Students and parents often must borrow money to help pay college tuition and other educational expenses. However, understanding how student loans work and navigating the process can be daunting. This article explains the different types of student loans and how they work, and it offers insights on finding the student loan that’s right for you.
What Is a Student Loan?
A student loan is money that the government or private lenders disburse to students or parents to cover tuition, room and board, books and other educational expenses. After graduation, borrowers pay back student loans with interest, which differs significantly from scholarships or grants, which do not require repayment.
Types of Student Loans
The three basic types of student loans are federal, state and private. Each has different eligibility requirements and terms. Some government loans are subsidized to make them more affordable, and some are not. Generally, government loans have lower rates and are more flexible than private loans.
There is also a distinctive class of interest-free student loans accessible to some students, but they are typically harder to get.
Federal College Loans
The U.S. Department of Education disburses federal college loans directly to eligible students and parents, providing a dependable financing option. Experts advise maxing out federal loans before considering private loans, as the federal benefits include flexible repayment options and potential loan forgiveness.
Here are the different subtypes of federal college loans:
- Direct Subsidized Loans:
Upon completing the Free Application for Federal Student Aid (FAFSA), students may receive a direct subsidized undergraduate loan based on financial need. While the student remains in school, the government covers the interest. A six-month grace period follows graduation or departure from school before the repayment process commences and interest accumulates.
- Direct Unsubsidized Loans:
Unsubsidized loans are available to undergraduate and graduate students without documented financial need. Students are still required to complete the FAFSA. The government does not cover the interest during enrollment; instead, interest begins accruing when the funds are disbursed.
>> RELATED: Subsidized vs. Unsubsidized Loans and Choosing Your Best Option
- Parent PLUS Loans:
Also called Direct PLUS loans, these loans can go to the parent of a dependent undergraduate, graduate, or professional student, or an independent graduate student. Undergraduate students are not eligible to apply for this loan directly. The application process involves completing the FAFSA and assessing the borrower’s credit during the application process. It’s worth noting that a PLUS loan features the highest fixed interest rate among all federal loans. A 4.228% disbursement fee also applies; therefore, the net loan amount you receive is 95.7% of the loan amount, even though you are responsible for repaying the total amount.
>> RELATED: What Is a Federal Parent PLUS Loan?
- Direct Consolidation Loans:
Students and parents can consolidate one or more federal education loans through a direct consolidation loan. This allows parents and students to lower their monthly payments and access federal forgiveness programs. There is no application fee to apply for a direct consolidation loan.
State Student Loans
In addition to federal student loans, parents and students should explore state student loans offered by state agencies as an additional source of money for college expenses.
State loan programs provide the advantage of lower interest rates, sometimes with the option for in-school deferments. They may also offer flexible post-graduation repayment plans based on income, opportunities for loan forgiveness in exchange for public service, and provisions for deferment in cases of financial hardship.
Certain state programs extend the same interest rate to all borrowers, regardless of their credit scores. These programs also offer fixed interest rates. While specific requirements may vary by state, the primary criterion is residency. Applicants typically need to be residents of the state or enrolled in a college in that state.
Private Student Loans
You should maximize your federal loans before going the private loan route. The repayment terms, rates, and other features will differ for each borrower based on credit history and information. Private student loans with fixed and variable rates are available for parents and students from banks, credit unions, and state agencies.
- Private parent loans: With the rise in Parent PLUS loan interest rates, more parents are turning to private lenders to finance their students’ education. It’s wise to compare lenders since interest rates vary based on your financial and credit history.
- Private student loans: These loans require a credit check, including a review of your credit history and score. Without a satisfactory credit rating, a cosigner will be necessary. Unlike federal loans, private loans have more stringent repayment terms, and most lenders don’t offer deferment or forbearance. (See table below for examples of private lenders.)
How Much Can You Get in College Loans?
The college assesses your eligible loan types and loan amounts for each academic year, considering the information provided in your FAFSA. Loan amounts are subject to specific limits contingent on your school year and whether you are a dependent or independent student.
Federal Student Loan Limits.
These loans have both annual and aggregate loan limits. The aggregate limit represents the total federal student loan debt you can borrow throughout your undergraduate and graduate years.
