College students headed back to school: Here's how to borrow student loans strategically

Many young Americans are going off to college and while this is an exciting time for students and their families, it can be easy to lose sight of the bigger financial picture. 

A college degree can be quite costly, leaving many graduates saddled with student loan debt. Outstanding student loan debt reached is $1.7 trillion as of Q1 2021, according to the Federal Reserve. And the cost of tuition alone has risen 33% since 2000, and that doesn't even account for a higher cost of housing, food and other necessities. 

It's important to come up with a plan on how to borrow student loans strategically — before you ever step foot in a classroom. After you've applied for scholarships and filled out the Free Application for Federal Student Aid (FAFSA), student loans can help you cover the upfront cost of a college education.

The main types of student loans are federal and private. Federal student loans are typically a good place to start when it comes to paying for college but they may not cover the entire cost of a university education. Private student loans can help bridge the financing gap and they typically come with competitive interest rates.

Keep reading to learn how to use both types of loans to pay for college. If you decide to borrow private student loans to help cover college costs, be sure to get offers from multiple private lenders on Credible to compare repayment options. 

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Borrow what you can with federal student loans

Federal student loans are backed by the Department of Education (ED), and they come with certain federal protections like economic hardship forbearance and income-driven repayment plans that make them a good first choice if you need to borrow money to pay for college.

These are the main types of federal loans to take into consideration:

1. Direct Subsidized Loans. These are granted based on financial need. The ED pays the interest while you're in school, for the first six months after you leave school and during deferment periods. No credit check is required.
2. Direct Unsubsidized Loans. These are available to all university students regardless of need. You're responsible for paying the interest during the life of the loan. No credit check is required.
3. Direct PLUS Loans. These are unsubsidized federal loans for graduate or professional students. There are also Parent PLUS Loans, which can be taken out by parents of college students. A credit check is required to determine one's eligibility.

Federal student loans have fixed interest rates, which means they will stay the same throughout the course of your loan. You'll also need to account for federal student loan fees, such as a loan origination fee. For loans disbursed between July 1, 2021 and July 2022, the interest rates are as follows:

• Direct Subsidized and Direct Unsubsidized Loans: 3.73% for undergraduate students.
• Direct Unsubsidized Loans: 5.28% for graduate and professional students.
• Direct PLUS Loans: 6.28% for parents, or professional and graduate students.

In contrast, interest rates on private student loans can be fixed or variable. Variable interest rates can change over time but they are often lower than what you may qualify for with fixed rates. You can compare private student loan rates from real lenders in the table below and on Credible's online loan marketplace. 

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How to cover the difference with private student loans

With Direct Subsidized and Unsubsidized federal student loans, your school's financial aid office will determine how much money you can borrow based on the cost of attendance. Often, this amount isn't enough to cover the full cost of college, such as housing, food and other education-related costs. That's where Direct PLUS Loans and private student loans come into play.

Since they're federal loans, Direct PLUS Loans may come with more federal protections like an income-contingent repayment plan (ICR). However, this type of federal loan has its drawbacks. Direct PLUS Loans are only offered to parents of college students and graduate or professional students, and they come with the highest interest rate of all federal student loans at 6.28%

Private student loan rates can come with fixed or variable rates, starting as low as about 1% APR for variable-rate loans. Here are the average private student loan interest rates that Credible borrowers received during the week of July 13, 2021:

• 10-year fixed-rate private student loans: 5.55%
• 5-year variable-rate private student loans: 3.05%

Unlike federal student loan rates, the interest rates on private student loans can vary based on creditworthiness, loan amount and loan length. This means you can shop around for the lowest possible interest rate on a private student loan, and even enlist the help of a cosigner to see if you can snag a lower interest rate.

You can compare private student loan interest rates across multiple lenders at once without impacting your credit score on Credible's online loan marketplace. And once you have a good idea of your estimated student loan interest rate from a private lender, you can estimate your monthly loan payments using a student loan calculator. 

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