How Student Loans Work: Your Complete Guide

How To Get Federal Student Loans

The application process for federal student loans is pretty straightforward. It starts with filling out the Free Application for Federal Student Aid (FAFSA). The FAFSA helps financial aid offices at colleges and universities decide how much student aid to offer you each school year. This aid comes in two main forms:

• Scholarships, grants, and work-study programs, which you don’t have to pay back

• Student loans, which you do have to pay back, but usually not until you graduate

You’ll find out your aid options when you get an “award letter” from your school. It will detail what financial aid the school and the federal government (in the form of federal student loans) are offering you.

How To Get Private Student Loans

Because federal student loans tend to come with lower interest rates and more generous repayment options than private student loans, many people see what aid they can get from the federal government first. If you find that you weren’t offered enough in scholarships, grants, and loans to cover the cost of college, you may decide to apply for a private student loan. This process is similar to applying for a personal loan. You find a private lender, like a bank, online financial institution, or credit union, and apply from the lender of your choice.

✍️ Regardless of the type of loan you get — federal or private — you (the borrower) must sign a promissory note. This is a legal document outlining your agreement to repay the loan plus interest. The promissory note includes all the terms and conditions of the loan. This is where you can find things like your interest rate, repayment period, and other repayment terms.

Types of Federal Student Loans

Federal student loans are offered by the federal government, specifically the U.S. Department of Education. The borrower on these loans may be you (as the student) or your parents. Some loans are designed specifically for student loan borrowers and others for parents borrowing on behalf of their children.

There are three main types of federal student loans:

• Direct Subsidized Loans

• Direct Unsubsidized Loans

• Direct PLUS Loans

What Are Direct Subsidized Loans?

After scholarships and grants, a Direct Subsidized Loan is probably the first place you want to look for financial aid. Only undergraduate students can take out Direct Subsidized Loans, and eligibility for these loans is based on financial need. The loans are called “subsidized” loans because they’re supposed to have a lower interest rate than borrowers would normally be able to get from a private lender. To get a subsidized loan, you have to fill out the Free Application for Federal Student Aid (FAFSA).

A major benefit of Direct Subsidized Loans is that the interest on these loans doesn’t accrue while you’re in school at least half-time or during the six-month grace period after you leave school. This grace period is automatic, so it’s different from deferment or forbearance, which you must specifically request from your loan servicer.

What Are Direct Unsubsidized Loans?

The biggest difference between subsidized and unsubsidized federal loans is that interest on Direct Unsubsidized Loans accumulates while you’re attending college. This makes the total cost higher in the long run than unsubsidized loans.

Direct Unsubsidized Loans are available to students regardless of their financial need. While only undergraduates can get subsidized loans, graduate students and professional students, along with undergraduate students, are eligible for federal Direct Unsubsidized Loans.

What Are Direct PLUS Loans?

Direct PLUS Loans are available to graduate or professional students or to the parents of undergraduate students. Direct PLUS Loans have a higher interest rate than Direct Subsidized and Direct Unsubsidized loans.

Direct PLUS Loans had an interest rate of 7.54%, compared to 4.99% for Direct Loans for undergraduates (both subsidized and unsubsidized) and 6.54% for Direct Unsubsidized Loans for grad students and professional students.

Taking out a student loan is always a big decision, but it’s especially important for students and their families to be careful before choosing to take out a Direct PLUS Loan. Unlike with Direct Subsidized and Direct Unsubsidized loans, there is no loan limit for borrowers. Parents can borrow as much as they’re offered under the Direct PLUS Loan program. This means that it’s easy for parents to end up with more debt than they can repay. And the higher interest rates of these loans make them pricier than Direct Subsidized and Direct Unsubsidized loans.

Types of Private Student Loans

Private student loans are those offered by anyone other than the federal government. That can include banks, credit unions, colleges or universities, local or state governments, or other types of financial institutions (including online lenders).

While Direct Subsidized and Direct Unsubsidized loans are offered regardless of the student’s credit score, private lenders usually take a closer look at the borrower's credit history, credit score, and sometimes other factors like their GPA or college major.

What Are the Key Differences Between Federal and Private Loans?

Borrowers likely opt for federal student loans more often because they have a lot of advantages:

• Federal student loans usually have a lower interest rate than private student loans (but not always).

• Federal student loans usually come with more repayment options than private student loans. This includes the popular income-driven repayment plans (IDR plans), which limit your monthly payment by considering how much you make.

• Federal loans also have more protections available if you lose your job or don’t make much money after you graduate. For example, you can put your loan in deferment or forbearance, which we’ll talk about more later.

