How Do Student Loans Work?

What Are Student Loans?

Student loans are a type of installment loan you can use to pay for approved education expenses, such as tuition, fees, books, supplies and room and board.

Both students and their parents can take out student loans, which are available from the federal government and private lenders. Each loan type comes with its own interest rates, fees and repayment rules, but they all share the same basic purpose of helping you cover the cost of school now and pay it back over time.

How Do Student Loans Work?

Student loans follow a general timeline, from application to repayment. Here's what to expect at each step.

1. Fill Out the FAFSA

The Free Application for Federal Student Aid (FAFSA) is the starting point for any student looking for financial aid. The form collects information about your finances and your family's finances and is used by schools to build your aid package.

2. Receive Financial Aid Offers

Once your FAFSA is processed, the schools you've been accepted to will send you a financial aid offer. This may include federal loans, grants, scholarships and work-study opportunities. As an incoming freshman or potential transfer student, comparing financial aid offers can help you pick the right school for you.

3. Choose and Accept Loans

Review each offer carefully and accept only what you need. If federal aid doesn't cover the full cost, you can also apply for private student loans to fill the gap.

4. Loan Funds Are Sent to the School

The lender sends loan money directly to your school, usually each term. The school applies the funds to your tuition and fees first, then refunds any leftover money to you for other education expenses.

5. Begin Repayment After School

Most federal student loans give you a six-month grace period after you graduate, leave school or drop below half-time enrollment. Private lenders also often offer a grace period, usually six or nine months. Parents who borrow on a student's behalf typically start making payments right away, though federal loans allow in-school deferment, and some private loans come with interest-only payment plans during school.

Federal vs. Private Student Loans

Federal student loans come from the U.S. Department of Education, while private student loans come from banks, credit unions and online lenders. Both can help you pay for school, but they work differently:

Learn more: What Are the Different Types of Student Loans?

What Are Federal Student Loans?

Federal student loans are loans issued by the U.S. Department of Education to help students and parents pay for college. There are three main types of federal student loans available to new borrowers:

• Direct subsidized loans: Available to undergraduate students who demonstrate financial need. The federal government pays the interest while you're in school at least half time and during deferment periods.
• Direct unsubsidized loans: Available to undergraduate, graduate and professional students, with no requirement to show financial need. Interest starts accruing as soon as the loan is disbursed.
• Direct PLUS loans: Available to parents of dependent undergraduate students. Borrowers must not have an adverse credit history.

Note:As of July 1, 2026, grad PLUS loans are no longer available to new graduate or professional student borrowers as a result of the One Big Beautiful Bill Act (OBBBA). Borrowers who already had grad PLUS loans before that date may continue borrowing for up to three academic years under legacy provisions.

What Are Private Student Loans?

Private student loans are loans issued by banks, credit unions and online lenders to help cover education costs that federal aid doesn't. Private lenders typically offer loans tailored to specific borrowers and programs, such as:

• Undergraduate loans
• Graduate loans
• Parent loans
• MBA loans
• Law school loans
• Medical and dental school loans
• Bar study loans
• Residency loans
• Career training loans

Each lender sets its own rates, fees and eligibility criteria, so it's crucial to shop around to find the best fit. The good news is that many private lenders allow you to check rates and eligibility with a soft credit check, which remains on your credit reports for up to two years but does not affect credit scores.

Learn more: What Is Prequalification?

Subsidized vs. Unsubsidized Student Loans

The biggest difference between subsidized and unsubsidized federal student loans is who pays the interest while you're in school.

• Subsidized loans: The federal government covers the interest while you're enrolled at least half time, during your grace period and during approved deferment periods. Only undergraduates with demonstrated financial need qualify.
• Unsubsidized loans: Interest starts accruing the moment the loan is disbursed and is your responsibility. Both undergraduate and graduate students can borrow, regardless of financial need.

If your school offers you both types, accept subsidized loans first. They cost less over time because of the in-school interest subsidy.

How Does Student Loan Interest Work?

Like any loan, student loans charge interest on the amount you borrow. How that interest is calculated and when it starts adding up depends on the loan type.

Federal Student Loan Interest

Interest rates on federal student loans are fixed for the life of the loan and set by Congress each year. For loans first disbursed after July 1, 2026, and before June 30, 2027, the rates are:

• Undergraduate loans: 6.52%
• Graduate direct loans: 8.07%
• Direct PLUS loans for students and parents: 9.07%

These rates are standardized, meaning everyone who qualifies gets the same terms. Interest accrues on most federal loans from the date of disbursement, except on subsidized loans during deferments and grace periods. Unpaid interest can be capitalized when repayment begins, meaning it's added to your principal balance.

Note: Federal loans also come with an origination fee that's deducted from each disbursement. For direct subsidized and unsubsidized loans first disbursed between October 1, 2020, and October 1, 2026, the fee is 1.057%. For direct PLUS loans during the same window, it's 4.228%.

Private Student Loan Interest

Private student loan interest rates are set by individual lenders and are based on your creditworthiness, the loan term and other factors.

Depending on the lender, you may be able to choose between fixed and variable interest rates. Fixed rates stay the same for the life of the loan, while variable rates can rise or fall with the market. Because of that, variable rates carry the risk of climbing over time.

Like federal loans, interest on private loans usually starts accruing from the date of disbursement and can be capitalized when you finish school (meaning the interest accrued during school gets added to the principal if it's not paid before the grace period ends). Making interest-only payments while you're enrolled can help reduce your total cost.

Learn more: Fixed APR vs. Variable APR: What's the Difference?

How to Apply for Student Loans

The application process is different for federal and private student loans. In most cases, it makes sense to apply for federal aid first and use private loans to fill any remaining gap.

