Key takeaways
The high cost of college means taking out student loans is a reality for many people.
There’s a big difference between public and private student loans.
It pays to learn all of the ins and outs about paying back student loans so you can make a plan for how you’ll manage that debt later.
Tom Gilmour is a senior director of planning experience integration for Northwestern Mutual.
We all know that college is expensive. And running the numbers makes it all the more stress-inducing. According to the College Board, the price tag for tuition and fees at a public, four-year college for out-of-state students was $29,150 in the 2023-24 school year. That’s nearly $117,000 spent over a four-year college career.
But if you haven’t managed to put quite that much away in a college savings plan, that doesn’t mean college is out of reach for your aspiring student. Fortunately, student loans are available to help foot the bill.
Still, the decision to take on student loan debt is a big one. Before your child starts the loan application process, it’s important they know everything about taking on and paying back student loans so they don’t leave school clueless about managing their debt. Here’s what you need to know.
Want more? Get financial tips, tools, and more with our monthly newsletter.
Public student loans
Interest rates
Student loans can be either public or private. Public loans are also called federal student loans because you’re borrowing from the federal government, and the interest rates on them are set by Congress. For loans disbursed on or after July 1, 2024, and before July 1, 2025, rates range from 6.53 percent to 9.08 percent. These depend on what type of loan you’re applying for, and whether you’re an undergraduate or graduate student, or a parent borrowing to help your child.
Subsidized vs. unsubsidized loans
Federal student loans can also come in two varieties: subsidized and unsubsidized.
For a subsidized loan, borrowers don’t pay interest while they’re in school, during a six-month grace period after leaving school, or if the loan is in deferment (meaning they’ve been able to temporarily postpone loan payments). That’s because the interest during those times is being footed by the government. Only undergrads are eligible to receive subsidized loans, and the amount they get is determined by financial need.
For an unsubsidized loan, which both undergrads and graduate students can get, the borrower does not get any help with the interest. This means the borrower must pay it, but they have options for how to pay. They can pay for the interest while in school or choose to let it accrue while hitting the books and then let it capitalize—that is, get added to the loan principal. (Choosing the latter will ultimately increase the amount they’ll end up owing.) The borrower does not have to demonstrate financial need to be eligible for an unsubsidized loan.
Application process
To apply for federal loans, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA), which helps determine how much financial aid they are eligible to receive—whether in the form of student loans, grants, or federal work study. This information usually appears in the student’s college financial aid package.
For the 2024-25 school year, the federal deadline to apply for financial aid is June 30, 2025. But colleges often have earlier due dates, and certain forms of funding are paid out on a first-come, first-served basis. That means that it can pay—literally—to be early.
Take the next step.
Your advisor will answer your questions and help you uncover opportunities and blind spots that might otherwise go overlooked.
Let's talkPrivate student loans
Interest rates
Private student loans are those issued by banks and other lenders. Because these institutions charge interest rates based on market condition, private loans typically carry higher interest rates compared to federal loans—potentially much higher.
Additionally, an interest rate on a private student loan could be fixed or variable, meaning the rate may change over the life of the loan.
Application process
Students can apply for private student loans much the way they apply for any other type of loan: Fill out an application with a private lender, who will determine how much to offer them and at what interest rate based on their creditworthiness (how likely the lender believes the students will be to pay the loan back). A private student loan lender will determine this based on a borrower’s credit score and the information in his credit report. If the borrower doesn’t have much of a credit history, then the lender may require a co-signer.
Public student loans tend to be preferable to private student loans because the federal government offers more flexibility when it comes to borrowing and repayment. And, as mentioned above, interest rates for private student loans tend to be higher than for public ones. But private loans can be a good secondary option if a student doesn’t receive enough financial aid to cover college costs.
Paying back student loans
When it comes to paying back student loans, the federal government provides more flexibility compared to private lenders, as well as the possibility of public service loan forgiveness, which relieves some of a borrower’s balances if he or she works in a qualifying public-service job for a certain amount of time.
Case-in-point: Congress passed the CARES Act at the onset of the global pandemic, which put student loan payments on federal student loans on pause from March 13, 2020 to October 1, 2023. (The 0% interest rate ended Sept. 1, 2023.)
Some private lenders may offer public loan-type features, including the ability to reduce or defer payments because of financial hardship. However, a borrower will generally have more repayment options with federal loans—which is helpful for someone who ends up in a tough financial situation. Just keep in mind that some of these plans could increase the total amount a borrower ultimately owes, because you’re still accruing interest on your overall balance—even if your actual payment due has been lowered.
These options can include:
- Graduated repayment, which starts with a lower payment earlier in the payment timeline and then gradually gets larger.
- Extended repayment, which extends the timeline beyond the typical 10-year repayment period.
- Income-driven repayment plans, which set a monthly payment amount based on how much the borrower makes.
The SAVE plan
The Saving on a Valuable Education (SAVE) Plan is the newest income-driven repayment (IDR) plan, which calculates your monthly payment amount based on your income and family size. It replaces the Revised Pay As You Earn (REPAYE) Plan and offers several other unique benefits to many borrowers by:
- Basing your payments on a smaller portion of your adjusted gross income (AGI). There is also no income limit.
- Providing an interest benefit: If your full monthly payment does not cover the accrued monthly interest, the government will cover the difference in the interest accrued for that month. This keps your balance from growing due to unpaid interest.
- Giving borrowers who originally borrowed $12,000 or less forgiveness after as few as 10 years.
Note: Federal loan borrowers may also be eligible for deferment or forbearance—temporarily suspending payments—for a period of time if they meet certain eligibility requirements. The primary difference between the two is whether interest accrues during the time the payments are halted. In deferment, subsidized loans don’t accrue interest, but unsubsidized loans do. In forbearance, both subsidized and unsubsidized loans accrue interest.
Student loan refinancing and consolidation
If in the future your college grad thinks they can lower the interest rate on their federal loans by refinancing them (i.e., selling them to a private lender), remind them that privatizing those loans may mean losing the protections and flexibility mentioned above.
Another option: If a borrower has multiple federal loans, they can consolidate them into one and make a single monthly payment. That won’t lower the interest rate, as the new interest rate will be a weighted average of the interest rates on all the loans. Plus, consolidating takes away the ability to get strategic about paying off debt more aggressively by prioritizing those loans with the highest interest rates and balances. But it can make it a little easier to stay on top of repayment compared to juggling multiple loans.
The bottom line on student loans
Student loans can be a powerful tool, helping your child pay for a college education that they otherwise might not be able to afford. But they also come at a cost, and not all student loans are created equally. Before your child borrows a student loan—whether from the government or a private lender—it’s important for them to know they work.
If you’re still in the college planning phase and thinking of ways to help your child pay for college with fewer student loan, your financial advisor may be able to help you sort through the best options available to you.
