The Ultimate Guide to Student Loans

We have a problem.  A serious, serious problem with student loan debt in the U.S.  My goal is to give you the knowledge and resources you need to be able to navigate your way through the student loan system with the least amount of debt possible.  Your experience with student loans doesn’t have to be a negative one!

First we need to understand how serious the student loan crisis in our country is.  The only way to do that is to list some facts.  Here we go:

  • Approximately 70% of all students graduating from four-year colleges had student loan debt in 2012.
  • 44.2 million Americans had student loan debt in 2016.
  • The average student loan debt for the class of 2016 was $37,172 (up 6% from 2015).  You could buy a new BMW luxury car for 37 grand, and that’s just the average student loan debt.
  • The delinquency rate for student loans in 2016 was 11.1%.  If you didn’t get your paycheck 11.1% of the time, you would be quite pissed.
  • The average monthly student loan payment in 2016 was $351.  That’s rent for a decent sized, non-cockroach infested, apartment in the Midwest.  Or for you east and west coasters, an eighth of your rent for a 200 square foot closet on the 10th floor of a building built in 1891 and not updated since.

These are some ridiculous numbers to wrap your head around. Unfortunately, unless we get a hold of our student loan debt situation, these numbers will continue to increase at a rapid rate as more and more students flock to colleges.

The ULTIMATE Guide to Student Loans

Picking the Right Student Loans

First we need to talk about the two main types of student loans, federal and private.  Obviously, federal student loans come from the federal government, but private student loans can come from numerous different entities and are much trickier to wrap your head around.

Federal Student Loans

The William D. Ford Federal Direct Loan Program is the largest federal student loan program in existence today.  With a federal student loan, you are borrowing from the U.S. Department of Education directly.

Federal student loans are broken down into four subcategories; Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Direct consolidation.

Direct Subsidized

Subsidized loans are available to undergraduate students who demonstrate a financial need (meaning they have to look at you and your parents financial situation).  Your school gets to determine the amount you can borrow from the federal government.  In some cases they won’t give you enough to cover all of your expenses.  This sucks, a lot.

The great part about Direct Subsidized loans is that the U.S. Department of Education pays the interest on your loan:

  • While you’re in school at least half-time.
  • For the 6 months after you graduate (“grace period”)
  • And during the period of deferment (if you get special permission to pay your student loans at a later date).

Direct Unsubsidized

Direct unsubsidized loans are quite a bit different.  You don’t need to prove financial need when applying for an unsubsidized loan.  They’re available to undergraduate AND graduate students.  The school you attend once again determines how much you can borrow and they base it off of the cost of attendance and other financial aid the applicant is receiving.

You have to remember that you are responsible for paying the interest on unsubsidized student loans.  The U.S. Department of Education will not help you one bit if you take out an unsubsidized loan.  That’s why the rules regarding applying for this loan are much more relaxed.  If you choose to not pay the interest on unsubsidized loans at any point, your interest will accrue and could be added onto the principle of your loan (very bad).

Direct Plus

Direct Plus loans are essentially unsubsidized loans for graduate and professional students, along with the parents of these students.  Yes, parents can take out Direct Plus loans for their children (or be cosigners).

Direct Plus loans also require that applicants don’t have “an adverse credit history”.  This basically means if you have $100,000 in debt and no way to pay it back, you’re not getting a federal direct plus loan.  They will run a credit history on you, so make sure it’s in tip top shape before applying for this loan.

Once again the maximum amount you can borrow from the Direct Plus program is the cost of attendance minus any other assistance the student is receiving.

The federal government does NOT pay the interest on Direct Plus loans, and along with the interest, there is an additional fee to take out a Direct Plus loan.  This fee is a percentage of the loan amount and is proportionately deducted from each check disbursement.

Direct Consolidated

This is essentially a loan that combines all of your federal student loans into one.  That means 1 monthly payment instead of multiple and the ability to easily track what your total principle amount is.  Loan consolidation can also give you the option to stretch your repayment out to 30 years which can be beneficial to people with large student loan debt.

However, when you stretch your loan over a longer amount of time you’ll find that you will pay a larger amount of interest and have to make more payments!  Take this into consideration when thinking about consolidating your student loans.

