Student loans come from the federal government, private banks, or sometimes your school itself
Most student loans fall into two categories: federal loans, which the U.S. Department of Education funds and manages, and private loans, which banks and other lenders provide. Federal loans have fixed interest rates set by Congress, income-based repayment options, and forgiveness programs. Private loans have rates that vary by lender and your credit history, and fewer protections if you run into trouble repaying.
Your school's financial aid office is the starting point for federal loans. They determine how much you can borrow based on your cost of attendance and other aid you receive. Private loans require you to contact lenders directly or compare them through loan marketplaces. The type you choose affects how much you pay back, how long you have to repay, and what happens if you can't make a payment.
Key Takeaways
- Federal loans require you to complete the FAFSA (Free Application for Federal Student Aid) through fafsa.gov, and your school's financial aid office tells you how much you can borrow.
- Private loans require a credit check and often a co-signer, and you apply directly to banks, credit unions, or online lenders rather than through your school.
- Federal loans offer income-based repayment plans and forgiveness programs; private loans do not, and their interest rates can change or be higher than federal rates.
- You must be enrolled at least half-time at a school that participates in federal student aid to borrow federal loans.
Federal student loans: the FAFSA and your school's financial aid office
To borrow federal student loans, you must first complete the FAFSA (Free Application for Federal Student Aid) at fafsa.gov. The FAFSA is free and asks about your income, assets, family size, and other factors to determine your financial need. You submit it to the Department of Education, which calculates your Expected Family Contribution — the amount your family is expected to pay toward education costs.
After you submit the FAFSA, your school's financial aid office receives your information and sends you an award letter. This letter lists the federal loans you are offered, how much you can borrow, and what interest rate applies. You then sign a Master Promissory Note (MPN) — a legal agreement to repay the loan — and the school disburses the money, usually by crediting your student account or sending you a check.
Federal loans include Direct Subsidized Loans (the government pays interest while you are in school), Direct Unsubsidized Loans (interest accrues from the day you borrow), and Direct PLUS Loans (for parents or graduate students with a credit check). The interest rates are the same across all lenders because the federal government is the lender. Current rates vary by year and loan type; check studentaid.gov for the current year's rates.
Private student loans: banks, credit unions, and online lenders
Private loans come from banks, credit unions, and online lenders. You apply directly to the lender, not through your school. The lender pulls your credit report and decides whether to approve you and at what interest rate. If your credit is limited or poor, most private lenders require a co-signer — usually a parent or relative with established credit who is legally responsible for repaying the loan if you do not.
Private loan interest rates are not set by law; they vary by lender, your credit score, and the loan term. A borrower with excellent credit might receive a rate of 4 to 6 percent, while someone with fair credit might pay 8 to 12 percent or higher. Some private loans have variable rates that change over time, which means your payment can increase. Compare offers from at least three lenders before choosing, because the difference in interest rate directly affects how much you repay over time.
Private loans do not offer income-based repayment or forgiveness programs. You repay on the lender's schedule, usually starting six months after you graduate or leave school. If you fall behind on payments, the lender can sue you or report the debt to credit bureaus, damaging your credit score. Private loans also do not pause during economic hardship the way federal loans can.
What documents and information you need to borrow
For federal loans, you need a Social Security number, a valid driver's license or state ID, and proof of U.S. citizenship or may be able to access non-citizen status. You also need your parents' information if you are a dependent student, because their income affects how much aid you receive. Have your most recent tax return available when you fill out the FAFSA.
For private loans, you need a Social Security number, proof of income (usually a recent pay stub or tax return), and information about your co-signer if you have one. The lender will run a hard credit inquiry, which temporarily lowers your credit score by a few points. Some lenders also ask for proof that you are enrolled in school, such as a letter from your school's registrar.
Federal loans versus private loans: the main differences
| Feature | Federal Loans | Private Loans |
|---|---|---|
| Interest rate | Fixed, set by Congress | Fixed or variable, set by lender |
| Credit check required | No | Yes |
| Co-signer needed | No | Usually, if credit is limited |
| Income-based repayment | Yes, multiple plans available | No |
| Forgiveness programs | Yes (Public Service Loan Forgiveness, income-driven forgiveness) | No |
| Deferment or forbearance | Yes, available in hardship | Varies by lender; rarely available |
| Where to apply | FAFSA through fafsa.gov, then your school | Directly to lender |
Steps to take before you borrow
Before you take out any loan, understand the total cost. Use the federal loan calculator at studentaid.gov to see how much you will repay over time at different interest rates. For private loans, use the lender's calculator or ask the lender for an amortization schedule — a month-by-month breakdown of what you owe.
Borrow only what you need for tuition, fees, books, and living expenses directly related to school. Every dollar you borrow costs more when you add interest. If you can work part-time, receive grants (money you do not repay), or attend a less expensive school, those options reduce how much you need to borrow. Ask your school's financial aid office whether you may have access to for grants or work-study before you take out loans.
If you are considering private loans, exhaust federal loan options first. Federal loans have more protections and lower interest rates for most borrowers. Private loans make sense only if you have already borrowed the maximum federal amount and still need more money, or if you have excellent credit and can secure a lower private rate than the federal rate available to you.
Frequently Asked Questions
Do I have to start repaying student loans right away?
Federal loans usually have a grace period of six months after you graduate or drop below half-time enrollment before repayment begins. Private loans vary by lender; some start charging interest immediately, while others offer a grace period. Check your loan documents or contact your lender to confirm when your first payment is due.
What if I cannot afford my monthly payment?
Federal loans offer income-driven repayment plans that cap your payment at 10 to 20 percent of your discretionary income, and you may pay as little as $0 per month if your income is very low. You can also request deferment or forbearance to pause payments temporarily. Private loans rarely offer these options, though some lenders allow you to temporarily reduce payments if you contact them before you miss a payment.
Can I borrow more than one type of loan?
Yes. Most students borrow federal loans first, then add private loans if they need more. Your school's financial aid office can tell you the maximum federal amount you can borrow in a given year, and you can then shop for private loans to cover any remaining gap. Keep track of all your loans and their terms so you know what you owe when repayment begins.
What happens if I default on a student loan?
Federal loan default triggers wage garnishment (the government takes money from your paycheck), tax refund seizure, and damage to your credit score. Private loan default can result in a lawsuit, wage garnishment, and credit damage. If you are struggling, contact your lender or loan servicer before you miss a payment to discuss income-driven repayment or temporary relief options.
Can I refinance my student loans?
You can refinance federal loans through private lenders, but you lose federal protections like income-based repayment and forgiveness programs. Refinancing makes sense only if you have excellent credit, a stable income, and do not plan to use federal relief options. Federal loans cannot be refinanced within the federal system, but you can consolidate multiple federal loans into one Direct Consolidation Loan.