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Student Loans

How Do Student Loans Work?

Student loans are loans that provide funds for school. 

The U.S. government administers federal student loans, but you can also obtain private loans through banks, credit unions, private lenders, and state agencies. 

You might need to take out student loans if you’ve exhausted other free sources of funding, such as scholarships, grants, and your personal savings. It’s important to first understand how student loans work, what’s needed to qualify, and your options when borrowing for school. 

In this guide:

When are student loans needed?

You may need to borrow student loans when your other financial resources are insufficient to cover your education costs. 

You may use student loans to pay for public or private two- and four-year colleges or universities, technical schools, vocational schools, graduate and postgraduate programs, or study abroad. 

Example scenarios of when student loans might be necessary include the following:

  • You get grant and scholarship funding that covers your tuition and fees but not room and board or books.
  • Your parents set aside money in a college savings account for you, but it’s not enough to cover your anticipated financial need. 
  • You’re planning a permanent move to a new state for college, but you must pay the higher out-of-state tuition rate during your first year of enrollment. 
  • You decide to go back to school to earn a professional degree, and your employer offers student loan reimbursement instead of tuition assistance. 
  • You want to spend a couple of semesters studying abroad, and the program in which you plan to enroll comes with a higher cost of attendance. 

You’ll have to pay back what you borrow with interest. But these examples illustrate how student loans can be useful in many situations. 

Am I eligible for a student loan?

Eligibility for student loans can depend on the type of loan you apply for. The Department of Education has specific student loan policies, while private lenders can establish their own guidelines. 

We’ll take a closer look at the differences between federal and private loans below. 

The following factors can affect your eligibility for student loans:

  • Your citizenship status
  • Where you’re enrolling in school 
  • Your enrollment status (i.e., part-time, half-time, or full-time)
  • Academic progress
  • Financial need

You may need to show proof of enrollment in an eligible degree or certificate program to qualify for loans. If you’re applying for need-based federal aid, you’ll also need to provide information about your income and assets, or your family’s income and assets if you’re a dependent student. You’d enter that information on the Free Application for Federal Student Aid (FAFSA).  

Credit scores can also factor in if you’re applying for graduate PLUS loans or private loans from lenders that require a credit check. 

A higher credit score could work in your favor for approval and getting favorable rates with private loans. If you have a limited credit history, you may need an endorser for PLUS loans or a cosigner for private loans. 

Who offers student loans? 

As we mentioned, the two types of student loans are federal and private. 

>>Read more: Who owns my student loans?

What’s the difference between federal and private loans? 

Federal and private student loans differ with regard to interest rates, eligibility requirements, how much you can borrow, and special protections or benefits. 

Comparing the features of each one can make it easier to decide which to use if you need student loans to pay for school. 

Federal student loans…Private student loans…
Have low, fixed interest rates which Congress sets each year. 

Are based on financial need, and credit history is only considered for PLUS loans.
Cap the amount you can borrow each year. 

Include built-in protections, such as forbearance and deferment options, and grace periods. 

Offer income-driven repayment plans.

May allow borrowers to qualify for loan forgiveness. 
Can have fixed or variable interest rates which individual lenders set. 

Often use credit history as a determining factor in who is approved for funding, with financial need as a secondary consideration. 

May allow you to borrow more than federal loans. 

Are not required to offer forbearance or deferment plans, or grace periods for borrowers.

Do not offer income-driven repayment. 

Are not eligible for federal loan forgiveness programs. 

You can learn more in our guide to the differences between federal and private student loans.

The Department of Education offers several types of federal student loans. Most private student loans fall under the same umbrella, though lenders may establish their own specifications for loan limits, interest rates, and repayment terms. 

Here’s a comparison of the different types of loans you could use to pay for school. 

Stafford (or Direct) Loan
Who issues?U.S. Department of Education (DoE)
Best for:All borrowers
Additional notes:Includes Direct Subsidized and Direct Unsubsidized
Annual and aggregate loan limits apply
FAFSA is required
Direct Subsidized Loan
Who issues?DoE
Best for:Borrowers with financial need
Additional notes:Annual and aggregate loan limits apply
Federal government pays interest during grace or deferment periods
FAFSA is required
Direct Unsubsidized Loan
Who issues?DoE
Best for:Undergraduate and graduate students who have maxed out subsidized loan limits
Additional notes:Annual and aggregate loan limits apply
Schools determine how much you can borrow based on other financial aid and cost of attendance
You are responsible for paying interest during all loan periods
FAFSA is required
Parent PLUS Loan
Who issues?DoE
Best for:Parents of eligible students 
Additional notes:Borrowers must not have adverse credit history
Students must complete the FAFSA before parents can apply for loans
PLUS Loans cannot be enrolled in income-driven repayment plans unless first consolidated into a Direct Loan
Grad PLUS Loan
Who issues?DoE
Best for:Graduate students who are enrolled at least half-time at an eligible school
Additional notes:Borrowers must not have an adverse credit history and must meet the basic eligibility requirements for federal student aid
State loans
Who issues?U.S. state agencies
Best for:Students seeking low-rate loan options
Additional notes:A credit check or cosigner may be required
Students may need to complete the FAFSA to apply
Private loans
Who issues?Banks, credit unions
Best for:Students who have exhausted federal student loan limits
Borrowers with special situations, such as DACA recipients or international students
Additional notes:Credit checks are often standard when applying, which could decrease your credit score by a few points.
A cosigner may be necessary for approval
Loan limits, repayment terms, and interest rates can vary by lender
See our resource on private student loan eligibility

Do I have to take out multiple loans, or does one loan cover all college costs?