For most people, consolidating student loans is a good thing. This is especially true when they have multiple different kinds of federal student loans with different interest rates that could go up in the future.


Private Student Loans

Private student loans are a completely different beast and can come from many different entities.  The most popular lenders for private loans are: banks, credit unions, state agencies, or a school.

You’ll hear from quite a few sources that private student loans are a trap, and some can be.  But, grouping all private loans into one category might cause you to miss a really good deal!

Here are some of the myths that you may hear about private student loans:

Myth #1: Private student loans almost never have better interest rates than federal student loans.

Truth: This all depends on the credit score of the applicant.  If a student or their parent has good or better credit, the interest rates for a private student loan can be competitive or beat a federal student loan.

Note: Regardless of the interest rate, make sure you look for fixed interest rates!

Myth #2: Private lenders don’t care about people in tough situations who may not be able to repay their loan on time.

Truth: This couldn’t be further from the truth.  Banks and other private lending agencies want to be paid in full for the loans they distribute.  It’s in the best interest of the lender to work with the borrower to extend grace periods, modify lending terms, and consolidate loans.

Myth #3: Private loan lenders are driving the student debt crisis.

Truth: Only 7% of the $1.2 trillion in student loan debt is private student loans.  9% of new student loan debt is carried by private lenders, a result of the banking industry offering better student loan products.


Federal vs. Private

Finally we get to what you want to know!  “Should I pick a federal or a private student loan?”  Well there isn’t a super simple, one sentence answer to that question.

A couple factors you should consider when you’re looking for a student loan that will lead you in the right direction:

  • Are you an undergrad or graduate student?
  • How much do you need to borrow?
  • What is your credit like?


If you’re an undergraduate student, the choices are nearly unlimited for student loans.  Federal subsidized undergrad loans are attractive and most likely the best option for you because the U.S. Department of Education will pay the interest while you’re in school, they don’t do a credit check on you (if you’re young and just going into college your credit is likely horrible), and you can consolidate your federal loans later if you need to.

Federal loans are need based, meaning they only pay the cost of attendance to your college.  If you need any other sort of financial assistance, you may have to look into private loans or paying for school through a part time job.

Graduate Students

Graduate students have fewer choices, but private loans become much more attractive.  Older students who have better credit histories may want to look into getting a private loan by themselves or with a cosigner.  The better the credit of the applicant or the cosigner, the better the terms for the private loan.

The Direct Plus federal loans are also a good option, but have fees.  We discussed this earlier in the post.

Note: Regardless of what loan you’re leaning towards or the advice that we give you, do your research.  Everyone’s situation is going to be different and finding the right loan for you with the best terms is all about doing your homework and asking the right questions!

We’re going to include some of the best student loan resources we can find on the net at the end of this post.

Paying Off Your Student Loans

Now that you’ve selected your student loan, you might think that you have 4+ years until you have to pay it off.  HA!  Not if you listen to my advice you don’t.

Paying down student loan debt can be extremely stressful, there’s no doubt about that.  Ask any person in their late twenties about the sleepless nights caused by student loan debt.  But it doesn’t have to be that way!

Reducing Your Debt While in School

There are 0 penalties for paying on your student loans while you’re still school.  Laws were passed in 2008 that prevents lenders (including the federal government) from charging fees for paying back student loans early.  This is a huge deal and you should take advantage of it ASAP.

Work Part-Time

I’ve heard this a billion times “I’m too busy to work and go to school”.  No… no you are not.  Millions of students do it every single semester to help put them through college.  As you get older you’ll realize that the lifestyle of constantly being in motion is a norm for almost all students/adults.

Moving on from my philosophical rant; work in college.  Find a job literally anywhere.  Deliver pizzas, work in an office as a secretary, find a job at your university.  There are jobs everywhere. Don’t be afraid to work, you’ll be doing it 40+ hours a week for the next 40+ years.

