The Three Types of Student Loans Families Should Understand
When financing higher education, families typically encounter the following student loan options:
- Federal loans (from the U.S. Department of Education)
- Private student loans from nonprofit and state based lenders with pricing and terms to reflect missions to promote affordability and student success instead of shareholder returns
- Private loans from for-profit providers like banks, credit unions and commercial lenders
Understanding how these options differ can help families plan how to pay for college. We'll start with the option that offers the strongest built in protections.
1. Federal Student Loans: Your First and Safest Option
Federal student loans are considered the safest option, and students should maximize all federal student loans (not necessarily federal parent loans) before considering other loans.
What Federal Student Loans Offer
Federal student loans stand out because they include borrower protections and flexibility that are difficult to match elsewhere. These loans are funded by the U.S. government and are typically the first option students should consider. Key features include:
- Fixed interest rates set by federal law and updated annually
- Income‑driven repayment (IDR) options that base payments on income and family size
- Flexible repayment options, including various repayment plans
- Borrower protections and flexibility such as deferment, forbearance and program-specific loan forgiveness programs
- No credit check for most undergraduate loans
Because of these benefits, federal student loans often provide the lowest risk and greatest protections for borrowers. However, annual and lifetime borrowing limits mean available federal loans may not fully cover the total cost of attendance, which leads some undergraduate students and many graduate students to explore additional options.
"Federal loans give students a safe on‑ramp to higher education with guardrails like income‑driven repayment. We encourage families to maximize these first before exploring any private student loan options," says Steve McCullough, president and CEO of Iowa Student Loan Liquidity Corporation, which funds loans under the name ISL Education Lending. "It’s worth noting that federal parent loans are often assumed to be similarly attractive but in fact come with higher interest rates and upfront fees that may not make them a good option for all families."
Helpful Links
Find more information about federal student loans.
2. Private Loans from State Based and Nonprofit Organizations: A Strong Second Choice
Even after maximizing federal student loans, many families find that borrowing limits mean federal student loans do not fully cover the cost of attendance. If a financial gap remains, students and families should consider private education loans from state-based or nonprofit organizations next.
What They Are
Loans offered by nonprofit and state based organizations are designed to improve college access and affordability. Many of these lenders emphasize lower costs, transparent terms and borrower success over maximizing profits.
Compared with loans from for profit lenders, loans from a state-based organization often offer meaningful cost and flexibility advantages.
- They commonly feature lower interest rates than many for profit lenders.
- These loans can offer lower rates but often with more selective eligibility (e.g., residency or school requirements).
How They're Financed (in Part)
Many state based student loan organizations rely heavily on tax exempt bond financings to fund loans. The bonds support public-minded goals like education access and ensure the products funded by the bonds remain affordable for the student, not profitable for the lender. In practice, this means state-based lenders offer private loans with lower interest rates for most borrowers.
Common Characteristics of Private Student Loans from State-Based Organizations
Look for these features:
- Highly competitive interest rates, generally lower than for profit lender loans
- More borrower friendly repayment terms
- Mission driven focus on education affordability
- The ability to meet established credit criteria or the inclusion of a creditworthy cosigner
State-based lenders have missions to promote affordability and student success. Pricing and terms reflect that mission instead of shareholder returns.
In addition, many nonprofit organizations fulfill their missions by providing free and accessible resources to help families as they plan for and pay for college.
While they do not offer the exact same broad protections as federal loans, student loans from state-based organizations are the second-best option for families when federal aid is not sufficient to cover all higher education expenses.
Helpful Links
Find more information about nonprofit and state-based lenders and their products.
3. Private Student Loans from For-Profit Lenders: Proceed Carefully
While many families consider loans from the same institutions that provide other financial products, they should weigh education loans carefully.
What They Are
For profit student loans come from banks, credit unions and commercial lenders whose primary goal is revenue generation. These private student loans can fill funding gaps but often offer fewer protections and less flexibility than federal or state based private loan options.
State-based lenders generally offer lower rates but may have tighter eligibility; for profit options vary widely by credit profile.
"If families need to borrow beyond federal student loan limits," says Rob Miller, president of ICAN, an Iowa nonprofit helping families prepare for postsecondary education, "we advise comparing multiple private offers and weighing not just the rate, but forbearance policies, cosigner release and fee structures."
Families considering these loans should pay close attention to the following features:
- Interest rates based on credit
- Fewer repayment options and limited flexibility
- Less borrower protection during financial hardship
Hierarchy of Student Borrowing
Families should explore all possible funding sources such as grants, scholarships and work-study. If additional funds are needed, consider student loans in the following order for best practice:
- Maximize federal student loans first (and understand annual and aggregate limits).
- Compare options from mission-driven or state-based organizations next for potentially lower costs and borrower-friendly terms.
- Evaluate private loans from for-profit lenders last, comparing APRs, fees and hardship options carefully.
Common FAQs from Borrowers and Families
These questions are often asked as families consider their choices for education loans.
Why don't federal loans cover all my costs?
Do state based lenders offer fixed and variable rates? What about cosigner release options?
Yes; many state based lenders offer fixed and variable choices and cosigner release after a track record of on time payments; specifics vary by program. Use EFC's Affordable Loan Finder to compare.
How do IDR plans work on federal loans?
Note: Federal programs and repayment options evolve. Always review the latest guidance on StudentAid.gov.
Final Thoughts
Student loans, particularly private student loans, are often maligned by the mainstream media. With good decision-making, however, these loans are a valuable investment in one's education and subsequent career. Understanding that state-based private loans often represent the strongest option after federal loans is a critical step for many families when making this important investment commitment.
About ISL Education Lending
ISL Education Lending is a state based, nonprofit organization providing private student loans, refinance options, scholarships and free planning tools—helping students and families access and complete postsecondary education. Learn more about
Students & families: Compare your federal eligibility and repayment options at StudentAid.gov.
If you still have a college financing gap: Explore state-based and nonprofit options through ISL Education Lending and other EFC members.