Dependent Undergraduate
| Year | Overall | Subsidized |
| 1st | $5,500.00 | $3,500.00 |
| 2nd | $6,500.00 | $4,500.00 |
| 3rd + | $7,500.00 | $5,500.00 |
| Total limit | $31,000.00 | $23,000.00 |
Independent Undergraduate
| Year | Overall | Subsidized |
| 1st | $9,500.00 | $3,500.00 |
| 2nd | $10,500.00 | $4,500.00 |
| 3rd + | $12,500.00 | $5,500.00 |
| Total limit | $57,500.00 | $23,000.00 |
Graduate and Professional
| Annual limit | $20,500.00 |
| Total limit, including undergraduate loans | $138,500.00 |
Note: Graduate and professional loan limits above apply to borrowers who first borrowed before July 1, 2026. New graduate borrowers after that date face new caps: $20,500/year up to $100,000 aggregate for graduate programs; $50,000/year up to $200,000 for professional programs (medicine, law, dentistry). Grad PLUS loans are eliminated for new borrowers entirely.
Parent PLUS Loan Limits
New borrowers (first Parent PLUS loan on or after July 1, 2026): Annual borrowing is capped at $20,000 per student per year, with a $65,000 lifetime limit per student — a major change from the previous cost-of-attendance model.
Legacy borrowers (borrowed before July 1, 2026): You can continue borrowing up to the cost of attendance minus other aid for up to three more academic years, or until your student finishes their program.
For a full breakdown of how this affects your decision, see our Parent PLUS vs. Private Student Loan comparison.
How Student Loan Interest Works
Most government and private student loans start accruing interest when the funds are disbursed. That means your loan balance actually grows. However, the advantage is that you don’t have to pay this interest while you’re in college. One exception is direct subsidized loans, which don’t accrue interest while you’re in school.
Student Loan Interest Rates
Federal Loans
Interest rates for federal loans are usually announced annually in June. Here are the current interest rates for funds disbursed after July 1, 2025, and before July 1, 2026:
| Type of Loan | Borrower | Fixed Interest Rate |
| Direct Subsidized* or Direct Unsubsidized | Undergraduate | 6.39% |
| Direct Unsubsidized | Graduate or Professional | 7.94% |
| Parent PLUS (Direct PLUS) | Parents and Graduate or Professional Students | 8.94% |
*Subsidized loans do not accrue interest while the student is still enrolled full-time or part-time.
State Loans
States usually offer lower interest rates fixed by each state and program.
Private Loans
Private loans are available with fixed and variable rates, typically higher than federal or state loans. Even though variable rates may be lower, they can change over time, which makes it difficult to calculate future payments and interest. Some private lenders may offer forbearance or deferment options, but it’s rare. It’s wise to shop and compare rates before choosing a lender.
Compare These Private Lenders
What matters most to you?
| Comparison field | SoFi Direct lender | College Ave Direct lender | Sallie Mae Direct lender | Ascent Direct lender | Juno Group-negotiated option | Student Choice Credit-union network |
|---|---|---|---|---|---|---|
| Best for | Borrowers with strong credit profiles | Students who want flexible repayment timing | Wide range of loan types and schools | Borrowers who need a no-cosigner path | Getting a negotiated deal | Families who prefer credit-union lending |
| Preview rates? | ✓ | ✓ | ✓ | ✓ | ✓ | Check with individual credit unions |
| Borrower type | Student & Parent | Student & Parent | Student & Parent | Student | Student & Parent | Student & Parent |
| Cosigner path | Not required; cosigner release available | Cosigner available; release possible | Cosigner available; release after payment history | Outcomes-based option for juniors/seniors without cosigner | Depends on lender | Cosigner typically expected |
| Repayment flexibility | Standard options | Multiple in-school payment options | Multiple repayment options including interest-only | Standard + interest-only options | Varies by negotiated terms | Varies by credit union |
| Distinctive angle | No fees; member benefits; career support | Flexible in-school payment choices | Longest track record; broad school coverage | One of few true no-cosigner options | Bulk-negotiated rates & perks | Connects you to nonprofit credit unions |
| Apply |
- Best for
- Borrowers with strong credit profiles
- Preview rates?
- ✓
- Borrower type
- Student & Parent
- Cosigner path
- Not required; cosigner release available
- Repayment flexibility
- Standard options
- Distinctive angle
- No fees; member benefits; career support
- Best for
- Students who want flexible repayment timing
- Preview rates?
- ✓
- Borrower type
- Student & Parent
- Cosigner path
- Cosigner available; release possible
- Repayment flexibility
- Multiple in-school payment options
- Distinctive angle
- Flexible in-school payment choices
- Best for
- Wide range of loan types and schools
- Preview rates?
- ✓
- Borrower type
- Student & Parent
- Cosigner path
- Cosigner available; release after payment history
- Repayment flexibility
- Multiple repayment options including interest-only
- Distinctive angle
- Longest track record; broad school coverage
- Best for
- Borrowers who need a no-cosigner path
- Preview rates?