• Some federal student loans qualify for student loan forgiveness programs.

• The federal government has borrowing limits for some types of federal student loans. In other words, there’s a maximum amount that each student can borrow from the federal government, which helps people not borrow more than they can repay.

• Interest rates for federal student loans are set by the federal government. They aren’t based on your credit score, GPA, choice of profession, or other factors that private lenders may consider.

• Federal student loans can be discharged if the borrower dies. That means if you have federal student loans and you die before your loan has been repaid, nobody else will be responsible for repaying your loan. Federal Parent PLUS loans are also discharged if the parent borrower passes away.

  • By comparison, private student loans aren’t always dischargeable upon death. If a friend or family member co-signed your private student loan, they may be on the hook to repay the loan if you die. If you didn't use a co-signer, private student lenders may try to collect from your spouse or estate.

How Does Interest Work on Student Loans?

The most important thing to know about student loans is that they aren’t free. Student loans are a type of debt, meaning if you take out a student loan, you’re on the hook to repay that loan, with interest. Over the life of the loan, interest can really add up.

For many college students, student loans are the first type of loan debt they’ve had. So let’s define the basic terms you’ll need to know:

• Principal: This is the loan amount you originally borrowed — sometimes called the principal balance. For the average student loan borrower, this is around $40,000 in total.

• Interest rate: This can be fixed (unchanging) or varied (changeable). This is essentially the amount (expressed as a percentage) that the loan costs you.

  • Interest rates on federal student loans are usually fixed rates between 4% and 8%. Private student loans can have a variable interest rate or fixed interest rate.

• Loan repayment term: Your loan term is how long you have to pay off your loan. For federal student loans, this can range from 10–30 years. If you have a private loan, repayment terms vary and your loan term will be part of your loan agreement.

• Loan balance: Your loan balance at any given time is your principal loan amount plus accrued interest. You can find out your loan balance from your loan servicer (the financial institution managing your student loan repayment) or by looking at the National Student Loan Data System.

Can You Lower the Interest Rate on Your Student Loans?

Lowering your student loan interest rate can help reduce your monthly payment and the total amount you pay over time. Here are some common ways borrowers try to lower their interest rate:

• Enroll in autopay.

• Refinance your loans.

• Negotiate with your lender.

• Pay extra toward the principal.

Enroll in Autopay

Many loan servicers — both federal and private — offer a small interest rate discount if you set up automatic payments from your bank account. This discount is usually around 0.25%. It’s one of the easiest ways to save a little on interest each month.

Refinance

Some borrowers choose to refinance their student loans through a private lender to try to get a lower interest rate. Refinancing means taking out a new loan to pay off your old ones. 

You may qualify for a lower rate if you have a good credit score, stable income, or a co-signer with strong credit. Just be aware that if you refinance federal student loans with a private lender, you’ll lose access to federal programs like income-driven repayment plans and loan forgiveness options.

Negotiate With Your Private Lender

If you have private student loans, it might be worth calling your lender to ask about lowering your interest rate — especially if your credit has improved or you’re considering refinancing. Some lenders may offer a better rate to keep your business.

Pay Extra Toward the Principal

This doesn’t lower your interest rate, but it can reduce the total amount of interest you pay over the life of the loan. If you can afford it, putting even a little extra toward the principal each month can help pay your loan off faster and save money in the long run.

When Is Your First Student Loan Payment Due?

This varies based on whether you have a federal student loan or a private student loan.

You don’t have to make payments on your federal student loans so long as you’re in school at least half-time (this usually means six credit hours a semester, but can vary by school). That’s not always true with private student loans. Many private student loan companies require you to make payments while you’re still in school.

If you have federal student loans, you’ll also benefit from a six-month grace period. This means your first payment isn’t due until six months after you graduate, you leave school, or your enrollment falls below half-time. Remember, though, that federal Parent PLUS loans don’t have a grace period.

How To Pay Back Your Student Loan

If you have a federal student loan, that loan will be assigned to a student loan servicer. The federal government works with several different servicers, including Navient, MOHELA, and FedLoan Servicing. If you’re not sure who your servicer is, check your Federal Student Aid account online.

You’ll make your loan payments directly to your servicer. You can usually do this online, over the phone, or by mail.

If you sign up for automatic payments from your checking account, some servicers will offer you a discount.

If you have a private loan, you’ll have to check with your lender about how to make payments. You may make your payments directly to the lender, or the lender may assign your loans to a servicer. In both cases, payments are generally due monthly.

