How student loans are borrowed and repaid
A student loan is money you borrow to pay for education, with the agreement that you will repay it later, usually with interest. Unlike a grant or scholarship, which you do not repay, a loan creates a legal obligation. The lender — which may be the federal government, a state, or a private bank — expects you to start repaying after you finish school or drop below half-time enrollment.
The repayment timeline and interest rate depend on the type of loan. Federal student loans typically have lower interest rates than private loans and offer income-based repayment plans that adjust your monthly payment based on what you earn. Private loans have terms set by the lender and usually require repayment to begin sooner. Most federal loans do not require a credit check, but private loans do.
The amount you can borrow varies. Federal loans have annual and lifetime limits that depend on your year in school and your parents' income (if you are a dependent). Private loans have no federal cap, but the lender decides how much to lend based on your credit and income.
Key Takeaways
- Federal student loans come from the U.S. Department of Education and have fixed interest rates, income-based repayment options, and do not require a credit check.
- Private student loans come from banks and credit unions, have variable interest rates, and require a credit check or a cosigner.
- You must complete the Free Application for Federal Student Aid (FAFSA) to access federal loans, even if you think you will not may have access to.
- Federal loans have annual borrowing limits that increase each year you are in school, while private loans have no federal cap.
- Repayment typically begins six months after you graduate or leave school, though some loans require repayment while you are still enrolled.
Federal student loans and how to access them
Federal student loans are issued by the U.S. Department of Education and are the most common type of student loan. To access them, you must complete the Free Application for Federal Student Aid (FAFSA). This form collects information about your income, assets, and family situation. Your school uses this information to calculate how much federal aid you are expected to receive.
There are two main types of federal student loans for undergraduate students. Direct Subsidized Loans are available to students with financial need. The government pays the interest while you are in school. Direct Unsubsidized Loans are available regardless of financial need, but interest accrues (builds up) while you are in school, meaning you owe more when repayment begins. Graduate students can also borrow Direct PLUS Loans, which have higher interest rates and no need-based limit.
The FAFSA opens on October 1 each year and remains open through the following June, though some states and schools have earlier deadlines. You can complete it at fafsa.gov. After you submit, your school's financial aid office will send you an award letter showing how much federal aid you have been offered. You then accept or decline each loan offer through your school's financial aid portal.
Private student loans and credit requirements
Private student loans come from banks, credit unions, and online lenders. They fill the gap when federal loans do not cover your full cost of attendance. Unlike federal loans, private loans require a credit check. If you have no credit history or poor credit, you will likely need a cosigner — usually a parent or guardian with established credit — to be approved.
Private loan terms vary widely by lender. Interest rates may be fixed (staying the same for the life of the loan) or variable (changing based on market conditions). Repayment may begin while you are in school, or it may be deferred until after graduation. Some lenders offer in-school deferment, meaning you do not have to make payments while enrolled, but interest still accrues.
To find private loans, start with your bank or credit union, then compare offers from major lenders such as Sallie Mae, Earnest, and Citizens Bank. Each lender has different credit requirements and interest rates. Getting quotes from multiple lenders does not hurt your credit score if you do it within 14 days — the credit bureaus count multiple inquiries as a single search.
What documents and information you will need
For the FAFSA, you will need your Social Security number, date of birth, and driver's license number (if you have one). You will also need tax information from the previous year — either your own tax return or your parents' return if you are a dependent. If you have not filed taxes, you can use your W-2 forms or other income records. You can link your FAFSA directly to the IRS to import your tax data automatically, which speeds up the process.
For private loans, lenders will ask for proof of income (pay stubs or tax returns), your Social Security number, and details about your school and program. If you have a cosigner, they will need to provide the same information. Some lenders also ask for proof of enrollment, which your school can provide.
