A student loan is money you borrow to pay for education, which you repay with interest after you finish school

A student loan is borrowed money from a federal or private lender that you use to cover tuition, fees, books, housing, and other education costs. Unlike a grant or scholarship, you must repay every dollar you borrow, plus interest. The lender charges you interest — a percentage of the loan amount — for letting you use their money. How much interest you pay depends on the loan type, the interest rate, and how long you take to repay.

Student loans come in two main categories: federal loans (made by the U.S. Department of Education) and private loans (made by banks, credit unions, and other financial companies). Federal loans have fixed interest rates set by Congress, income-based repayment options, and forgiveness programs in some cases. Private loans have terms set by the lender and fewer protections. Most borrowers use federal loans first because the terms are more flexible and the interest rates are usually lower.

You do not have to repay a student loan while you are still in school full-time — this period is called in-school deferment. Repayment typically begins six months after you graduate, leave school, or drop below half-time enrollment. This six-month window is called the grace period. During the grace period, you do not have to make payments, though interest may still be building on some loan types.

Key Takeaways

  • Federal student loans are issued by the U.S. Department of Education and have fixed interest rates and income-based repayment plans; private loans are issued by banks and have terms set by each lender.
  • You do not repay while enrolled full-time in school, and you have a six-month grace period after graduation before payments begin.
  • Interest accrues (builds up) on most loans while you are in school, meaning you owe more when repayment starts than the amount you originally borrowed.
  • Federal loans offer forgiveness programs for certain professions and income-driven repayment plans that cap payments based on what you earn.
  • Private loans have no forgiveness programs and typically require you to begin repayment sooner, sometimes while you are still in school.

Federal loans versus private loans: the main differences

Federal student loans are funded by the U.S. Department of Education and carry protections that private loans do not. The interest rate on federal loans is the same for all borrowers and is set by Congress — it does not change based on your credit score or income. Federal loans also offer income-driven repayment plans, which adjust your monthly payment based on how much you earn. If you work in certain fields (teaching, nursing, public service) or for certain employers (nonprofits, government agencies), you may be able to have part or all of your federal loan forgiven after making payments for a set number of years.

Private student loans are issued by banks, credit unions, and online lenders. The interest rate depends on your credit score, income, and the lender's policies — borrowers with better credit typically receive lower rates. Private loans do not offer income-based repayment or forgiveness programs. Many private lenders require you to begin repayment while you are still in school or shortly after, rather than waiting until after graduation. If you struggle to pay, private lenders have fewer options to help you than federal loan servicers do.

Most students borrow federal loans first and turn to private loans only if federal loans do not cover their full education costs. Federal loans have borrowing limits (the amount you can borrow per year and in total), which is why some students need private loans to fill the gap.

How interest works on student loans

Interest is the cost of borrowing money. It is calculated as a percentage of the loan amount and added to what you owe. On federal loans, the interest rate is fixed, meaning it stays the same for the life of the loan. On private loans, the rate may be fixed or variable — a variable rate can go up or down over time based on market conditions.

On most federal loans, interest begins building (accruing) while you are in school, even though you are not making payments. This means that when you graduate and repayment begins, you owe more than you originally borrowed. For example, if you borrowed $10,000 and $2,000 in interest accrued while you were in school, your first payment will be toward a $12,000 balance. Some federal loans (like subsidized loans) do not accrue interest while you are in school — the government pays the interest for you during that time.

On private loans, interest accrues from the moment you borrow the money. Some private lenders let you defer payments while in school, but the interest still builds. Others require you to make interest-only payments while enrolled, meaning your payment covers only the interest that month and does not reduce the amount you owe.

Types of federal student loans

Subsidized loans are federal loans where the government pays the interest while you are in school and during your grace period. You only start paying interest once repayment begins. These loans are available only to undergraduate students and are based on financial need — you must complete the Free Application for Federal Student Aid (FAFSA) to be considered.

Unsubsidized loans are federal loans where you are responsible for all interest from the moment you borrow. Interest accrues while you are in school, during your grace period, and during repayment. Unsubsidized loans are available to both undergraduate and graduate students and are not based on financial need, though you still must complete the FAFSA to receive them.