- ✓
- Borrower type
- Student
- Cosigner path
- Outcomes-based option for juniors/seniors without cosigner
- Repayment flexibility
- Standard + interest-only options
- Distinctive angle
- One of few true no-cosigner options
- Best for
- Getting a negotiated deal
- Preview rates?
- ✓
- Borrower type
- Student & Parent
- Cosigner path
- Depends on lender
- Repayment flexibility
- Varies by negotiated terms
- Distinctive angle
- Bulk-negotiated rates & perks
- Best for
- Families who prefer credit-union lending
- Preview rates?
- Check with individual credit unions
- Borrower type
- Student & Parent
- Cosigner path
- Cosigner typically expected
- Repayment flexibility
- Varies by credit union
- Distinctive angle
- Connects you to nonprofit credit unions
How to Pay Less Interest
There are multiple ways to pay less interest on a student loan:
- Pay more than the minimum monthly payment to reduce the accrued interest.
- Enroll in autopay from a checking or savings account.
- Take advantage of discounts offered by the lender.
- Refinance your student loans when lower interest rates become available.
- Negotiate with your existing lender during periods of low interest rates.
Determining the Role of Loans in Your Financial Aid Package
College costs can overwhelm families. So, start by assessing what you can afford. Then, build a college list that fits the student’s needs and the family’s budget. Explore merit scholarships and need-based financial aid, which don’t require repayment. If possible, minimize your student loans.
The process for evaluating your financial aid package should include these steps:
- Complete the FAFSA for state and federal-funded student aid consideration. States and colleges also use the FAFSA information to determine their grant, scholarship, and loan distributions.
- Review your FAFSA Submission Summary and compare the financial aid packages received for grants, scholarships, and work-study funds.
- Maximize the grants, scholarships, and work-study funds offered to you.
- Review your eligibility and terms for federal student loans, including possible loan forgiveness.
- Consider applying for a state student loan that may be offered at a low rate.
- Apply for private loans when all other options have been exhausted.
How to Avoid or Lessen Student Loans
Families can become overwhelmed by the total cost of an undergraduate, graduate, or professional education. In the How America Pays for College 2024 study by Sallie Mae, 23% of students and families resorted to student loans to pay for college.
Understanding what you can afford, choosing the right school, and maximizing grants, scholarships, and work-study funds are essential to avoid or lessen student loans. In the 2023-2024 school year, 27% of students used eligible grants and scholarships to prevent or reduce student loans, and more than 75% ended up eliminating a school from consideration based on cost.
>> RELATED: How to Pay for College Without Loans
How to Choose the Best Student Loan
The best student loan is the one that best fits your situation now and in the future. When you start repaying it after college, you need a budget with room for your loan payments. So, to find the best loan, you’ll need to compare loan offers.
Consider these key factors in comparing loans:
- Interest rate over the term of the loan, and whether it’s variable or fixed
- Low or no loan origination fees
- Repayment options, including whether you’ll make payments while you are still in school, or whether you can defer payments and interest until after graduation.
- Monthly payment, and whether it fits your current and future budget
- Loan term, such as 10 or 20 years
Use our student loan comparison tool to compare borrowing options side by side.
How Do You Apply for a Student Loan?
Applying for a federal student loan begins with completing the FAFSA. All students who submit a FAFSA are eligible for federal direct student loans, regardless of financial need or income level.
A new loan application must be submitted at the start of each academic year since the cost of attendance is determined annually. See our complete guide on how to submit the FAFSA application and a link to apply for FAFSA.
When you receive your financial aid award package, the college will let you know what subsidized or unsubsidized student loan amounts you qualify for. At this point, you must accept or reject the loan offers and complete all paperwork required by the deadline to receive the loan disbursement.
To apply for a Parent PLUS loan, a FAFSA application must be completed. All parents are eligible to apply for a PLUS loan, and most are approved. Once you have your FSA ID, sign on to the StudentLoans.gov website and follow the directions for the PLUS loan. Once you receive approval, complete the required forms and paperwork to have the funds released to the college.
To apply for a state loan, use the U.S. Department of Education website to find the Department of Education or Higher Education Agency contact information for the college.
The process for applying for a private student loan is at the lender’s discretion. Before initiating the application, knowing the school’s cost and the financial aid awarded is important. While the school may suggest preferred lenders, conducting your own comparison of lenders is advisable. You can compare up to five loans simultaneously with the Road2College Loan Calculator. Upon approval, the lender will furnish loan documents detailing the interest rate, repayment terms, and any other additional costs.
