Thoughtful Borrowing: A Guide to Education Loans

September 18, 2025

Over the past 20 years, college costs have doubled, far outpacing inflation and wage growth, making paying for college more challenging than ever. For most students—and often their parents—borrowing has become a necessary part of covering the cost.

Thoughtful borrowing is key to getting the education you want without compromising your financial future. This guide explains the different types of education loans available and offers strategies for wisely managing your education debt. A glossary of loan terms is available HERE.

Thoughtful borrowing also includes having an early, honest family discussion about college financing—ideally before you even begin looking at colleges. Are You on the Same Page About College Costs? can help spark meaningful conversations about education debt and so much more.

Types of Loans

Students and parents can borrow from a variety of sources, each with its own advantages and disadvantages.

• Federal Loans
  • Direct Student Loans
    • Direct Loans are federal student loans available to eligible students who file a FAFSA to help cover the cost of education at two- and four-year colleges, trade schools, career schools, and technical schools that participate in the federal student aid program.
    • Direct Loans are issued in the student’s name without a credit check or co-signer. Because of this and other favorable terms—including grace periods, repayment flexibility, deferment, and forbearance options—financial advisors always recommend students take advantage of these loans before turning to other borrowing options. Interest rates are set annually but remain fixed for the life of the loan. Direct Loans always have origination fees, deducted from the loan amount before disbursement.
    • Nearly all colleges include the maximum Direct Loan amount a student is eligible for in their financial aid package, based on their year in school and whether they have financial Need. While students are not required to accept these loans, they are still responsible for the costs they would have covered.
    • There are two types of Direct Loans:
      • Direct Subsidized Loans
        • Available to undergraduate students with financial Need.
        • The government pays the interest while you are enrolled at least half-time, during a six-month grace period after leaving school, and during any authorized deferment (postponement of loan payments).
        • Nearly all colleges include the maximum Direct Loan amount a student is eligible for in their financial aid package, based on their year in school and whether they have financial Need. While students are not required to accept these loans, they are still responsible for the costs they would have covered.
      • Direct Unsubsidized Loans
        • Available to all undergraduate and graduate students regardless of financial Need.
        • You are responsible for paying the interest from the moment the loan is disbursed.
        • During periods when you are not required to make payments (such as while you are in school, deferment or forbearance), interest will accrue (accumulate) and be capitalized (added to the loan principal). You can choose to pay the interest that accrues even when you are not required to make payments.
        • Dependent students whose parents are not eligible for a Direct PLUS Loan may be eligible for additional Unsubsidized Loan amounts.
    • Direct Loan Borrowing Limits: Borrowing limits for Direct Subsidized and Unsubsidized Loans are based on your year in school, whether you have financial Need, and whether you are a dependent or independent student, as summarized in the table below.

• Federal PLUS (Parent Loan for Undergraduate Students) Loans
• PLUS Loans are federal loans available to the biological or adoptive parents (or in some cases, the stepparents) of dependent undergraduate students who file a FAFSA and are enrolled at least half-time at an eligible school. These loans help families cover the cost of college.
• To qualify, borrowers cannot have an adverse credit history, defined as:
  • Having one or more debts with a combined outstanding balance greater than $2,085 that are 90 or more days delinquent, or that have been placed in collection or charged off (written off) during the two years preceding the date of the credit report.
  • Having, within the past five years, experienced default, bankruptcy discharge of debts, foreclosure or repossession, tax lien, wage garnishment, or write-off of federal student aid debt.
• Parents who are denied a PLUS Loan due to an adverse credit history may still be approved if they add a cosigner or provide documentation that there are extenuating circumstances that caused the adverse credit history.
• PLUS Loans are an optional form of borrowing and are not considered financial aid. Eligible parents may borrow up to the full Cost of Attendance (minus financial aid awarded by the school) for the 2025–26 academic year. Parents with existing PLUS loans may continue to borrow up to the full cost of attendance until July 1, 2028. However, beginning July 1, 2026, new borrowers will have an annual borrowing limit of $20,000 per student and a lifetime cap of $65,000 per student.
• PLUS loans have fixed interest rates set annually and always include origination fees. While interest rates and fees are often higher than private loans, PLUS Loans come with more flexible repayment, deferment, and forbearance options. For current terms and more information, visit studentaid.gov.