If you need help figuring out the best repayment strategy, consider working with Upsolve's partner Student Debt Solutions (SDS). SDS is a self-service platform that helps people understand their options and what their next steps should be.

Federal Student Loan Repayment Options

Federal student loans have several payment plan options. If you want to do a deep dive into understanding your options, check out our article: What’s the Best Student Loan Repayment Plan?

Standard Repayment Plan

Unless you choose otherwise, you’ll be enrolled in the standard repayment plan by default. This has a 10-year repayment term, which is much shorter than other types of federal repayment plans and can lead to a higher monthly payment than some borrowers can afford.

Income-Based Repayment Plans

Luckily, you can choose from several other plans that will lower your monthly payments. Some of these plans are based on a percentage of your income, which means if your income is very low, you may not have to make any payment at all during those months.

Here are the most common types of income-based repayment plans:

• Income-Based Repayment (IBR) Plan

• Income-Contingent Repayment (ICR) Plan

• Pay-As-You-Earn (PAYE) Plan

• Saving on a Valuable Education (SAVE) Plan

  • Formerly the Revised Pay As You Earn Repayment (REPAYE) Plan

Under these plans, your payment amount fluctuates based on how much money you’re earning. You’ll pay for 20–25 years on the plan. After that time, any outstanding balance will be forgiven.

⚠️ Important Update: Many of the income-driven plans listed here — including SAVE, PAYE, and ICR — will no longer be available for new borrowers after July 1, 2026, and will be completely phased out by July 1, 2028.

If you want to stay on one of these plans, you must select and enroll before then. A new income-based Repayment Assistance Plan (RAP) will replace most IDR plans, and all borrowers will be transitioned unless grandfathered in.

Student Loan Forgiveness Programs

If you work for the government — including federal, state, local, and tribal governments — or for certain nonprofit organizations, you may be eligible to have your debt forgiven after 10 years of making qualifying payments under a policy called Public Service Loan Forgiveness (PSLF). To receive PSLF, you generally need to make payments under an income-based repayment plan.

Private Student Loan Repayment Options

Private student loans don’t always come with payment plan options. This varies by lender. Some private lenders offer forbearance or hardship programs, but many do not. Contact your lender to ask about your options.

What if You Can’t Afford Your Student Loan Payment?

Before the student loan pause was instituted in March 2020, one-third of student loan borrowers showed signs of financial distress: 15% had defaulted on their student loans and another 15% had loans in deferment or forbearance. This is to say: If you can’t afford your monthly payments, you’re not alone.

It’s important to understand the consequences of not paying your student loans and to act as soon as you know you won’t be able to make a payment. Educate yourself about options if you can’t make your student loan payments. They include, but are not limited to:

• Pausing loan payments temporarily through deferment or forbearance

• Getting a consolidation loan to make your payments more manageable (especially if you have several different loans)

• Seeing if you qualify for any student loan forgiveness programs

If you’ve been out of school for a while and have been struggling for years to make your student loan payments, you may also want to consider filing bankruptcy to erase your student loan debt.

Understanding Student Loan Deferment and Forbearance

If you’re having trouble making your monthly federal student loan payments, deferment and forbearance are two options that can give you temporary relief. Both allow you to pause your payments for a limited time, usually up to 12 months at a time. But there’s an important difference between the two: how interest is handled.

• With deferment, interest on subsidized loans doesn’t accrue. That means the government covers the interest while your loan is paused, so your balance doesn’t grow during that time. This only applies to certain types of loans, like Direct Subsidized Loans.

• With forbearance, interest does continue to accrue on all types of loans — even subsidized ones. If you don’t pay the interest while your loans are in forbearance, it will be added to your principal balance when repayment starts again. This is called capitalized interest, and it can make your loan more expensive in the long run.

To request either deferment or forbearance, you usually need to apply through your loan servicer and provide documentation. Common reasons include financial hardship, unemployment, medical expenses, military service, or returning to school.

Student Loan FAQSs

There are a lot of aspects of student loans to consider before borrowing or when you start to repay your loans. Here are some of the most frequently asked questions about student loans

How Do Student Loans Affect Your Credit Score?

Student loans are a type of credit and can become an important part of your credit history. How you handle your student loan payments can shape your credit score for years. That can be a good thing or a bad thing, depending on how you manage your loans.

📈 Making your student loan payments on time every month can help you build a strong credit history. This is especially helpful if you’re new to credit and don’t have credit cards or other loans yet. On-time payments show future lenders that you’re responsible and can be trusted to repay debt.

