What a student loan is and why students use them
A student loan is money borrowed specifically to pay for education — tuition, fees, books, housing, or living expenses while in school. Unlike a scholarship or grant, you have to repay it, usually with interest. The reason students use them is straightforward: education costs money upfront, but the income to repay it comes later, after graduation.
Student loans exist because most families cannot pay the full cost of college or trade school out of pocket. A loan lets you spread that cost across years of repayment, starting after you leave school. The federal government and private banks both offer student loans, and they work differently in important ways — who sets the interest rate, when you start repaying, what happens if you cannot pay, and what protections you have.
Key Takeaways
- Federal student loans come from the U.S. Department of Education, have fixed interest rates set by Congress, and offer income-based repayment plans if you struggle to pay after graduation.
- Private student loans come from banks and credit unions, require a credit check or cosigner, and have fewer protections if your financial situation changes.
- You must complete the FAFSA (Free process for Federal Student Aid) to access federal loans, even if you think you will not may have access to for grants.
- Federal loans do not require repayment while you are in school at least half-time, but private loans often do.
- Interest rates, repayment terms, and forgiveness options differ sharply between federal and private loans, so understanding the difference before borrowing matters.
Federal student loans: how they work and who offers them
Federal student loans are issued by the U.S. Department of Education through your school's financial aid office. The interest rate is set by Congress and is the same for all borrowers in a given year — for example, all undergraduate federal loans issued in 2024 have the same rate. You do not need good credit to borrow, and the government does not check your credit history.
There are several types of federal student loans. Direct Subsidized Loans are for undergraduate students with financial need; the government pays the interest while you are in school. Direct Unsubsidized Loans are available to undergraduates and graduate students regardless of need; interest accrues (builds up) while you are in school, meaning you owe more when repayment starts. Direct PLUS Loans are for graduate students and parents of undergraduates; they require a credit check but have higher borrowing limits.
Federal loans do not require repayment while you are enrolled at least half-time. This is called in-school deferment. You also get a six-month grace period after you graduate or drop below half-time enrollment before repayment begins. During that grace period, unsubsidized interest continues to accrue.
Private student loans: how they work and when to consider them
Private student loans come from banks, credit unions, and online lenders. Unlike federal loans, the interest rate depends on your credit score and the lender's policies — two people borrowing the same amount may pay different rates. Most private lenders require a credit check, and if your credit is limited or poor, you may need a cosigner (usually a parent) to borrow.
Private loans typically require you to begin repayment while you are still in school, though some lenders offer in-school deferment if you ask. The terms vary by lender: some offer fixed rates, others offer variable rates that change over time. Private loans have fewer protections than federal loans — there is no income-based repayment option, and if you become disabled or face hardship, the lender is not required to pause payments.
Most financial aid experts recommend exhausting federal loan options before turning to private loans, because federal loans offer more flexibility and protection. However, if you have borrowed the maximum federal amount and still have education costs to cover, a private loan from a credit union (which often has better terms than banks) may be worth exploring.
How to start the process: the FAFSA and your school's financial aid office
The first step is completing the FAFSA (Free process for Federal Student Aid), even if you do not think you will may have access to for grants or scholarships. The FAFSA determines your may be able to access for all federal aid, including loans. You complete it online at fafsa.gov, and it asks about your income, assets, family size, and other financial information.
After you submit the FAFSA, your school's financial aid office receives the results and creates a financial aid package showing what you are offered — grants, work-study, and loan options. This package is not automatic; you must accept the loans in writing through your school's financial aid portal or in person at the office. Some schools require you to complete entrance counseling (a short online course about loan repayment) before the loan is disbursed.
Your school disburses the loan money directly to your account, usually in two payments per semester or term. If the loan covers more than tuition and fees, the school sends you the remainder, which you can use for books, housing, and living expenses. Keep track of how much you borrow each year — many students do not realize how much total debt they have accumulated until after graduation.
