In general, your student should try to fund any education you can’t pay for from 529s, income etc from the lowest interest rate loan available to the highest. The ordering below usually matches that, but make sure to compare each source of available financing.
FAFSA student loans– especially the subsidized ones which don’t begin to accrue interest until you graduate– are almost certainly going to be the best. This is even more true given their historically generous repayment options like ‘Income-Driven Repayment’ as well as public service loan forgiveness, which effectively allow the student to pay less than the stated interest rate. There’s also the chance that a future administration will forgive loans in some way.
Parent Plus loans may be cheaper than private loan options, which parents may have to co-sign (be liable for) anyway. Make sure to see if the (private) school itself offers student loans, and under what terms.
Should you just go to a cheaper school?
If your income/529 plan savings + FAFSA student loans won’t cover the costs of your little Einstein’s 4-year degree, strongly consider going to a cheaper school. Quality in-state, public schools offer a terrific value compared to, say, small liberal arts colleges. Unless you’re doing to a Harvard, Yale, Princeton, MIT, Stanford, etc, is anyone really going to care about the name brand of your school? Are you really going to increase your earning power or other life satisfaction but such an incredible amount to justify paying, say, $80,000 a year for a small, liberal arts college vs $40,000 for a good state school?
Wouldn’t you rather have (1) an English degree with State U with no debt vs (2) an English degree from Fancy Pants Superior U with $200,000 in debt?
Earnings potential is largely driven by the student themselves, not where they go to school. Expensive schools are usually ranked highly not because they make students smarter, but because the students are smarter to begin with. You need to determine how much your college experience will add to YOUR life, not just the average quality of the students.
Sure, if you want to be CEO of Megahyperglobalcorp (Ticker: EVIL) or a US Senator, go to Harvard or Yale if you can get in. If you just want to be in middle management, or get hired as a crack software engineer by a FAANG firm, any school with a decent business, or computer science program, will do.
Undergrad loan for dependent students
- FAFSA student loans, subsidized + unsubsized ($5,500 /year 1st year, $6.5 K 2nd, $7.5 K 3+ for lifetime total of $31 K, or $26 K if your student finishes in 4 years) 6.39% as of March 2026.
- Parent Plus loans: $20 K per year max and $65 K lifetime cap (previously unlimited) for new loans after July 1st, 2026 per the OBBB act. 9% as of March 2026. They are also no longer eligible for income-drive repayment past the July 1st, 2026 deadline.
- Loans aka ‘payment plans’ from the private school itself: https://www.ravennasolutions.com/blog/breaking-down-the-financial-aid-formula-for-private-schools/
- Private student loans from a 3rd party bank: rate dependent on credit score of the student or parents.
Selling a kidney.
Graduate loans for dependent students
Similar ordering list as above for Undergrad, but with different limits.
Gaming the system on subsidized loans
If you have loans that don’t accrue interest until the student graduates, you can play the game of (1) taking out the max in subsidized (or low interest) loans, (2) investing the funds you WOULD have used to pay college in investments (you SHOULD be spending your 529 funds, however, so this assumes your taxable brokerage or income) then (3) re-paying the student loans after graduation around the time the interest starts to accrue, using (2) to pay off (1).
Keep in mind that if you’re investing in anything risky, like stocks, you could lose money via a market downturn during college vs just using that money to pay tuition. The risk-free method would be to invest in bonds or high-yield cash during college, eking out a smaller, but ‘guaranteed’ return over, say, 4 years of undergrad on ~$18 K of subsidized FAFSA loans (at 3%, you might earn a few hundred bucks. Not really a huge reward, but if you like to take advantage of a Federal tax system that privileges the shrewd upper-middle class, go for it.)
Can you use Direct Loans for international degrees or study abroad?
Yes, IF your school is on this list AND noted as ‘Eligible’, then you can take out new loans to pay for education there. If they are on the list with ‘Deferment Only’ as the status, you can only defer payments on old loans (from a prior institution), but can’t take out loans for that institution: https://studentaid.gov/sites/default/files/international-schools-in-federal-loan-programs.pdf (Updated quarterly, so check back as needed!)