The money that you get from your part-time job can go to a couple things:

  • Living expenses: If you’re living in a dorm, try to pay for some of your housing expenses with your part-time job instead of using a loan to do so.
  • Tuition: Once again, take out a smaller loan, pay for your education with as much of your own money as possible.
  • Pay down debt: If you already have debt and you’re in school, make prepayments on your debt to reduce the principle!
How to make a prepayment:

Apply for Scholarships and Grants

This is super important.  We haven’t talked about this yet, but make sure you’re getting as many scholarships and grants as you possibly can before you look to student loans!  Any money you save by taking a scholarship/grant and not taking out a student loan is worth it.

You may have to put in effort to get the scholarship or grant!  Imagine that, people want you to put in some kind of effort before they give you free money.  Writing an essay to explain who you are and why you need this money is almost mandatory for most scholarships and you’ll most likely have to prove you need the money as well.

There are scholarships for every kind of situation, and plenty of websites out there to help you find them.

Scholarship Websites:

Live Like a Student

This is super simple.  You’re at college to learn and to get your education.  You’re not here to live like DJ Khaled and bathe in champagne.  Be reasonable, find a roommate or a couple, make your own food at home (it’s surprisingly fun and rewarding), and use the money that you save from your frugal lifestyle to pay for your tuition.

Note: This doesn’t mean turn into a hermit and never have fun.  Find out how much you can spend on having fun by making a budget and stick to it.  Find fun FREE things to do with your friends.

Related Posts:
How to Balance Fun With Financial Responsibility
How to Budget Effectively – A Guide to Budgeting for College Students

Paying Off Your Loan After You Graduate

This is a topic that you can find a lot of different pieces of information on, but it’s something we need to cover for our older audience members.  Paying off student debt quickly is the key to getting out of the hole.

Pay More Than The Minimum Payment

This goes for all kinds of debt.  Pay more than the minimum payment so that you pay less in interest.  The faster you can pay off the principle, the less interest you have to worry about and the more you’ll save.

This concept sounds fantastic in theory, but in reality it becomes much more difficult.  Being in your 20s, just starting your career, and trying to find extra income to throw into your loan is quite the task.

We suggest sitting down with your monthly budget and making your student loans a priority.  After your rent, food, and utilities, try to find as much spare income as you can to pay off that student loan.  Live frugally, make it a priority, and be diligent about paying it down quickly.

Related Post: 6 Ways to Increase Your Cash Flow Now

Consolidate Your Loans

We talked earlier about the Federal Direct Consolidated loan program that allows you to bundle your student loans into one and pay them off quicker.  This is a wonderful idea.  Look into doing this not only with your federal loans, but your private loans as well if you have them.

The concept of having 1 payment at a single interest rate allows you to focus your effort on that one goal of paying off your combined balance.  In most cases when you consolidate your loans you can also reduce the interest rates of your loans.

Do your research, ask questions, and be nosy about how you can reduce your debt!  There’s no shame in trying to save money.

Federal Direct Consolidation Loan:
6 Best Banks to Refinance Student Loans:

Use Your Extra Money Wisely

This is something that many millennials get trapped up in very quickly.  They get a raise, extra money from a tax check, or find some other source of income on the side and they use it to improve their lifestyle in a meaningless way instead of paying down the $50,000 in student loans they have.

Focus all of your extra money into paying off your debt!  If you get a raise, congratulations.  You survived just fine before the raise, therefore you can use the extra money to pay off the principle of your student loans quicker.

You don’t need that new car, or that bigger house yet.  Paying down debt, and holding onto your money should be your priority.  Not owing anyone a dime and paying for everything in cash is an incredibly empowering feeling.  Use your successes to work towards that end goal of being independent!

Resources You’ll Need

That basically wraps up our ultimate guild to student loans, but we think it’s important that we give you all of the resources that we used to compile this information and others that we didn’t get to include!  Remember to subscribe to our email list to get all of our guides and posts.

Federal Student Aid:
Student Loan Hero:
Private Student Loan Facts:
Better Business Bureau:

Before You Go!

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About David Coleman 17 Articles
David is the founder of His goal is to bring personal finance education to the millennial population. His passion for financial literacy, coupled with a background in investing and tax, gives him a unique insight into the world of millennial finance. He wants to help young adults pay off student loan debt and increase wealth without giving up their lifestyles.

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