Students and parents often spend countless hours researching colleges, searching for scholarships, and trying to uncover the “WHAT” or the total cost of attending college. However, as more families rely on borrowing to cover these costs, more attention needs to be paid to the “HOW” these borrowed expenses will actually be repaid. The way your student loans are structured will directly affect repayment options, eligibility for forgiveness programs, credit scores, and even who bears legal responsibility in the event of default.

These student loan choices can shape both the student’s and parents’ financial lives for the next 10 to 30 years. Obtaining the loans is rarely the problem. Understanding and managing future repayment is where transparency is needed most.

As college costs and borrowing complexities increase, access to clear information is more critical than ever. Below is a guide to help you better understand your student loan options.

Types of Federal Student Loans

Most undergraduate students are limited to only $27,000 to $35,000 of federal student loans.  The federal direct student loans are the legal responsibility of the student to pay back.  If additional student debt is needed to fund a shortfall, a parent or other person will be directly or indirectly responsible for those loans.  This other person must co-sign or sign for the additional student loan.

It is also essential to understand that these loans have annual loan limits.  When creating a four-year college borrowing strategy, a family must consider their current savings, yearly cash flow, loan limits, and years to retirement to structure their student loans properly.

For post-graduate studies, currently the student could qualify for federal loans up to the cost of attendance.  This will be changing under the OBBB Act after 7/1/2029.  As more careers require post-graduate studies, better debt planning is needed.  Undergraduate federal loans have a much lower interest rate and fees than federal graduate loans.  This loan decision is another example of the importance of your student loan structure.

Federal Direct Subsidized Loan (Stafford)

The government offers Federal Direct Subsidized loans to help students pay for an associated degree, undergraduate degree, community college, trade, career, and technical schools.  The loans require the student to have financial need, and the subsidized amount you receive can’t exceed your financial need.  The U.S. Department of Education will pay the interest on a Direct Subsidized loan while you are in college, and repayment will begin six months after you leave school.  Loans issued after 7/1/2012 will have the interest charged to the loan one month after you graduate or stop going to school.

There are benefits to the Federal Direct Subsidized loan.  This loan will maintain its interest-free status while the student is in school and some loan repayment methods.  This loan option would include undergraduate and graduate studies.  An added benefit is that this loan is the student’s responsibility to repay.   A parent does not need to co-sign for this loan.

Families must understand that to qualify for this loan, the student must complete a FAFSA form based on their filing status.  Our previous blog, “Completing the FAFSA,” outlines this process.

Federal Direct Unsubsidized Loan

The government offers Federal Direct Unsubsidized loans to help students pay for an associated degree, undergraduate degree, community college, trade, career, and technical schools.  These loans do not require a student to have financial need.  This loan is the legal responsibility of the student and not the parent.  You only need to submit the current year’s FAFSA form to qualify for this loan type.  The interest on a Direct Unsubsidized loan will be charged while you are in college, and repayment will begin six months after you leave school.

This loan will always be charged interest, but you can defer payment when enrolled in a qualified program.

Interest Rate & Loan Limits

The Direct Subsidized and the Federal Direct Unsubsidized Loans have a fixed interest rate that changes on 7/1 of each year.  The interest rate is fixed for the life of each loan.  This process is why a student may have different interest rates depending on the types of loans taken out each year.  The rate will change if the loans are consolidated.  Click here to view our blog article that lists the interest rates for federal loans first disbursed on or after July 1, 2025, and June 30, 2026.

What often needs to be discussed is that there are specific limits to the federal loans the student can obtain in their name.  The loan limit is based on the student’s academic progress toward graduation by year.  For example, a dependent, first-year undergraduate student has an annual loan limit of at most $5,500.  As part of that annual $5,500 total, the need-based student could qualify for $3,500 of Subsidized Direct Loans if eligible.

Parent Direct PLUS Loans

Parent Direct PLUS Loans are federal unsubsidized loans funded through the government and given to parents of dependent students to pay for college.  Parents cannot use them to fund graduate school.  The interest is charged to this loan while the student is in school.  Although the Parent PLUS loan will always be charged interest, you can defer payment while the student is enrolled at least half-time in a qualified program.

Parent PLUS loans do not require the student to have financial need.  To qualify for this loan type, you must submit a current-year FAFSA form and not have any recent payment delinquencies over 90 days old exceeding approximately $3,000.

To qualify for this loan, the student must complete a FAFSA form based on their filing status.  Parent PLUS loan limits are based on the student’s financial aid award.  What happens if the parent is denied a Parent PLUS loan?  In that case, the student will qualify for an additional Direct Unsubsidized Loan of a maximum of $4,000.00 per year due to the Parent PLUS loan denial.

The Parent Direct PLUS loan repayment responsibility is the parent, not the student.  It is legally the parents’ loan, not the students’.  Many parents may take this loan out with the intention of the student repaying this loan.  Please always keep sight of the Parent PLUS loans are the parent’s legal responsibility.

Direct Graduate Plus and Direct Graduate Stafford

As stated above, graduate loans are becoming more common as more careers require that level of education.  There are two options to consider when funding graduation school.

The first is the Unsubsidized Direct Graduate loan.  These should be the first loans considered since they have a better interest rate and lower fees.  They also have an annual limit of $20,500.

If additional funding is required, a Grad PLUS loan will be your next option.  The Grad PLUS loans have the highest interest rates and fees of the federal loans.  The advantage of this type of loan structure is the repayment flexibility and forgiveness options the federal loan contains.  Private loans are another option, and they may offer lower interest rates and fees but have limited repayment flexibility.

Federal graduate loans, in most cases, have limits that can cover a majority of the cost, and they are in the student’s name only.  The problem is that the administrative fees and interest rates are much higher.

The most significant advantage is these loans are federal and carry the major benefits of federal loans, such as better repayment options, loan forgiveness, death, and disability coverage.  When seeking a federal graduate loan, the person must submit the FAFSA form yearly.

Creating a College Funding Plan

All this can affect their financial life after graduation.  Discussing student loans as your child enters college will better prepare your child for the economic realities of the world after graduation.

To identify any potential college funding gaps, we recommend that families create a four-year cash flow plan outlining college costs and expenses. This proactive approach helps improve debt management strategies and encourages students to understand the true financial commitment of their education.

A key part of this analysis involves reviewing different student loan repayment options and determining if loan forgiveness programs may apply. Because federal loans are relatively easy to obtain, students often overlook how many loans are needed to cover all costs—and how that debt will influence their financial future. The way student loans are structured ultimately affects repayment flexibility and forgiveness eligibility.

By discussing student loans before your child begins college, you’ll help them gain a realistic understanding of the financial responsibilities that come after graduation.

Preventing Excessive Student Debt

Our company’s mission is to solve the student debt crisis.  We will only be able to solve the problem if we prevent it.  Having the ability to create a customized plan based on your college award and a family’s resources is essential.  Instead of focusing primarily on admissions, a movement to envision an outcome is part of our goal.  These articles and software solutions are steps to creating more transparency and a better financial future for families.

Suppose you are a student or parent who needs help calculating the cost of college or possible debt scenarios.  In that case, the College Cost Analyzer and In-College Payer can easily project your total student loans.