The main sources are the federal government, your school, and private lenders — each with different terms and rules

Student loans come from three places: the U.S. Department of Education (federal loans), your college or university, and private banks or loan companies. Federal loans are the most common starting point because they offer fixed interest rates, income-based repayment options, and forgiveness programs that private loans do not. Your school may also offer its own loans, usually at better rates than private options. Private lenders are typically a last resort when federal and school loans do not cover your costs.

Where you borrow matters because the terms, interest rates, and what happens if you struggle to pay back are very different. A federal loan and a private loan for the same amount can cost thousands of dollars differently over ten years. Understanding which source is right for your situation means knowing what each one actually offers and what it will cost you.

Key Takeaways

  • Federal loans are issued by the U.S. Department of Education and include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans, each with different borrowing limits and interest rates.
  • To borrow federal loans, you must complete the Free Application for Federal Student Aid (FAFSA), which determines how much you can borrow and what other aid you may receive.
  • Your school's financial aid office may offer institutional loans with rates lower than private lenders, so check what your college offers before turning to private borrowing.
  • Private lenders require a credit check and typically charge higher interest rates than federal loans, and they do not offer income-based repayment or forgiveness programs.
  • The order that makes financial sense is usually federal first, then school loans, then private loans only if you still need more money.

Federal loans through the Department of Education

Federal student loans are issued directly by the U.S. Department of Education or through your school acting as a servicer. There are three main types: 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 higher borrowing limits and a credit check). Undergraduate students can borrow up to $5,500 to $7,500 per year in subsidized and unsubsidized loans combined, depending on their year in school. Graduate students and parents can borrow more through PLUS loans.

To get a federal loan, you start by filling out the Free Application for Federal Student Aid (FAFSA) on fafsa.gov. This form determines your Expected Family Contribution and tells your school how much federal aid you can receive. After you submit the FAFSA, your school's financial aid office will send you an aid package showing how much you can borrow in federal loans, plus any grants or other aid. You then accept the loans you want through your school's financial aid portal, and the money goes directly to your school to cover tuition and fees.

Federal loans have fixed interest rates set by Congress, which means the rate does not change over the life of the loan. As of 2024, rates vary by loan type but are typically between 5% and 8%. After you graduate or drop below half-time enrollment, you enter a grace period (usually six months) before you must start repaying. The federal government also offers income-driven repayment plans that cap your monthly payment at a percentage of your income, and some loans may be forgiven after 20 to 25 years of payments under these plans.

School-based loans from your college or university

Many colleges and universities offer their own loans to students, sometimes called institutional loans or school loans. These are separate from federal loans and are funded by the school itself or through a private lender the school has partnered with. Interest rates on school loans are often lower than private lenders charge, and some schools offer better terms to students with financial need. Your school's financial aid office can tell you whether institutional loans are available and what the terms are.

School loans typically appear on your aid package alongside federal loans. You do not need to apply separately; your financial aid office will include them as an option when you accept your aid. The repayment terms vary by school — some may offer a grace period after graduation, while others require payments to begin sooner. Because these loans are not federal, they do not come with income-based repayment options or forgiveness programs, but the interest rates are often competitive enough to make them worth considering before private loans.

Private student loans from banks and loan companies

Private student loans are issued by banks, credit unions, and online lenders. They are not backed by the federal government and do not have the protections or flexible repayment options that federal loans offer. Private lenders set their own interest rates based on your credit score and income, which means rates can vary widely — from around 4% to over 12% depending on the lender and your creditworthiness. Most private loans require a credit check, and if your credit is limited or poor, you may need a cosigner (usually a parent) to be approved.

To borrow from a private lender, you apply directly with the bank or lender, not through your school. You will need to provide proof of income, your Social Security number, and authorization for a credit check. The lender will tell you how much you can borrow and at what rate. Private loans typically do not have a grace period — you may be required to start making payments while still in school, though some lenders allow you to defer payments until after graduation. Private loans also do not offer income-based repayment or forgiveness programs, so your payment amount stays the same regardless of what you earn after graduation.

Private loans should be your last option because they are more expensive over time and offer fewer safety nets if you face financial hardship. However, if you have exhausted federal and school loans and still need money to cover your education costs, a private loan from a credit union (which often has lower rates than banks) may be worth exploring.

How to choose between sources

Start with federal loans because they offer the best combination of low fixed rates, flexible repayment, and forgiveness options. Complete the FAFSA first — it is free and determines what federal aid you can receive. Once you know your federal loan amount, check with your school's financial aid office about institutional loans. If federal and school loans together do not cover your costs, then look at private lenders.

When comparing private lenders, get quotes from at least three sources — banks, credit unions, and online lenders. Compare the interest rate, whether the rate is fixed or variable, the repayment term, and whether there are fees for origination or prepayment. A lower interest rate saves you thousands of dollars over the life of the loan. If you need a cosigner, ask whether the lender will release the cosigner from the loan after you have made a certain number of on-time payments, which can improve your credit independently.

Keep in mind that borrowing more than you need now means paying more in interest later. Only borrow what you actually need to cover tuition, fees, room and board, and books. Scholarships and grants do not need to be repaid, so maximize those before taking out loans.

What happens after you borrow

Once your loan money reaches your school, the school applies it to your tuition and fees first. Any leftover money is usually sent to you as a refund, which you can use for room, board, books, and living expenses. Keep track of how much you have borrowed in total — many students are surprised by their total debt after graduation because they borrowed a little each semester without adding it up.

Before you graduate, your school will require you to complete entrance counseling, which explains your repayment obligations and the terms of your loans. For federal loans, this is done online through the National Student Loan Data System (NSLDS). This is also when you should choose your repayment plan if you have federal loans. After graduation or when you drop below half-time enrollment, your loan servicer will contact you about when payments begin.

Frequently Asked Questions

Do I have to borrow the full amount my school says I can?

No. You can borrow less than the maximum amount your school offers. Borrow only what you need to cover your actual education costs. The less you borrow, the less you owe after graduation.

Can I get a federal student loan without filling out the FAFSA?

No. The FAFSA is required to receive any federal student aid, including federal loans. You must complete it each year you want to borrow. The form is free and available at fafsa.gov.

What is the difference between subsidized and unsubsidized federal loans?

With subsidized loans, the government pays the interest while you are in school and during your grace period. With unsubsidized loans, interest starts accruing immediately and is added to what you owe. Subsidized loans are better if you can get them, but they have lower borrowing limits.

Can I switch from a private loan to a federal loan later?

No. Private loans cannot be converted to federal loans. However, you can refinance a private loan with a different private lender if you find better terms. Be aware that refinancing federal loans into private loans removes your federal protections, so that direction is usually not recommended.

What if I cannot afford my private loan payments after graduation?

Private loans do not offer income-based repayment or forgiveness programs like federal loans do. Your options are limited to contacting your lender about deferment or forbearance (temporarily pausing payments), or refinancing with another lender. This is one reason federal loans are preferable — they have more flexibility if your income drops.