What Can Student Loans Be Used For?
Student loans can be used for these expenses related to attending college and obtaining an education:
- College tuition and fees
- Room and board (on campus or off campus)
- Books and supplies
- Transportation (bus, train, or other ground transportation expenses)
- Technology (computers, laptops, and other requirements)
- Lab fees
- Utilities
- Groceries or personal supplies (including clothes, housewares, bedding, and eating out)
- Childcare or other dependent care
- Medical expenses
- Car expenses, including gas
Just remember, the money borrowed accrues interest so determining how to spend it should be considered wisely.
How Do You Get Your Money?
Before you can receive your first federal direct subsidized or unsubsidized loan as an undergraduate, or your first Parent PLUS loan as a graduate/professional student, you must complete the “entrance counseling,” which can be done online in about 30 minutes.
Once your federal student loan is ready to be disbursed, the Department of Education will send it directly to your college. They will then apply that money to cover tuition and any other fees. If money is left over, you will receive it to cover living expenses for the semester. You will usually receive the money before classes start, but first-time borrowers may have a 30-day waiting period after enrollment. The funds typically disburse twice a year — one payment per semester.
State loans are disbursed based on the guidelines specified for each state. Once you have applied and been approved, you can contact the state lender for accurate disbursement information.
For private loans, each lender determines its disbursement policies. Some lenders pay the borrower directly. In this case, the student is responsible for paying the tuition bill with the loan disbursement and will manage the remaining funds, if any, to cover living expenses. Other lenders will disburse the loan directly to the college after getting confirmation of enrollment and the cost of attendance.
How Do You Repay a Loan?
After graduation, if you reduce enrollment to less than half-time or leave school, your federal student loans go into repayment. A six-month grace period is usually granted before payments are due, except for PLUS loans, which usually lack a grace period.
When payments begin, the lender typically enrolls you in a standard repayment plan, which you can modify upon request if it doesn’t align with your financial situation. Fortunately, many private lenders recognize that students cannot repay loans while still in school and follow the same repayment regulations as federal loans. Certain lenders may require in-school payments, so make sure you review your loan documents and any correspondence from your lender post-graduation.
Your loan servicer will furnish a billing statement containing your repayment schedule, payment due dates, total number of payments, frequency, and payment amount. Opting for electronic deductions often results in an interest rate reduction of 0.25% with federal loans.
Student Loan Repayment Options
Federal student loan repayment options changed significantly on July 1, 2026 under the One Big Beautiful Bill Act (OBBBA). The plan available to you depends on when your loans were first disbursed.
For loans first disbursed on or after July 1, 2026, two plans are available:
- Standard Repayment Plan: Fixed monthly payments over 10, 15, 20, or 25 years depending on your total loan balance. This is the default plan if you do not select another option.
- Repayment Assistance Plan (RAP): An income-driven plan that sets monthly payments at 1% to 10% of adjusted gross income, with a $10 minimum if income is under $10,000 per year. Remaining balances may be forgiven after 30 years. Note: Parent PLUS loans are not eligible for RAP.
For loans disbursed before July 1, 2026, additional plans remain temporarily available:
- Graduated Repayment Plan: Lower initial payments that increase every two years, typically over 10 years.
- Extended Repayment Plan: For borrowers with over $30,000 in loans; extends repayment up to 25 years with fixed or graduated payments.
- Income-Based Repayment (IBR): Monthly payments of 10–15% of discretionary income. Borrowers on IBR can remain on it or switch to RAP after July 1, 2026.
- Income-Contingent Repayment (ICR): Available only to Parent PLUS borrowers who consolidated into a Direct Consolidation Loan before July 1, 2026.
Important: REPAYE, PAYE, and SAVE are no longer available to new borrowers. Borrowers currently enrolled in PAYE or ICR must transition to IBR or RAP by July 1, 2028.
For current guidance on each plan, refer to StudentAid.gov.
When Do I Start Repaying My College Loan?
When you start repaying your college student loan depends on the loan terms. Federal student loans have the most flexible repayment terms and offer a six-month grace period, so you don’t have to start repaying the loan until six months after graduation.
If you borrow from your state’s educational funding, the state sets the repayment plans and options.
The most common repayment plan for private student loans involves level payments for a fixed number of years based on the debt amount. Some lenders offer extended repayment terms of up to 30 years or the option of interest-only payments for the first year or two, with the total principal and interest payments beginning afterward.
Ensure you fully understand your lender’s repayment options before receiving private student loan funds.
How Much Will I Owe Each Month?