Understanding interest rates and repayment terms before you borrow
Federal student loan interest rates are fixed, meaning they stay the same for the life of the loan. Congress sets the rate each year, and it applies to all new federal loans issued that year. For example, if you borrow in 2024 and again in 2025, the two loans may have different rates because Congress sets a new rate each year.
Private loan interest rates depend on your credit score and the lender. A borrower with excellent credit might pay 4 percent, while a borrower with fair credit might pay 8 or 9 percent from the same lender. Some private loans have variable rates, meaning the rate can change annually based on market conditions — this is riskier because your payment could increase unexpectedly.
Repayment terms also differ. Federal loans typically offer a standard 10-year repayment plan, but you can choose income-based plans that stretch repayment over 20 or 25 years, lowering your monthly payment if your income is low. Private loans usually have fixed terms of 5 to 20 years, and you cannot change the plan after you borrow. Before taking out a private loan, ask the lender what your estimated monthly payment will be after graduation and whether you can afford it on your expected salary.
What happens after you graduate: repayment and your options
Federal loans enter repayment six months after you graduate or drop below half-time enrollment. You can choose from several repayment plans. The Standard Repayment Plan is 10 years of fixed payments. Income-Driven Repayment Plans calculate your payment based on your current income and family size — if your income is very low, your payment might be as low as $0 per month, though interest still accrues. After 20 or 25 years of payments on an income-driven plan, any remaining balance may be forgiven, though you may owe taxes on the forgiven amount.
If you work in certain public service jobs (government, nonprofit, teaching, nursing), you may be may be able to access for Public Service Loan Forgiveness, which erases remaining federal loan debt after 10 years of on-time payments. This program has strict requirements — you must work full-time for a may have access to employer, make 120 may have access to payments, and stay on an income-driven repayment plan.
Private loans have no forgiveness programs and no income-based repayment options. If you cannot pay, your only options are to ask the lender about forbearance (temporarily pausing payments) or deferment, but these are not may provide. If you default on a private loan, the lender can sue you and garnish your wages.
Comparing federal and private loans side by side
| Feature | Federal Loans | Private Loans |
|---|---|---|
| Interest rate set by | Congress (fixed) | Lender (fixed or variable) |
| Credit check required | No | Yes (or cosigner needed) |
| Repayment while in school | No (in-school deferment) | Usually yes (varies by lender) |
| Income-based repayment | Yes | No |
| Forgiveness programs | Yes (income-driven, public service) | No |
| Protections if you cannot pay | Deferment, forbearance, income-driven plans | Limited; lender discretion |
Frequently Asked Questions
Do I have to borrow the full amount my school offers?
No. Your financial aid package shows what you are offered, but you choose how much to accept. You can borrow less than the maximum, or decline loans entirely and use only grants or scholarships. Borrowing only what you need keeps your total debt lower.
What is a cosigner and why would I need one?
A cosigner is someone (usually a parent) who signs the loan agreement and promises to repay it if you do not. Private lenders often require a cosigner if you have no credit history or poor credit. The cosigner is legally responsible for the debt, so they should understand the terms before signing.
Can I borrow for living expenses, or only tuition?
You can borrow for the full cost of attendance, which includes tuition, fees, books, housing, food, and transportation. Your school calculates this amount, and you can borrow up to that total. Any loan money left after tuition and fees are paid goes to you to cover other expenses.
What happens if I drop out before finishing my degree?
You still owe the loan. The six-month grace period still applies — repayment does not start until six months after you leave school. However, you lose the benefit of in-school deferment when ready. If you think you might not finish, consider borrowing less, because you will repay the full amount regardless of whether you graduate.
Can I refinance my student loans to get a lower interest rate?
Federal loans cannot be refinanced through the government, but you can refinance them with a private lender if you have good credit and income. This converts federal loans to private loans, so you lose federal protections like income-based repayment and forgiveness programs. Refinancing makes sense only if the new rate is significantly lower and you do not need federal protections.