Loans

Money is borrowed from private lender, like banks, credit unions and state agencies. There is wide variety of offerings. Shop around for the best deal on fees, deferred payments and interest rates. The better your credit, the better terms you’ll find.

Pros of Private Loans

• Larger borrowing limits in many cases
• Can supplement costs not covered by federal aid
• Usually disbursed immediately after approval
• May be able to find deal that doesn’t have origination fee or other terms better than the federal loans
• Funds can be used for education expenses beyond tuition, books and housing
• Finding a co-signer could improve the interest rate

Cons of Private Loans

• No subsidized interest
• Repayment rules may be less flexible
• Payments may start while student is still in school
• Good credit history matters for interest rate, other terms
• Private loan interest is not tax deductible
• Not eligible for Direct Consolidation Loan
• Few private lenders offer loan forgiveness or income-based repayment.

Which Student Loan Is Right for You?

Federal loans usually offer relatively low interest rates and don’t require a credit check (except PLUS Loans) or a cosigner. A borrower can have the option of having all their federal loans consolidated into one lump sum for repayment purposes. Depending on your profession, the federal government may even forgive the loans if certain conditions are met.

• Direct Subsidized Loans: Students with financial hardship should apply – the subsidized interest makes a difference when payment time comes.
• Direct Unsubsidized Loans: Students not facing a financial hardship who need to borrow money to meet tuition expenses.
• PLUS Loans: For parents who want to help bridge the gap between their student’s Direct Loans and cost of school, or graduate students who need to do the same.
• Private Loans: Best for people with good credit, established credit histories who can’t apply for federal aid, can’t receive a scholarship or grant, or tapped out what they can receive from the government.

What Are the Best Private Student Loans?

Finding the best private student loan depends on how well you shop around.

If you’re looking to take out a private loan, you should consider these factors:

• Interest rates
• Flexibility
• If lender can release co-signer once you’ve proven you can make on-time payments over a specified length of time.
• Years the lender has been working with student loans.
• Does the lender sell its loans?
• Repayment benefits

Another way to potentially find a good deal on a private student loan deal is to ask if your college or university of choice provides a list of preferred or suggested lenders.

Private lenders lists are usually found on a school’s website. Universities and colleges are required to explain why they made their selections. It would be good for your family to review them before taking out a private loan.