Federal loans come from the U.S. Department of Education, not banks

The largest source of student loans is the federal government, not private banks. Federal student loans — Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans — are issued and serviced through the Department of Education. You do not borrow from a bank; you borrow from the government, and the government may contract with a servicer to collect your payments. The servicer is not the lender.

Private student loans, by contrast, come from banks, credit unions, and online lenders. These are separate products with different terms, interest rates, and repayment rules than federal loans. Most borrowers should exhaust federal options first, because federal loans offer protections that private loans do not — income-driven repayment plans, loan forgiveness programs, and deferment options if you face hardship.

Key Takeaways

  • Federal student loans come from the Department of Education, not banks, and are the primary source of student borrowing for most undergraduates.
  • Private student loans from banks and credit unions typically require a credit check and a cosigner, and carry higher interest rates than federal loans.
  • You access federal loans through your school's financial aid office and the Free Application for Federal Student Aid (FAFSA), not by approaching a bank directly.
  • Banks that offer private student loans include Sallie Mae, Earnest, SoFi, LendingClub, and Discover, but these should be considered only after federal loan options are exhausted.
  • Interest rates on private loans vary by lender, credit score, and loan term, and are not fixed by the government.

How to get federal loans through your school

To borrow federal student loans, you complete the Free Application for Federal Student Aid (FAFSA) and submit it to the Department of Education. Your school's financial aid office then determines how much you can borrow and sends you a loan offer. You accept the loan through your school's financial aid portal, and the Department of Education disburses the money directly to your school to cover tuition and fees. Your school then sends any remaining balance to you.

You do not choose which bank services your federal loan — the Department of Education assigns a servicer. Common servicers include Mohela, Nelnet, Great Lakes, and Aidvantage. The servicer handles billing and payment processing, but the Department of Education owns the loan. If you have questions about your federal loan terms or repayment options, contact your servicer, but know that the terms themselves are set by federal law, not by the servicer.

Private student loans from banks and credit unions

Private lenders offer student loans when federal borrowing limits are exhausted or when a borrower does not meet federal requirements. Banks and credit unions that offer private student loans include Sallie Mae, Earnest, SoFi (Social Finance), LendingClub, Discover, Wells Fargo, and PNC Bank. Each lender sets its own interest rates, fees, and repayment terms. Interest rates are typically variable or fixed, and the rate you receive depends on your credit score, income, and whether you have a cosigner.

Private loans require a credit check, and most require a cosigner if you have limited credit history. Unlike federal loans, private loans do not offer income-driven repayment plans or loan forgiveness programs. If you lose your job or face financial hardship, your private lender is not required to pause payments or lower your monthly amount. Private loans also do not include the same protections for borrowers with disabilities or in public service roles.

Comparing interest rates and terms across lenders

Private student loan interest rates vary significantly by lender and by your financial profile. A borrower with a 750 credit score may receive a rate of 5% from one lender and 7% from another. Rates also depend on whether you choose a fixed rate (which stays the same for the life of the loan) or a variable rate (which can change over time). Variable rates are often lower at first but can rise, sometimes substantially, if market conditions change.

Before comparing rates, understand that each lender's rate quote requires a hard credit inquiry, which temporarily lowers your credit score. Most lenders allow you to check rates with a soft inquiry first, which does not affect your score. Once you have narrowed your choices, you can request formal quotes from two or three lenders within a short window — typically 14 to 45 days — and the multiple inquiries count as a single inquiry for credit scoring purposes.

When private loans make sense

Private loans are most useful when you have already borrowed the maximum in federal loans and still need additional funds. Federal undergraduate loan limits are $5,500 to $7,500 per year depending on your year in school and dependency status. If your school costs more than that, a private loan can bridge the gap. Private loans may also be an option if you are a graduate student, because federal graduate loan limits are higher but still finite.

Private loans can also be worth considering if you have strong credit and a stable income, because you may receive a lower interest rate than the federal unsubsidized rate. However, you should run the numbers carefully: a private loan at 6% is only better than a federal loan at 8% if you are certain you can repay it on schedule. If you face job loss or income reduction, a federal loan's income-driven repayment option may save you thousands of dollars.

Credit unions as an alternative to banks

Credit unions often offer student loans with terms comparable to banks but sometimes with lower rates or more flexible underwriting. If you are a member of a credit union, ask whether they offer student loans and what rates they would offer you. Credit unions are nonprofit institutions owned by their members, and some prioritize lending to members over maximizing profit, which can result in better terms.

Credit union student loans still require a credit check and typically a cosigner, and they do not include the federal protections that come with government loans. However, credit unions may be more willing to work with you if you face hardship during repayment, because they have direct relationships with borrowers rather than servicing loans on behalf of a distant investor.

Frequently Asked Questions

Can I borrow directly from a bank without going through my school?

Federal loans must go through your school's financial aid office — you cannot borrow directly from a bank. Private loans can be obtained directly from a bank or online lender without involving your school, though your school may require you to notify them of outside borrowing.

What happens if I cannot repay a private student loan?

Private lenders can pursue collection, garnish your wages, or sue you. They do not have to offer income-driven repayment or pause payments during hardship. Federal loans have protections like income-driven plans and forbearance; private loans do not.

Do I need a cosigner for a private student loan?

Most private lenders require a cosigner if you have no credit history or a low credit score. Some lenders will approve borrowers without a cosigner if they have strong income and credit. Ask the lender whether you can may have access to on your own before involving a family member.

Can I refinance a federal loan with a private lender?

Yes, you can refinance federal loans into a private loan, but you lose federal protections like income-driven repayment and loan forgiveness. Refinance only if you have stable income and a lower interest rate is worth giving up those protections.

What is the difference between a loan servicer and a lender?

The lender owns the loan and sets the terms. The servicer collects payments and handles customer service. For federal loans, the Department of Education is the lender, and companies like Mohela or Nelnet are servicers. For private loans, the bank is both lender and servicer.