Understanding the Different Types of Student Loans (And How to Actually Pay Them Off)
The Money Class You Never Got in School
What You Weren’t Told About Student Loans
Student loans are the only kind of debt we’re encouraged to take on before we’re old enough to rent a car. And for most people, they’re confusing from the moment you accept them. Fixed vs. variable interest? Subsidized vs. unsubsidized? Federal vs. private? Let’s clear it all up—and help you build a plan to pay them off.
The Two Big Buckets: Federal vs. Private Loans
There are two main types of student loans: federal (backed by the U.S. Department of Education) and private (offered by banks, credit unions, or fintech companies).
| Loan Type | Federal Loans | Private Loans |
|---|---|---|
| Interest Rates | Fixed, low interest (set annually by Congress) | Variable or fixed, usually higher than federal |
| Repayment Options | Multiple income-driven plans, deferment options | Fewer options, limited flexibility |
| Forgiveness Programs | Yes (PSLF, IDR forgiveness) | No |
| Credit Check Required | No (except PLUS loans) | Yes |
| Tax-Deductible Interest | Yes (up to $2,500/year) | Sometimes |
Subsidized vs. Unsubsidized Loans
If you qualify for federal loans, you may be offered one or both of these:
- Subsidized Loans: The government pays your interest while you’re in school and during deferment. Best-case scenario.
- Unsubsidized Loans: Interest starts accruing immediately. It’s still federal, but you’ll owe more over time.
Take subsidized loans first, then unsubsidized, and avoid private loans if possible.
How Interest Really Works
Let’s say you borrow $20,000 at 5% interest. If you wait to make payments, that interest stacks fast. Federal unsubsidized loans will grow while you’re still in school unless you pay as you go.
Private loans can be even worse—some go up to 14% or have variable rates that change over time, making your total owed unpredictable.
If you can afford it, make interest-only payments while you’re in school. You’ll save thousands long-term.
Repayment Plan Options
Once you graduate or drop below half-time enrollment, your loans enter repayment. Here are the main federal options:
- Standard Plan: 10 years, fixed monthly payments
- Graduated Plan: Payments start low and increase every two years
- Income-Driven Repayment (IDR): Adjusts your payment based on your income and family size. Includes SAVE, PAYE, IBR, and ICR
- Extended Plan: Up to 25 years for larger balances
Private loans may offer fewer repayment options and are less likely to pause payments during hardship.
Public Service Loan Forgiveness (PSLF)
If you work full-time in government or nonprofit roles and make 120 qualifying payments under an income-driven plan, you could qualify for full forgiveness of your remaining balance. It’s strict—but real.
Can You Write Off Student Loan Interest?
Yes. If you paid interest on a qualified student loan, you can deduct up to $2,500 per year on your taxes (as long as your income is below a certain threshold).
You don’t need to itemize to claim this deduction—it’s an “above the line” adjustment. You’ll receive a Form 1098-E from your servicer each January showing how much you paid.
Which Loans Are “Better” and Why?
Here's a quick ranking, best to worst:
- Federal Subsidized Loans – low interest, interest covered while in school, flexible repayment
- Federal Unsubsidized Loans – interest starts immediately, but still manageable
- Federal PLUS Loans – for graduate students or parents; higher interest, some credit check
- Private Student Loans – harder to manage, fewer protections, less flexibility
If you're deciding which loans to accept or which to pay off first, start from the bottom of this list and work upward.
Paying Them Off Faster
Here’s how to make real progress:
- Make extra payments directly toward principal (not future interest)
- Use windfalls like bonuses, refunds, and side income
- Refinance only if you lose no federal protections and get a much better rate
- Use the debt snowball or avalanche method to stay focused
Paying $75 extra per month on a $30,000 loan at 6% interest can shave off 3 years and save $3,000+ in interest.
Use a Budget to Stay Ahead
Loan servicers don’t always tell you the best strategy. Use YNAB (You Need a Budget) to build a debt plan, organize your repayment across multiple loans, and prioritize extra payments toward the ones costing you most.
Try YNAB free with my link here
You’re in MoneyMode now. And whether you’re still in school, just graduated, or 10 years into repayment—it’s not too late to get clear, get organized, and move toward freedom.