Repayment plans and what happens after graduation
Federal student loans offer several repayment plans. The Standard Repayment Plan requires fixed monthly payments over ten years. Income-Driven Repayment Plans calculate your payment based on your current income and family size; these include Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Payments under income-driven plans can be as low as $0 per month if your income is very low, and any remaining balance may be forgiven after 20 to 25 years of payments.
Repayment typically begins six months after you graduate or drop below half-time enrollment. This period is called the grace period. During the grace period, you do not have to make payments on subsidized loans, but interest continues to accrue on unsubsidized loans. You can make voluntary payments during the grace period to reduce the amount you owe later.
Private loans have fewer repayment options. Most require you to choose between a fixed term (5, 10, or 15 years) and a variable term. Some offer income-based repayment, but it is less flexible than federal options. If you have private loans and your financial situation changes, refinancing (taking out a new loan to pay off the old one) may lower your interest rate, but you will lose any federal protections that came with the original loan.
Federal loan forgiveness and discharge programs
Several federal programs can reduce or eliminate your student loan debt. Public Service Loan Forgiveness (PSLF) forgives remaining federal loan balance after 120 may have access to payments (ten years) if you work full-time for a government agency or nonprofit organization. Teacher Loan Forgiveness forgives up to $17,500 of federal loans if you teach in a low-income school for five consecutive years.
You may also have your federal loans discharged (canceled) if you become permanently and totally disabled, if your school closes while you are enrolled or shortly after you withdraw, or if you are defrauded by your school. Discharge is different from forgiveness: it erases the debt without tax consequences, whereas forgiveness after 20 to 25 years of income-driven repayment may result in taxable income.
Private loans do not have forgiveness programs. If you have private loans and face financial hardship, contact your lender to ask about forbearance (temporarily pausing payments) or deferment (delaying payments). These options vary by lender and may not be available.
Common mistakes to avoid when borrowing
One common mistake is not completing the FAFSA because you think you will not may have access to. Federal loans are not based solely on financial need — unsubsidized loans are available to all students, and the FAFSA determines your may be able to access for grants, work-study, and tax credits as well. Skipping it costs you money.
Another mistake is borrowing more than you need. Private loans are easy to access, but every dollar you borrow costs more in interest over time. Borrow only what your school's cost of attendance minus other aid does not cover. If you are unsure, ask your financial aid office to review your budget.
A third mistake is ignoring loan documents. Read your promissory note (the legal agreement you sign) before accepting any loan. It explains the interest rate, repayment terms, and what happens if you default. If you do not understand something, ask your school's financial aid office or contact the lender directly.
Frequently Asked Questions
Do I have to start repaying student loans right after graduation?
Federal loans have a six-month grace period after graduation before repayment begins. Private loans vary — some require repayment while you are in school, others offer a grace period. Check your loan documents to know when your first payment is due. You can make voluntary payments during the grace period to reduce interest.
What is the difference between subsidized and unsubsidized federal loans?
With subsidized loans, the government pays the interest while you are in school. With unsubsidized loans, interest accrues from the moment the loan is disbursed, so you owe more when repayment begins. Subsidized loans are only available to students with demonstrated financial need, shown through the FAFSA.
Can I borrow a private student loan without a cosigner?
Some lenders will approve private loans without a cosigner if you have good credit and stable income. However, most lenders require a cosigner, especially for first-time borrowers or those with limited credit history. Having a cosigner usually results in a lower interest rate.
What happens if I cannot repay my student loans?
For federal loans, contact your loan servicer to discuss income-driven repayment, forbearance, or deferment. These options pause or reduce payments temporarily. Defaulting (not paying for 270 days) has serious consequences: wage garnishment, tax refund seizure, and damage to your credit. For private loans, contact your lender immediately to discuss hardship options.
Can I refinance my student loans to get a lower interest rate?
You can refinance federal loans through a private lender, which may lower your rate if your credit has improved. However, refinancing federal loans means losing income-driven repayment, forgiveness programs, and discharge protections. Refinancing private loans is straightforward if your credit qualifies. Compare offers from multiple lenders before deciding.