The amount of money you will owe each month will be based on the amount you borrowed (the loan amount plus fees), the length of the repayment plan, and the interest rate. Use our Student Loan Calculator to help determine what your monthly payments will be.
What Happens If You Don’t Repay Your Student Loans?
If you cannot repay your student loan, don’t panic. You have viable options, but ignoring the loans isn’t one of them.
In cases of short-term financial difficulty with federal student loans, you may qualify for a deferment or forbearance. Private student loans offer fewer options, usually requiring refinancing to achieve lower payments.
Failure to repay your student loans can lead to the following consequences:
- Government Intervention: If it’s a federal loan, the government will take your money. After nine months of non-payment, they can garner wages without a court order, seize tax refunds, intercept other federal benefits within limits, and hinder access to additional financial aid for further education. Also, note that federal student loans are not dischargeable through bankruptcy.
- Legal Action: Private lenders may resort to legal measures by suing you to start the collection process. They often engage in aggressive tactics through collection agencies, involving phone calls, emails, and mailed letters. Private lenders don’t tolerate missed payments. A single late payment can lead to potential collection or legal action.
- Credit Score Impact: Non-payment of student loans will inevitably hurt your credit score. A lower credit score translates to increased costs for mortgages, car loans, insurance, personal loans, cell phone plans, and credit cards. It could also impact your prospects for future employment, as many employers conduct credit score checks during the hiring process.
If you can’t make your payment, contact your lender and try to negotiate the terms or ask for a grace period. You can also ask to set up a different payment plan or choose another repayment option that fits your financial situation. Ignoring the problem is not advisable as it will only worsen the situation.
Will My Student Loan Be Forgiven?
The U.S. government has several programs that offer student loan forgiveness, but you must meet specific eligibility requirements to qualify.
For example, the Public Service Loan Forgiveness (PSLF) program forgives the remaining balance on your direct loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. However, the program has strict eligibility requirements, and only a small percentage of applicants get approved for loan forgiveness.
Other loan forgiveness programs include the Teacher Loan Forgiveness Program, the Perkins Loan Cancellation and Discharge Program, and the Closed School Loan Discharge Program. Each program has its own eligibility requirements, and some may forgive only a portion of your loan balance.
As of this writing, the U.S. government has not announced any plans to forgive all student loans, and it remains a highly controversial issue in U.S. politics.
Are Student Loans Worth It?
If you decide to pursue student loans, borrow only what you need. Most experts agree that a good rule of thumb for total undergraduate borrowing is to limit your loans to what you expect to earn your first year after graduation. The student loan payment should be limited to 8-10 percent of your gross monthly income.
It’s also important to ask yourself if the money you borrow is worth its return on investment (ROI). For example, incurring $200,000 in student loan debt for a career that pays an average of $40,000 yearly would not be considered a good ROI.
If you aren’t sure of the starting salary for a particular profession, check the Bureau of Labor Statistics Occupational Outlook Handbook. You’ll also find information on the growth potential in various careers and projections for future hiring needs.
Student Loan FAQ
How a student loan works depends on the type of loan and who the lender is. If you borrow money from the government or a private lender to pay for college tuition and other educational costs, you must repay the loan with interest.
The lender typically enrolls you in a standard repayment plan after graduation if you reduce enrollment to less than half-time or leave school. In most cases, a six-month grace period is granted before payments are due, except for PLUS loans, which usually lack a grace period.
All federal and most private student loans are typically sent directly to the school. Some private lenders may offer to distribute the funds to the borrower directly.
The payoff time depends on the repayment plan and how much you pay monthly. The standard repayment plan would take ten years to repay the student loan. Repayment can take up to 25 years if you change your repayment plan.
The government discharges federal student loans upon the death of the student. It also discharges Parent PLUS loans if the parent who borrowed the money dies and only one parent is on the loan. Some private lenders terminate student loans at death, and others do not.
According to the Education Data Initiative, the average time to pay off a student loan is 20 years.
*Writer Suzanne Shaffer contributed to this article.
About the author: Debbie Schwartz founded Road2College in 2014 to help families navigate the realities of paying for college. She previously worked in finance at Vanguard, Fidelity, and Accenture, and holds an MBA from MIT Sloan.
This article is for educational purposes and does not constitute financial or legal advice. Loan terms, interest rates, and lender policies change frequently. Always review current loan agreements directly with your lender before signing.
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Other Articles You Might Like:
Understanding Subsidized vs. Unsubsidized Loans and Choosing Your Best Option
Answers to Your Top 5 Questions About Student Loans
How to Avoid Student Loans: How Parents Can Help
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