But if you fall behind or miss payments, that can damage your credit score. Late payments, defaulted loans, and even certain types of deferment or forbearance can show up on your credit report. This can make it harder to qualify for things like car loans, mortgages, or credit cards. It may also mean you’ll have to pay higher interest rates when you do get approved.

The total amount you owe (your loan balance) also matters. A high loan balance doesn’t directly lower your credit score, but lenders do look at your debt-to-income ratio — which compares how much you owe to how much you earn. A high student loan balance can raise a red flag if your income is low or unstable.

Do You Need Good Credit To Get Student Loans?

It depends on the type of student loan you’re applying for.

For federal student loans (like Direct Subsidized and Unsubsidized loans), you do not need good credit or any credit history at all. These loans are based on your financial need and the information you include on your FAFSA. Most students qualify, even if they’ve never borrowed before or don’t have a credit score.

The exception is Direct PLUS Loans (for parents and graduate students). These do require a basic credit check, but you don’t need a high credit score to qualify. The government is mainly checking for major negative marks on your credit report, like recent defaults or bankruptcies.

For private student loans, your credit does matter. Private lenders — like banks, credit unions, and online companies — usually check your credit score and credit history before approving your application. 

If you don’t have good credit or a long credit history, you may need a co-signer to qualify. A co-signer is someone (like a parent or relative) who agrees to take responsibility for the loan if you can’t pay it back.

What Can (and Can’t) You Use Student Loan Money For?

✅ You can use student loan funds to pay for education-related expenses, including:

• Tuition and school fees

• Rent (on or off campus)

• Utilities and groceries

• Textbooks and supplies

• Transportation (like gas or public transit)

• Healthcare and medications

• Childcare (if needed while you attend school)

❌ You can’t use student loans for non-education expenses like travel, business costs, credit card debt, luxury electronics, or dining out frequently. Stick to expenses that support your ability to stay in school and succeed.

Can You Use Student Loans To Pay for Rent?

🏠 Yes, you can usually use student loan money to pay for rent, whether you live on campus or off campus. After your school uses loan funds to cover tuition and fees, the leftover money is sent to you. You can use those funds to cover living expenses, including rent, groceries, utilities, and transportation.

Just remember: Student loans are meant for education-related costs. That includes basic living expenses while you're in school — not things like vacations or luxury purchases.

Can You Defer Your Student Loans if You Go to Grad School?

Yes, in most cases, you can defer your federal undergraduate student loans if you go back to school for a graduate degree and are enrolled at least half-time. 

💡 This is called in-school deferment, and it often happens automatically because schools report your enrollment status. If it doesn’t happen on its own, you can request it through your loan servicer.

During deferment, you won’t have to make monthly payments. But keep in mind that interest may still accrue, especially if your loans are unsubsidized. If you can afford to, paying the interest while you're in school can help you avoid a bigger balance later. 

Private loans don’t always offer in-school deferment, so it’s a good idea to contact your private lender directly to ask about your options.

What’s the Difference Between Refinancing and Consolidation?

If you're looking to lower your interest rate or make your student loans easier to manage, you may be thinking about refinancing or consolidating your loans. These terms get used a lot, but they mean very different things.

In short: Refinancing is about getting a better deal, but you may lose important federal protections. Consolidation is about making repayment easier and keeping access to federal programs, though it may cost more in the long run.

Refinancing Student Loans

Refinancing involves taking out a new loan with a private lender to pay off one or more of your existing loans. This new loan may come with a lower interest rate, a new repayment term, or both. 

You can refinance federal loans, private loans, or a mix of both, but refinancing any federal loans means those loans become private. That’s a big deal because you’ll lose access to federal benefits like income-driven repayment plans, loan forgiveness programs, and options for deferment or forbearance.

Refinancing is usually best for borrowers with a strong credit score, steady income, and low debt-to-income ratio. These factors help you qualify for better interest rates and terms. If your current loans have high interest rates and you’re not using any federal loan benefits, refinancing could help you save money over time.

Consolidating Student Loans

Consolidation is a federal program that lets you combine multiple federal student loans into one new loan called a Direct Consolidation Loan. 

🎯 The goal here isn't to get a lower interest rate, but to simplify repayment. You’ll have one monthly payment, one loan servicer, and access to income-driven repayment plans and federal forgiveness programs (as long as you qualify).

Consolidation doesn’t require a credit check and keeps most federal protections in place. But it can extend your loan term, which lowers your monthly payment but may increase how much you pay in interest over time. 

Also, if you’re already working toward Public Service Loan Forgiveness, consolidating could reset your progress, so timing matters.