Student loans are often used to help pay for college or other post-secondary education. Many people think of them as “good debt” because education can lead to higher earnings over time. But not all student loans are created equal, and not every borrowing situation is beneficial. It’s important to understand your loan type, repayment options, and long-term impact.

Types of Student Loans

There are two main categories of student loans: federal and private.

Federal Student Loans

These loans are backed by the government and usually offer more flexible repayment options. Most financial advisors recommend using federal loans first before considering private loans.

Private Student Loans

These loans come from banks, credit unions, or online lenders. If you have strong credit, you may qualify for lower interest rates and higher loan amounts. However, rates can be much higher for those with lower credit scores.

Understanding Federal Student Loans

There are three main types of federal student loans:

Subsidized Loans

Available to undergraduate students who demonstrate financial need and complete the FAFSA (Free Application for Federal Student Aid).

• No interest is charged while you're in school or during the six-month grace period after graduation
• Loan limits depend on whether you're a dependent or independent student
• As of 2025, lifetime limits are $31,000 for dependents and $57,500 for independents
• Unsubsidized Loans

Available to undergraduate, graduate, and professional students regardless of financial need.

• Interest begins accruing as soon as the loan is disbursed
• FAFSA is still required
• Lifetime borrowing limit in 2025 is $138,500

Direct PLUS Loans

Available to graduate students and parents of dependent undergraduate students.

• These loans have higher interest rates and fees than subsidized or unsubsidized loans
• Credit checks are required

How Interest Works

Interest rates vary depending on when your loan was first issued. Here's how daily interest is calculated:

Interest Amount = (Outstanding Principal x Interest Rate ÷ 365) x Number of Days Since Last Payment

Your monthly payment first covers any interest that has accrued. Only after all interest is paid does your payment go toward reducing the loan balance.

You may be able to deduct up to $2,500 in student loan interest on your taxes, depending on your income and filing status.

Other Things to Keep in Mind

• Federal student loan servicing may shift to a different government agency in the future, such as the Department of the Treasury or the Small Business Administration. This could affect how your loan is managed, so it’s important to keep your own records.
• To qualify for federal loans, students must be enrolled at least half-time in an eligible program.

Managing student loans can feel complex, but understanding the basics helps you make informed decisions. Whether you're borrowing for the first time or reviewing repayment options, staying informed is the key to long-term financial health.