Whether you’ll need to take out multiple student loans or just one to pay for school can depend on your cost of attendance and other financial resources. It’s not uncommon for borrowers to take out multiple loans. 

For example, you might have more than one student loan if you:

  • Max out your Direct Subsidized Loan limits and need Unsubsidized Loans to make up the difference. 
  • Have borrowed up to the annual limit for federal loans and require private or state loans to cover the gap. 
  • Take out a mix of federal and private loans to pay for undergraduate and graduate school. 

It’s wise to apply for federal student loans first as they can have lower interest rates than private student loans. You also get access to benefits and protections that don’t accompany private loans, such as deferment and forbearance periods, and the option to enroll in income-driven repayment. 

Estimating your costs of attending school can give you an idea of how much money you’ll need. You can then fill out the FAFSA to determine your Expected Family Contribution (EFC). That number is used to calculate how much federal aid you qualify for. 

If your financial aid award is less than you need, you could ask the school if additional aid is available. You may need to file a financial aid award appeal letter to make the request in writing. If no further federal aid is available, you can consider whether you want to apply for private student loans. 

Check out our guide to how to get a student loan.

Who is involved with the lending process? 

The student loan lending process can encompass a number of parties. In addition to the person borrowing money for school, the list includes:

  • The Department of Education (if you’re applying for federal loans).
  • Private lenders (if you’re taking out private loans).
  • Credit bureaus (if a credit check is required for loans).
  • The school that receives loan proceeds.
  • Cosigners (if required for PLUS or private loans), which may include a parent, guardian, or another responsible adult.
  • State loan agencies (if you’re getting state loans).

You may interact with several entities as you apply for loans. Once you begin repaying federal loans, you’ll add a loan servicer to the list. 

Your loan servicer is the company to which you make your federal student loan payments. It can also answer any questions you have about your loans

How to apply for a student loan

If you hope to qualify for federal student aid, completing the FAFSA is the most basic student loan requirement

You can submit it online through the Department of Education website. The process can take a couple of hours. It’s helpful to get all of the necessary documentation, which we’ll detail below, organized before you begin. 

To get student loans from private lenders, you must apply with the lender. This often requires submitting your application online and uploading supporting documentation.

Lenders may allow you to get preapproved without hurting your credit (aka a soft credit check), allowing you to compare rates and loan quotes from several companies. 

What do you need to apply for a student loan?

What you need to apply for a student loan depends on the type of loan you’re seeking. You can expect to share information about your income, debt, and plans for attending school. 

The documents you may need include bank statements, pay stubs, or tax forms. 

A credit check may be required for PLUS loans or private loans. In either case, the lender is responsible for completing the credit check (aka a hard credit check). You only have to agree to the credit check; you don’t have to furnish any credit information.

Federal student loans

To complete the FAFSA, you’ll need to create a Federal Student Aid (FSA) ID. You can do that through the FSA website. 

Documents you might need to complete the FAFSA include:

  • Tax returns for yourself and your parents
  • Bank statements for yourself and your parents
  • Investment account statements, including statements from 529 college savings plans or Coverdell Education Savings Accounts (ESAs)
  • Proof of income

You’ll also need to provide your Social Security number. 

Submitting the FAFSA with incorrect or missing information could delay your financial aid approval or cause you to lose funding altogether. It’s important to read through the application as you complete each section so you don’t omit key details. 

When applying for federal loans, keep the following in mind:

  • After completing the FAFSA, you will receive a financial aid package from each school where you apply and are accepted. This will detail the loans you’re eligible for.
  • If you accept the financial aid package, you’ll sign a promissory note for federal student aid.
  • You’ll complete entrance counseling if you’re a first-time borrower. 
  • Loan funds are released to your school rather than you. 

Parents can also apply for PLUS loans on behalf of eligible students through the Department of Education. In that instance, the parent is the borrower and is responsible for repaying the loan. Students must complete the FAFSA before parents can apply for PLUS loans. 

Private student loans

To apply for private student loans, you must complete the application process with the lender of your choosing. The specific process can vary from one lender to the next. Most require proof of income and good credit to qualify.

