What a student loan is and how the money reaches you

A student loan is money you borrow from the federal government or a private lender to pay for college, university, or career training. Unlike a grant or scholarship, you must repay it — with interest — after you leave school. The lender gives the money directly to your school, which applies it to tuition, fees, room and board, and books. You do not receive cash in your hand.

Federal student loans come from the U.S. Department of Education. Private student loans come from banks, credit unions, and other financial companies. Federal loans have fixed interest rates set by Congress, while private loan rates vary by lender and your credit history. Federal loans also offer protections — like income-driven repayment plans and forgiveness programs — that private loans typically do not.

The process starts when you complete the Free Application for Federal Student Aid (FAFSA). This form tells the Department of Education your family's income and assets, and it determines how much federal aid you can borrow. Your school's financial aid office then packages loans, grants, and work-study into an offer. You choose which loans to accept by signing a Master Promissory Note, a legal agreement to repay.

Key Takeaways

  • Federal loans are disbursed directly to your school in two payments per academic year, and repayment does not begin until after you graduate or drop below half-time enrollment.
  • Interest accrues (builds up) while you are in school on unsubsidized federal loans, but the government pays the interest on subsidized federal loans during enrollment.
  • Private loans often require a credit check and a co-signer, and repayment terms vary widely depending on the lender.
  • Your loan servicer — the company that collects your payments — is not always the lender, and it can change without notice.
  • Federal loans offer income-driven repayment plans that cap your monthly payment at a percentage of your income, while private loans typically require fixed monthly payments.

The difference between subsidized and unsubsidized federal loans

The federal government offers two main types of undergraduate loans: subsidized and unsubsidized. With a subsidized loan, the government pays the interest while you are enrolled at least half-time. This means the loan balance does not grow while you are in school. With an unsubsidized loan, interest accrues from the moment the money is disbursed. If you do not pay the interest as it builds, it gets added to your loan balance — a process called capitalization — and you end up owing interest on interest.

Subsidized loans are awarded based on financial need, determined by the FAFSA. Unsubsidized loans are available to all students regardless of need, though there are borrowing limits. Graduate students can only take unsubsidized loans. Many students borrow both types. The interest rate on both is the same for a given year, but the total amount you repay differs because of how interest is handled during school.

How interest rates and fees work

Federal student loan interest rates are set by Congress and change each year. For the 2023–24 academic year, undergraduate loans carried a 5.5% interest rate, while graduate loans were 7.05% and PLUS loans (parent or graduate loans) were 8.05%. These rates are fixed for the life of the loan, meaning they do not change after you graduate. The Department of Education also charges an origination fee — typically around 1% of the loan amount — which is deducted before the money reaches your school.

Private loan interest rates depend on the lender, the type of loan, and your credit score. Rates can be fixed or variable. A variable rate may start lower but can increase over time, sometimes significantly. Private loans also charge origination fees and may charge prepayment penalties if you pay off the loan early. Always read the promissory note to understand the exact rate, fees, and terms before you borrow.

When repayment begins and what your first payment looks like

Federal loan repayment begins six months after you graduate, leave school, or drop below half-time enrollment. This period is called the grace period. During the grace period, interest continues to accrue on unsubsidized loans, but you do not have to make payments. Your loan servicer will contact you before the grace period ends to explain your repayment options and set up your first payment.

Your first payment amount depends on which repayment plan you choose. Under the standard 10-year plan, payments are fixed and typically range from $100 to $300 per month, depending on how much you borrowed. Under income-driven plans, your payment is calculated as a percentage of your discretionary income — usually 10% to 20% — and can be as low as $0 per month if your income is very low. You can change repayment plans at any time, and many borrowers switch plans as their income changes.

Private loan repayment terms vary by lender. Some require payments to begin while you are still in school; others offer a grace period. Some allow interest-only payments during school, which reduces the amount that capitalizes. Read your promissory note to know when your first payment is due.