PLUS loans are federal loans for graduate students and parents of undergraduate students. They have a higher interest rate than subsidized or unsubsidized loans and require a credit check. PLUS loans begin accruing interest immediately and typically require repayment to begin while the student is still in school, though you can request to defer payments until after graduation.

Perkins loans are federal loans with a lower interest rate, available only to students with significant financial need. These loans are made through the school itself rather than directly by the Department of Education. Not all schools offer Perkins loans, and the program has been phased out for new borrowers in recent years.

Repayment plans and what happens after graduation

Federal loans offer several repayment plans. The Standard Repayment Plan requires you to pay a fixed amount each month for ten years. The Income-Driven Repayment Plans adjust your monthly payment based on your income — if you earn less, you pay less each month. Income-driven plans can extend repayment to 20 or 25 years, and any remaining balance may be forgiven after that time, though you may owe taxes on the forgiven amount.

Private loans typically offer only one or two repayment options set by the lender. You cannot switch to an income-based plan if your circumstances change. If you lose your job or your income drops, you may be able to request forbearance (a temporary pause on payments) or deferment, but the lender is not required to grant it.

After you graduate or leave school, your loan servicer (the company that collects your payments) will contact you with information about your repayment plan options and your first payment due date. You can change your repayment plan at any time on federal loans, but you cannot change it on most private loans without refinancing with a different lender.

What happens if you cannot pay

If you miss a federal student loan payment, your loan enters delinquency. After 90 days of missed payments, the loan is reported to credit bureaus and damages your credit score. After 270 days (about nine months) of nonpayment, the loan goes into default, which is a serious status that can trigger wage garnishment (the lender takes money directly from your paycheck) and the loss of certain tax refunds.

Federal loans offer options if you cannot pay. Forbearance allows you to temporarily stop making payments or reduce your payment amount for up to three years. Deferment is similar but is available only in specific situations (returning to school, economic hardship, unemployment). During forbearance and deferment, interest may continue to accrue on unsubsidized loans. Income-driven repayment plans can also lower your payment to as little as $0 per month if your income is very low.

Private loans have fewer options. Most private lenders offer forbearance but not deferment, and they do not have income-based plans. If you default on a private loan, the lender can sue you, garnish your wages, and report the default to credit bureaus. Some private lenders work with borrowers in hardship, but there is no legal requirement for them to do so.

Loan forgiveness and discharge programs

Federal student loans can be forgiven in specific situations. Public Service Loan Forgiveness forgives remaining federal loan balances after you make 120 may have access to payments (ten years) while working 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. Other forgiveness programs exist for nurses, military members, and borrowers with permanent disabilities.

Federal loans can also be discharged (erased) if the school closes while you are enrolled or shortly after you leave, if the school defrauds you, or if you become permanently and totally disabled. Discharge is different from forgiveness — it means you no longer owe the debt at all.

Private loans have no forgiveness or discharge programs. The only way to reduce a private loan balance is to pay it off, refinance it with a different lender, or in rare cases, have it forgiven if the lender goes out of business.

Frequently Asked Questions

Do I have to take out student loans to pay for college?

No. You can also use grants (money you do not repay), scholarships, savings, work-study jobs, or pay out of pocket. Many students use a combination of these options. Loans are one tool, but not the only one.

What is the difference between a loan and a grant?

A grant is money given to you based on financial need or merit that you do not repay. A loan is money you borrow and must repay with interest. Grants are typically smaller and harder to get, so most students who need money use loans.

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

Yes, federal student loans have no prepayment penalty — you can pay extra toward your balance at any time without being charged a fee. Private loans vary by lender; some allow early repayment without penalty, while others charge a fee. Check your loan documents or contact your lender to confirm.

What happens to my student loans if I die?

Federal student loans are forgiven if you die — your family does not inherit the debt. Private loans are treated as part of your estate and may be paid from your assets before money goes to heirs. Some private loans have a death discharge clause, but you must check your specific loan agreement.

Can I refinance my student loans?

Yes, but refinancing works differently for federal and private loans. You can refinance federal loans into private loans through a bank or lender, but you lose federal protections like income-based repayment and forgiveness programs. You can refinance private loans with a different lender if you have improved your credit score or income. Refinancing does not erase your debt — it replaces one loan with another.