Tracing the student loan process.
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Itâs long been saidâperhaps even taken for grantedâthat a college education can be a path to upward mobility. For millions of students each year, student loans help make a college education possible.
The amount you need to borrow can therefore be an important part of the college decision. Getting into your dream school is one thing; figuring out how to cover a $40,000-a-year funding gap is another. Student loans often fill in the gaps not covered by scholarships, grants, savings, work-study, and family contributions.
Understanding how student loans work before you borrow can help you make informed decisions about how much debt to take on. Because loans typically must be repaid with interest, borrowing more than you need increases your overall cost.
Key Points
- Compare your college costs and available aid before deciding how much you need to borrow.
- The student loan process runs from completing the FAFSA and receiving loan funds through interest accrual, repayment, and payoff.
- Federal student loans generally offer more borrower protections and flexible repayment options than private student loans.
FAFSA: The first step in the student loan process
The Free Application for Federal Student Aid (FAFSA) is the gateway to most federal financial aid. Completing the FAFSA each academic year provides the information used to determine your eligibility for Pell Grants, work-study, and federal student loans. Some state financial aid agencies and colleges also use information from the FAFSA to determine your eligibility for scholarships and other aid, so it can be worth filling out the form even if your family doesnât qualify for federal grants.
Federal or private student loans?
Federal student loans generally offer fixed rates, income-based repayment options, and borrower protections, and most require no credit check, unlike private loans. Private loans may also carry higher interest rates, particularly if you donât have strong credit or a creditworthy cosigner.
Private loans can help close a funding gap that remains after federal loan options have been exhausted. Learn more about federal versus private student loans.
You must complete the FAFSA to be eligible for federal student loans. You can apply before or during the academic year for which you need aid, although states and colleges may have earlier deadlines. The FAFSA generally becomes available in October for the academic year that begins the following fall.
Federal vs. private student loans: Key differences
Once you understand your student aid options, including grants, scholarships, and work-study, you can review whether your savings and family contributions leave a funding gap. That gap can be filled by student loans.
Federal student loans are issued by the U.S. Department of Education, which contracts with companies to service them. Private student loans are issued by private lenders, such as banks, credit unions, and other financial institutions. See table 1 for a comparison of their key features.
| Feature | Federal student loans | Private student loans |
|---|
| Interest rates | Fixed; set annually under federal law | Fixed or variable; depends on the lender and borrower |
| Credit check | Not required for Direct Subsidized and Unsubsidized Loans; required for PLUS loans | Generally required |
| Income-driven repayment options | Available | No, but some hardship plans may be available |
| In-school deferment | Available | Depends on the lender |
| Federal loan forgiveness programs | Available to eligible borrowers | Not available |
Types of federal student loans
Private student loans vary by lender, while federal loans are standardized. Three main types of federal student loans are available for new borrowers as of July 1, 2026:
- Direct subsidized loans. Undergraduate students who demonstrate financial need receive a break on interest accrual. The federal government pays your interest while youâre enrolled at least half time in school and during your grace period after leaving school, meaning these generally cost less over time.
- Direct unsubsidized loans. Undergraduate, graduate, and professional students can access these loans regardless of need or credit profile. Unlike subsidized loans, youâre responsible for the interest that accrues from the time an unsubsidized loan is disbursed. You can choose to pay the interest while youâre in school. If you donât, the interest is added to your loan balance, increasing the total amount you owe.
- Parent PLUS loans. Parents of undergraduate students can take out loans on their childâs behalf. These loans come with minimal credit requirements and are subject to limits, but they are often easier to qualify for than private student loans.
Graduate PLUS student loan program after July 1, 2026
As of July 1, 2026, Graduate PLUS loans are no longer available to new borrowers. Students who already borrowed through Graduate PLUS may continue to do so for up to three years or until they finish their degree program, whichever comes first.
Paying for college with student loans: How much can you borrow?
Private lenders generally allow students to borrow up to their schoolâs cost of attendance, minus other financial aid they receive. Some lenders may set lower borrowing limits.
For the 2026â27 academic year, federal student loans have annual limits based on your year in school and whether youâre a dependent or independent student.
- First-year undergraduate students: $5,500 for dependent students; $9,500 for independent students; $3,500 can be subsidized.
- Second-year undergraduate students: $6,500 for dependent students; $10,500 for independent students; $4,500 can be subsidized.
- Third-year and beyond undergraduate students: $7,500 for dependent students; $12,500 for independent students; $5,500 can be subsidized.
- Graduate students: $20,500; $50,000 for students in certain professions.
- Parent PLUS: $20,000 per child.
In most cases, your student loans are disbursed to your school at the beginning of the semester, although some private lenders might send the money to you first. Generally, the school uses the money to cover your tuition, fees, on-campus housing, and other applicable costs, such as meal plans. Leftover money is sent to you, by check or bank deposit. Youâre expected to use money you receive for authorized education expenses, including books, transportation, supplies, and rent.
How student debt works while youâre in school
If your private loan allows you to postpone payments while youâre in school, interest generally continues to accrue. That interest can increase the amount you ultimately have to repay.
Federal loans allow in-school deferment as long as you are enrolled at least half time. Parents can also defer PLUS loan payments until their student graduates. Federal loans include a six-month grace period when you leave school; some private lenders also offer a grace period.
If you are using unsubsidized federal or private loans, making interest payments while youâre in school can reduce the overall cost.
Repaying your student loans
Private loan repayment terms and schedules vary by lender. Federal repayment options depend in part on when you borrowed. For loans made on or after July 1, 2026, borrowers have two main repayment options:
- Tiered Standard Plan. You make fixed monthly payments over 10, 15, 20, or 25 years, depending on your outstanding loan balance. The more you owe, the longer your repayment term. If you donât choose a repayment plan, youâll be placed in Tiered Standard.
- Repayment Assistance Plan (RAP). RAP is the only income-driven option for new borrowers. Monthly payments range from 1% to 10% of income, depending on your income and number of dependents, with a minimum payment of $10. If your payment doesnât cover the interest that accrues that month, the remaining interest is waived. The government may also contribute up to $50 a month toward your principal.
Because new loans are disbursed each academic year, you may have several loans by the time you graduate. A Direct Consolidation Loan combines eligible federal loans into a new federal loan with a single monthly payment. You can also consider refinancing private student loans. Both federal and private loans can be refinanced, but refinancing federal loans with a private lender means giving up federal protections, including income-driven repayment and loan forgiveness programs.
If you qualify for programs like public service loan forgiveness or teacher loan forgiveness, you might be able to have some of your balance canceled. Any remaining balance after 30 years of qualifying payments is forgiven under RAP.
Student loans can help make higher education more accessible, but borrowing is only one part of paying for college. Scholarships, grants, savings, and other aid can reduce the amount you need to borrow. Federal loans generally offer more borrower protections and repayment options than private loans.
Before choosing a school, think beyond graduation. That $40,000 annual funding gap at your dream school can turn into a six-figure loan balance by graduation. Consider what those monthly payments could look like against your expected starting salary and budget. Planning how much to borrow and how youâll repay it can help keep student debt manageable after graduation.
Ready to test your knowledge? Take the quiz on student loans.
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