What happens if you cannot make a payment

If you miss a federal loan payment, your loan enters delinquency. After 90 days of missed payments, the loan servicer reports the delinquency to credit bureaus, damaging your credit score. After 270 days (nine months) of non-payment, your loan goes into default. Once in default, the entire remaining balance becomes due immediately, and the government can garnish your wages, intercept your tax refund, and offset your Social Security benefits.

If you are struggling to pay, contact your loan servicer before you miss a payment. Federal loans offer deferment and forbearance — temporary pauses on payments. Deferment stops both payments and interest accrual on subsidized loans (though not on unsubsidized loans). Forbearance pauses payments but interest continues to accrue on all loan types. Both options are limited in duration and have specific may be able to access requirements. Income-driven repayment plans can also lower your payment to $0 if your income is low enough.

Private loans have fewer protections. Most do not offer deferment or forbearance, and missing payments can lead to default much faster. If you have private loans and are in financial hardship, contact your lender immediately to ask about hardship programs — they vary widely and are not may provide.

Loan forgiveness and discharge programs

Federal student loans can be forgiven or discharged under specific circumstances. Public Service Loan Forgiveness (PSLF) forgives remaining loan balance after 120 may have access to payments while working for a government agency or nonprofit organization. Teacher Loan Forgiveness forgives up to $17,500 for teachers who work in low-income schools for five years. Income-Driven Repayment Forgiveness forgives any remaining balance after 20 to 25 years of payments under an income-driven plan, though forgiven amounts may be taxable as income.

Loans can also be discharged — meaning you no longer owe them — if you become permanently and totally disabled, if your school closes while you are enrolled or shortly after you leave, or if you are defrauded by your school. Discharge is not the same as forgiveness; it erases the debt entirely rather than forgiving it after a period of payments.

Private loans do not have forgiveness or discharge programs. Once you sign a private loan promissory note, you are obligated to repay it under the terms stated, with very few exceptions.

How to track your loans and understand your servicer

Your loan servicer is the company that collects your payments and handles customer service. The servicer is not always the lender — the lender may sell the loan to a servicer after it is disbursed. You can find all your federal loans and servicers on the National Student Loan Data System (NSLDS) at studentaid.gov. Log in with your FSA ID to see loan balances, interest rates, disbursement dates, and servicer contact information.

Servicers can change without notice. If your servicer changes, the new servicer will contact you with payment instructions. Keep records of all payments you make, especially if you switch servicers, because payment history does not always transfer smoothly. If you believe a payment was not credited, contact your servicer immediately with proof of payment.

For private loans, log into your lender's website or contact them directly to track your balance and payment history. Private loans are not listed on NSLDS.

Frequently Asked Questions

Can I pay off my student loan early without a penalty?

Federal student loans have no prepayment penalty — you can pay any amount at any time without extra fees. Paying extra toward principal reduces the total interest you pay over the life of the loan. Private loans vary; some charge prepayment penalties while others do not. Check your promissory note or contact your lender to confirm.

What is the difference between a loan and a grant?

A grant is money you do not have to repay. It is awarded based on financial need or merit and comes from the federal government, your state, or your school. A loan must be repaid with interest. Grants are limited and highly competitive; most students receive a mix of grants, loans, and work-study.

Do I have to use federal loans if my school offers them?

No. You can decline federal loans and borrow only private loans, or borrow less than offered. However, federal loans typically have lower interest rates and more protections than private loans, so declining them is usually not in your financial interest. Review your aid package carefully before deciding.

What happens to my student loans if I die?

Federal student loans are discharged (forgiven) upon death. Your estate is not responsible for repayment. Private loans may be discharged, but it depends on the lender and the terms of the promissory note. Some private loans require a co-signer to repay if the borrower dies. Confirm the terms with your private lender.

Can student loans be forgiven in bankruptcy?

Student loans are rarely discharged in bankruptcy. You must prove "undue hardship," a legal standard that is difficult to meet and varies by court. Undue hardship typically means you cannot maintain a minimal standard of living, your hardship will likely continue, and you have made a good-faith effort to repay. Consult a bankruptcy attorney if you are considering this option.