• State Loans
  • State student education loans are offered by individual state agencies, often providing competitive interest rates and benefits for residents attending in-state colleges. Not all states offer these programs, and eligibility and terms vary widely.
  • State education loans are not financial aid but can provide alternative financing for students who have exhausted federal aid and scholarships. Many programs require that you complete the FAFSA to determine eligibility, but some have their own application forms. State loans often offer better terms than private loans, such as fixed interest rates and flexible repayment options.
  • For more information about what your state offers visit collegescholarships.org/loans/state.htm

• Private Loans
  • Private student loans are offered by banks, credit unions, and other private lenders. They are not considered financial aid and are not part of any government education lending program. Most private loans require a co-signer and do not include the borrower protections, flexible repayment options, or fixed interest rates that government loans offer.
  • Interest rates are usually variable, meaning they can change over time and rates often depend on the co-signer’s credit history. Borrowers with excellent credit qualify for rates lower than government loans. Co-signers are financially responsible for the loan, though many lenders allow co-signers to be released after a set number of on-time payments.
  • Private loans vary widely in terms, so it’s important to compare lenders carefully. Key factors to consider include:
    1. Interest Rate
       • Look at the APR which reflects the true annual cost of the loan rather than an advertised rate.
       • Understand whether the rate is fixed (will not change over time) or variable. If it’s variable, understand what index it’s tied to, how often it can change, and the maximum rate.
       • Private loans vary widely in terms, so it’s important to compare lenders carefully. Key factors to consider include:
    2. Repayment Terms Review grace periods, repayment period, and options for deferment, forbearance, or hardship.
    3. Origination Fees Pay attention to these fees, because they reduce the amount of money applied to your college costs.
    4. Other fees or penalties Review terms for late fees, return payment fees, and prepayment fees.
    5. Discounts Check for incentives such as discounts for auto payments.
    6. Co-Signer Release Understand if and when a co-signer can be released from the loan.
    7. Customer Service The average borrower takes 20 years to repay their loan. Choose a lender with a reputation for responsive, supportive, and helpful customer service.

• Income Share Agreements (ISA)
  • An ISA is a college financing option where instead of borrowing a fixed sum and repaying with interest, a student agrees to pay a percentage of their future income—often 2–10%—for a set period, typically 2–10 years. ISAs usually include repayment thresholds (you have no payments unless you earn above a minimum salary) and caps (there is a maximum limit to what you pay back). ISAs are considered private education loans.
  • Only a small percentage of ISAs are offered directly by traditional 4-year colleges, and these tend to be limited to specific academic programs. Most ISAs come from private providers or career-training schools. At a typical 4-year college, a private ISA usually functions like a private loan: it won’t reduce your Net Price, but it also won’t replace need-based grants. Your financial aid package is determined first, and an ISA is an optional tool you can use to help you cover any remaining costs.
  • Because ISAs are not standardized and are lightly regulated compared to federal loans, their terms can vary widely. It’s important to compare potential student loan costs with an ISA’s repayment percentage, income thresholds, contract length, and repayment cap before signing. And be aware, since ISAs are usually offered only after federal aid has been applied, students may graduate with both federal loan payments and ISA payments—two different repayment streams to manage.
  • If you’re considering an ISA, talk with your financial aid office and review the details carefully—especially how the ISA payments might stack alongside federal loan obligations.

Wisely Manage Your Debt

Use Tuition Payment Plans to Reduce Borrowing

Not all colleges offer tuition payment plans, but when available, they let you pay all or a portion of each year’s tuition in 10 – 12 interest-free monthly installments. Any amount of tuition paid this way reduces the fees and interest you would otherwise owe on loans.

Parents may not think they have extra funds for monthly tuition payments, but savings on food, utilities, and car insurance while the student is in college can add up to hundreds of dollars a month—money that can go toward a tuition payment plan.

Keep an Eye on Your Loans

The only student loan that doesn’t accrue interest while you’re in school is the Federal Direct Subsidized Loan. All other loans begin charging interest from the day they are disbursed. Many lenders, including the federal government, allow you to defer payments on Direct and PLUS Loans until after graduation.

During deferment, you can either allow interest to capitalize (add to your principal and the total owed) or pay the interest as it accrues. Paying the interest on deferred loans while in school can save thousands of dollars over the life of the loan.

If you use an ISA to cover remaining costs, run the numbers carefully. Understand the repayment terms, how they’ll fit with your expected salary, and how ISA payments will stack with any federal loan obligations.

Money-Saving Tips for Repaying Student Loans

• Make bi-weekly payments instead of monthly. This effectively adds a little more than one additional payment each year, which can save a bundle in overall loan interest.
• Apply extra payments toward the highest interest loan first. If all your loans have the same interest rate, apply extra payments to the loan with the largest principal balance.
• Enroll in autopay to reduce your interest rate. Most lenders will offer at least 0.25% reduction, which can save $525 over ten years on a $35,000 loan

Final Word

Paying for college can feel overwhelming, but understanding your loan options, borrowing responsibly, and actively managing your debts puts you in control of your financial future. Know the terms, limits, and repayment strategies for federal, state, and private loans, as well as ISAs. Use tools like tuition payment plans, autopay, and targeted principal payments to minimize unnecessary debt while still investing in your education.

Thoughtful borrowing, combined with open family conversations and careful planning, helps you achieve your academic goals without compromising your long-term financial security.