A student loan is money borrowed from the government or a private lender to pay for education costs, which you repay over time with interest.

Unlike a grant or scholarship, which you do not repay, a student loan creates a debt obligation. You borrow a sum, use it to cover tuition, fees, room and board, or books, and then pay it back in monthly installments after you leave school or drop below half-time enrollment. The lender charges interest — a percentage of the loan amount that accumulates over time — so you repay more than you borrowed.

Most student loans come from the federal government through programs like Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. Private lenders (banks, credit unions, online companies) also offer student loans, though federal loans typically have lower interest rates and more flexible repayment terms. The type of loan you take out, the interest rate, and the repayment timeline all depend on whether the loan is federal or private, and which specific program you use.

Key Takeaways

  • A student loan is borrowed money for education that you repay with interest, unlike grants or scholarships which do not require repayment.
  • Federal student loans come from the U.S. Department of Education and typically offer lower interest rates and more repayment options than private loans.
  • Interest accrues (builds up) on unsubsidized loans while you are in school, but the government pays the interest on subsidized loans until you start repaying.
  • Repayment usually begins six months after you graduate, leave school, or drop below half-time enrollment — a period called the grace period.
  • Monthly repayment amounts depend on the loan balance, interest rate, and which repayment plan you choose.

Federal loans versus private loans

Federal student loans are issued by the U.S. Department of Education. The interest rate is set by Congress and does not change based on your credit score. Federal loans include income-driven repayment plans, which lower your monthly payment if your income is low, and loan forgiveness programs that cancel remaining debt after 20 to 25 years of payments or in certain public service jobs. If you default (stop paying), the government can garnish your wages or tax refunds, but you have legal protections and options to get out of default.

Private student loans come from banks, credit unions, and online lenders. Interest rates are based on your credit score and can be fixed or variable (changing over time). Private loans do not offer income-driven repayment or forgiveness programs. If you default, the lender can sue you and pursue collection through the courts. Private loans are typically a second resort after you have exhausted federal loan options, because the terms are less flexible and more expensive if your income drops.

How interest works on student loans

Interest is the cost of borrowing money. On a $10,000 loan at 5% interest, you pay $500 per year in interest charges. The interest rate on federal loans is fixed — it stays the same for the life of the loan. Private loan rates can be fixed or variable.

On subsidized federal loans, the government pays the interest while you are in school at least half-time, during your grace period, and during deferment (a pause in payments). You only owe the principal (the amount you borrowed) when you start repaying. On unsubsidized federal loans, interest accrues from the day the loan is disbursed (sent to you). If you do not pay the interest while in school, it is added to your loan balance when repayment begins — a process called capitalization. This means you end up paying interest on interest.

Example: A $5,000 unsubsidized loan at 5.5% interest accrues about $275 per year while you are in school. If you do not pay that interest, it gets added to your balance, so you owe $5,275 when repayment starts, and you pay interest on the full $5,275.

When repayment begins

Repayment does not start immediately after you borrow. Most federal loans enter a grace period of six months after you graduate, leave school, or drop below half-time enrollment. During this time, you do not have to make payments, though interest continues to accrue on unsubsidized loans.

Parent PLUS Loans (borrowed by parents for their children's education) do not have a grace period — repayment can begin as soon as the loan is fully disbursed. Some private loans also have no grace period. You should confirm the grace period terms for any loan you take out before you borrow.

After the grace period ends, you enter repayment and must make monthly payments. The amount depends on your loan balance, interest rate, and repayment plan. Standard repayment takes 10 years. Income-driven plans (available only for federal loans) can extend repayment to 20 or 25 years and lower your monthly payment based on your current income.

Types of federal student loans

Direct Subsidized Loans are available to undergraduate students with financial need. The government pays the interest while you are in school and during the grace period. You must demonstrate need through the Free Application for Federal Student Aid (FAFSA).

Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. Interest accrues from disbursement. You can borrow more with an unsubsidized loan than a subsidized one.

Direct PLUS Loans are for graduate students and parents of undergraduate students. They have higher interest rates and require a credit check. Parents can borrow up to the full cost of attendance minus other aid received.

Direct Consolidation Loans combine multiple federal loans into one new loan with a single monthly payment. The interest rate is the weighted average of your existing loans, rounded up to the nearest one-eighth of a percent. Consolidation can simplify repayment but may extend the repayment timeline and increase total interest paid.

How much you can borrow

Federal loan limits depend on your year in school and whether you are a dependent or independent student. Dependent undergraduates can borrow $5,500 to $7,500 per year in subsidized and unsubsidized loans combined, up to $31,000 total. Independent undergraduates and graduate students can borrow more. Parent PLUS Loans have no aggregate limit — parents can borrow up to the full cost of attendance.

Private loan limits vary by lender and your creditworthiness. Some lenders cap loans at the cost of attendance; others allow you to borrow more. Interest rates and terms differ widely, so comparing offers from multiple lenders is important if you choose private loans.

Documents you need to borrow

To borrow federal student loans, you must complete the Free Application for Federal Student Aid (FAFSA). This form determines your financial need and your loan may be able to access. You will need your Social Security number, date of birth, and information about your income and assets (or your parents' income and assets if you are a dependent). The FAFSA opens October 1 each year and remains open through June 30.

Your school's financial aid office uses your FAFSA results to create a financial aid package that may include loans, grants, and work-study. You then accept or decline each loan offer. For private loans, you will need to apply directly with the lender, provide proof of enrollment, and authorize a credit check.

Frequently Asked Questions

What is the difference between a loan and a grant?

A grant is money you do not repay; it is a gift based on financial need or merit. A loan is money you borrow and must repay with interest. Grants are limited and highly competitive. Most students use a combination of grants, loans, and scholarships to pay for school.

Can I get a student loan if I have bad credit?

Federal student loans do not require a credit check, so bad credit does not disqualify you. Private loans do require a credit check, and a low credit score may result in a higher interest rate or denial. If you have bad credit, federal loans are your better option.

What happens if I do not repay my student loan?

If you stop making payments for 270 days, your federal loan goes into default. The government can garnish your wages, intercept your tax refunds, and take other collection actions. You may also lose may be able to access for future federal aid. Defaulted loans can be rehabilitated by making nine on-time payments in ten months, which removes the default status from your credit report.

Can I pay off my student loan early?

Yes. Federal student loans have no prepayment penalty, so you can pay extra toward your principal at any time without fees. Paying extra reduces the total interest you owe. Private loans vary — some allow early repayment without penalty, others charge a fee. Check your loan documents or contact your lender to confirm.

What is income-driven repayment?

Income-driven repayment is a federal repayment plan that bases your monthly payment on your current income rather than your loan balance. Plans include PAYE, REPAYE, IBR, and ICR. Your payment can be as low as $0 if your income is very low. After 20 to 25 years of payments, any remaining balance is forgiven, though you may owe taxes on the forgiven amount.