How to Apply for Federal Student Loans

1. Create your Federal Student Aid (FSA) ID. Visit StudentAid.gov to set up an account. You'll use this ID to sign the FAFSA and other federal aid documents.
2. Fill out the FAFSA. Submit the FAFSA as early as possible. It opens on October 1 each year for the following school year.
3. Review your financial aid offer. Each school you list on the FAFSA will send a financial aid offer outlining your federal loan eligibility, plus any grants or work-study.
4. Accept your loans. Through your school's financial aid portal, accept the loans you want. You can borrow less than the maximum amount offered.
5. Complete entrance counseling and sign the master promissory note (MPN). First-time borrowers must complete entrance counseling and sign the MPN at StudentAid.gov before funds are released.

How to Apply for Private Student Loans

1. Compare lenders. Look at interest rates, fees, repayment terms and borrower benefits across several lenders. Many lenders let you check rates with a soft credit pull that won't affect your credit scores.
2. Gather your documents. You'll typically need a government-issued ID, proof of income, school enrollment details and information about your cosigner if you're using one.
3. Apply with your top choice. Submit a formal application with the lender you've chosen. This usually triggers a hard credit inquiry, which remains on your report for up to two years but only affects your score for one year.
4. Review and sign your loan agreement. If you're approved, carefully review the interest rate, repayment term and total cost before signing.
5. Wait for school certification. Your lender will work with your school to confirm your enrollment and cost of attendance before disbursing the funds.

Student Loan Repayment Options

For most federal student loans, you'll start repayment six months after you graduate, leave school or drop below half-time enrollment. Private lenders set their own repayment timelines.

If you have federal loans first disbursed before July 1, 2026, your repayment options include:

• Standard repayment plan: Fixed monthly payments over 10 years (or up to 30 years for consolidation loans).
• Graduated repayment plan: Payments start lower and increase every two years, with the loan paid off in 10 years (or up to 30 years for consolidation loans).
• Extended repayment plan: Available if you have more than $30,000 in direct loans. Payments are fixed or graduated and stretch up to 25 years.
• Income-driven repayment (IDR) plans: Income-based repayment (IBR) and other IDR plans cap your monthly payment as a percentage of your discretionary income, with any remaining balance potentially forgiven after a set repayment period.

Federal loans first disbursed on or after July 1, 2026, fall under a new structure created by the One Big Beautiful Bill Act. Borrowers can choose between two plans:

• Standard tiered repayment plan: Fixed monthly payments over 10 to 25 years, depending on your loan balance.
• Repayment Assistance Plan (RAP): A new income-driven plan that sets payments at roughly 1% to 10% of your adjusted gross income, with a $10 monthly minimum. Remaining balances can be forgiven after 30 years of qualifying payments.

Private student loan borrowers typically choose a repayment term when they apply. If your monthly payment becomes unaffordable, you may be able to refinance with another lender to lower your rate or extend your term.

What to Do if You Can't Pay Your Student Loans

Missing a student loan payment can lead to late fees right away. For federal loans, your servicer typically reports the delinquency to the credit bureaus after 90 days, and the loan enters default at 270 days, triggering collection costs, wage garnishment and tax refund offsets.

Private loans usually default after 90 to 120 days, and lenders may report missed payments to the credit bureaus as early as 30 days late. If you're struggling, contact your loan servicer right away to discuss your options:

• Switch repayment plans. If you have federal loans, an IDR plan may lower your monthly payment based on your income.
• Request deferment or forbearance. Both options pause your payments temporarily. Interest typically still accrues, except on subsidized loans in deferment.
• Look into loan forgiveness. Federal programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness can cancel some or all of your remaining balance if you meet the requirements.
• Ask about employer repayment assistance. Some employers offer student loan repayment as a benefit. Federal and state agencies also run repayment assistance programs for certain professions.

Be aware: Federal forbearance rules are tightening. For borrowers with new loans, forbearance will be capped at nine months in any 24-month period. Use it only as a last resort.

Do Student Loans Affect Your Credit Score?

Student loans appear on your credit report and can affect your credit score in several ways, including the following:

• Payment history: On-time payments help build positive credit history, the biggest factor in your FICO^® Score^Θ. Student loan payments 90 days or more past due—or 30 days for private loans—can cause significant damage.
• Credit mix: Adding an installment loan, like a student loan, to a credit profile that's mostly credit cards can improve your credit mix.
• Length of credit history: Student loans tend to stay open for several years, which can lengthen the average age of your accounts over time.
• Amounts owed: Carrying a large student loan balance won't hurt your score as much as high credit card balances, but paying it down still helps.

Alternatives to Student Loans

Before borrowing, exhaust funding options that don't have to be repaid. Common alternatives to student loans include:

• Scholarships: Scholarships are often awarded based on academics, athletics, talent or other criteria. You don't have to repay them, and many can be stacked with other aid.
• Grants: Grants come in the form of need-based aid from the federal government, states or schools, such as the Pell Grant. Like scholarships, grants don't need to be repaid.
• Work-study: The federal work-study program provides part-time jobs to undergraduate and graduate students with financial need.
• Employer tuition assistance: Some employers help pay for college courses or degrees, especially in fields related to your work.
• 529 plans and savings: Money saved in a 529 college savings plan grows tax-free when used for qualified education expenses.
• Income from a part-time job: Working during school can help cover books, food and other expenses without borrowing.

Frequently Asked Questions

The Bottom Line

Student loans can open the door to a college education, but they're a long-term financial commitment. Understanding how federal and private loans work, including interest, repayment and the impact on your credit, can help you borrow smarter and pay less over time.

Once payments start, your student loans become part of your credit profile. Sign up for Experian's free credit monitoring to track your FICO^® Scoreand watch your credit grow as you stay on top of your loans.