Student loans are money you borrow to pay for college or career school. You must pay this money back with interest, even if you don’t finish school. In the United States, student loans come from the federal government or private lenders like banks or credit unions.
Most students use loans to cover tuition, books, housing, and other education costs. The key to using them well is understanding the terms before you borrow.
How do student loans work?
When you take out a student loan, you agree to repay the amount you borrowed plus interest. Interest is a percentage of the loan that accrues over time. The lender charges this fee for letting you use their money.
Most student loans have a grace period after you graduate, leave school, or drop below half-time enrollment. This gives you time to find a job before your first payment is due. For federal Direct Subsidized Loans, the grace period is six months.
You can usually choose a repayment plan that fits your income. Some plans start with lower payments that increase over time. Others base your payment on how much you earn.
Types of student loans
Federal student loans
Federal loans are funded by the U.S. Department of Education. They have fixed interest rates and offer benefits like income-driven repayment and loan forgiveness programs. To get them, you must fill out the Free Application for Federal Student Aid (FAFSA) every year.
There are four main types of federal loans:
- Direct Subsidized Loans – for undergraduates with financial need; the government pays interest while you’re in school.
- Direct Unsubsidized Loans – for undergraduate and graduate students; you’re responsible for all interest.
- Direct PLUS Loans – for graduate students or parents of dependent undergraduates; requires a credit check.
- Direct Consolidation Loans – combine multiple federal loans into one loan with a single payment.
Private student loans
Private loans come from banks, credit unions, and other financial institutions. They often require a credit check and a co-signer if you have limited credit history. Interest rates can be fixed or variable, and they may be higher than federal rates.
Private loans usually don’t offer the same flexible repayment options as federal loans. You should only consider them after you’ve exhausted federal aid, scholarships, and grants.
Interest rates and fees
Federal loan interest rates are set by Congress each year. For the 2025–2026 school year, undergraduate Direct Subsidized and Unsubsidized loans have an interest rate of 6.53%. Graduate unsubsidized loans are 8.08%, and PLUS loans are 9.08%. These rates are fixed for the life of the loan.
Private loan interest rates vary based on your credit score, income, and the lender. They can be as low as 4% or as high as 15% or more. Variable rates can change over time, making your monthly payment unpredictable.
Most federal loans also charge a loan fee, which is a percentage of the loan amount. This fee is deducted from the money you receive, so you’ll owe slightly more than you get.
Repayment options
Federal loans offer several repayment plans. The standard plan lasts 10 years with fixed payments. Graduated plans start lower and increase every two years. Extended plans stretch payments over 25 years.
Income-driven repayment (IDR) plans cap your monthly payment at a percentage of your discretionary income. After 20 or 25 years of qualifying payments, any remaining balance is forgiven. You must re-certify your income and family size each year to stay on these plans.
Private loans have fewer options. You typically choose a fixed or variable rate and a repayment term of 5, 10, or 15 years. Some lenders allow deferment or forbearance if you hit financial hardship, but interest may continue to accrue.
Table: Federal vs. Private student loans
| Feature | Federal Loans | Private Loans |
|---|---|---|
| Interest rates | Fixed, set by Congress | Fixed or variable, based on credit |
| Credit check | Not required (except PLUS) | Required |
| Repayment plans | Multiple, including income-driven | Limited |
| Loan forgiveness | Available | Rarely |
| Deferment/forbearance | Available | Varies by lender |
How to get a student loan
To get federal loans, start by completing the FAFSA. The form opens on October 1 for the next academic year. You’ll need your tax returns, bank statements, and your school’s federal school code.
Your school will send you a financial aid offer that lists the loans you qualify for. You can accept all or part of the loan amount. Remember, you don’t have to borrow the maximum offered.
For private loans, compare offers from multiple lenders. Check interest rates, fees, and repayment terms. Apply directly with the lender, and make sure you understand the total cost over the life of the loan.
Tips for borrowing wisely
- Borrow only what you need, not just what you’re offered.
- Maximize free aid like scholarships and grants first.
- Consider a federal loan before a private one.
- Use a loan calculator to estimate monthly payments.
- Make interest payments while in school if possible.
Summary
Student loans help millions of Americans afford higher education, but they require careful planning. Understand the difference between federal and private loans, know your interest rates, and choose a repayment plan that fits your future income. Always borrow responsibly and explore all other financial aid options first.
Frequently Asked Questions
What is the difference between a subsidized and unsubsidized student loan?
A subsidized loan is based on financial need and the government pays the interest while you are in school. An unsubsidized loan is available to all students and you are responsible for all interest that accrues.
Do I have to pay back student loans if I don’t graduate?
Yes, you must repay your student loans even if you do not graduate. The loan is a legal obligation, and not completing your degree does not cancel the debt.
How long do I have to repay student loans?
Federal loans typically have a standard repayment term of 10 years, but you can choose extended or income-driven plans that last 20 to 25 years. Private loans usually have terms of 5 to 15 years.
Can I get student loans with bad credit?
Federal student loans do not require a credit check, so you can get them with bad credit. Private loans usually require a credit check and may need a co-signer if your credit is poor.
What happens if I can’t make my student loan payments?
Contact your loan servicer immediately to discuss options like deferment, forbearance, or income-driven repayment. Missing payments can lead to default, which harms your credit and may result in wage garnishment.