You’ll need to fill out the lender’s application. The lender may ask for your permission to perform a credit check if one is required. If you’re applying with a cosigner, they’ll also be subject to a credit check. 

Once you submit the application, the lender will review it and approve or deny you for loans. 

If you’re approved, you’ll have a chance to review the loan terms before signing off. If you decide not to continue with the loan, you must notify the lender you no longer wish to borrow. 

How often do I need to apply for student loans?

Most borrowers must apply for student loans at the beginning of each academic year. 

If you completed the FAFSA, you’ll resubmit it annually to determine your ongoing eligibility for federal student aid. Most private lenders expect you to reapply for each year you need loan funding. 

It’s a good idea to submit your FAFSA early as that may allow you to qualify for a larger amount of grant or scholarship funding. 

Certain federal aid programs, such as work-study, are offered on a first-come, first-served basis, so being early could work in your favor if you hope to earn money from the program. 

What happens if you’re denied a student loan? 

There are a number of reasons you might be denied a student loan. With federal loans, you may be denied if you can’t meet the basic requirements for student aid. For example, you may not be able to get federal loans if you can’t demonstrate financial need or don’t meet citizenship requirements. 

Your Student Aid Report (SAR), which is issued after you submit the FAFSA, should offer insight into why you were denied and possible solutions. If you were denied because you already have federal loans in default, for instance, you may get approved for additional aid by completing loan rehabilitation. 

Private lenders may deny you if you don’t have a strong enough credit score or sufficient income to qualify. In that instance, you may be able to qualify if you reapply with a cosigner. 

>>Read more: How to file a student loan complaint

How does a cosigner affect a student loan?

A cosigner could make it easier to get approved for private student loans if they have a strong credit history. Having a cosigner may also allow you to qualify for lower rates, which could save you money on interest over the life of the loan. 

The actual loan term may not depend on the cosigner as the lender might allow you to choose how long it takes you to pay the money back. Keep in mind, however, a longer repayment term could mean paying more in interest even if you can use a cosigner to get a lower rate. 

Also remember the cosigner is equally responsible for the loans. If you default on payments, both of your credit scores may drop. The lender could also sue both of you to recoup the amount owed. 

How do I receive the funds from a student loan? 

Federal student loans are paid to the school. Your school will deduct enough to cover your tuition, room, and board, and release the remainder (if any) to you. You can use this remaining balance to pay for other school-related expenses, such as purchasing textbooks or living costs.

Schools often disburse federal loan payments each term. If you’re unsure when your funds will be disbursed, ask your school’s financial aid office for more information. If you’re a first-year undergraduate or first-time borrower, you may have to wait 30 days after the first day of your enrollment period before the school will release your funds. 

Private lenders may disburse funds to the school or to you. If you receive them, you must pay for tuition, fees, or other costs. Failing to pay on time could result in the school dropping you from your classes. 

What can I use student loans for?

Student loans are meant to pay for necessary costs to obtain a college education. 

You can use your student loans to pay for the following:

  • Tuition and fees
  • Room and board
  • Books, supplies, and other equipment
  • Study abroad
  • Transportation to and from school
  • Child care expenses so you can attend school
  • Miscellaneous fees or out-of-pocket costs you pay for school
  • Costs related to a disability, such as specialized equipment or transportation fees

Student loans shouldn’t be used for anything nonessential. This includes traveling with friends, dinner out, new clothes, or a big-screen TV. 

The Office of Federal Aid mandates students use federal loans only for approved expenses, while private lenders may have their own list of what you can and can’t spend the money on.

Are there limits to how much you can borrow or how many student loans you can take out? 

The federal government sets annual and aggregate limits on the amount of Subsidized and Unsubsidized Direct Loans you are eligible for.

The amount you can borrow will depend on whether you’re a dependent or independent student. Here are the current student loan limits, as of December 27, 2022.

YearDependent students (except students whose parents are unable to obtain PLUS Loans)
First year undergraduate annual limit$5,500
No more than $3,500 of this amount may be in Subsidized loans.
Second year undergraduate annual limit$6,500
No more than $4,500 of this amount may be in Subsidized loans.
Third year and beyond annual limit$7,500 per year
No more than $5,500 of this amount may be in Subsidized loans.
Graduate or professional student annual limitNot applicable. (All graduate and professional degree students are considered independent.)
Subsidized and Unsubsidized aggregate loan limit$31,000
No more than $23,000 of this amount may be in Subsidized loans.
YearIndependent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)
First year undergraduate annual limit$9,500
No more than $3,500 of this amount may be in Subsidized loans.
Second year undergraduate annual limit$10,500
No more than $4,500 of this amount may be in Subsidized loans.
Third year and beyond annual limit$12,500
No more than $5,500 of this amount may be in Subsidized loans.
Graduate or professional student annual limit$20,500 (Unsubsidized only)
Subsidized and Unsubsidized aggregate loan limit$57,500 for undergraduates
No more than $23,000 of this amount may be in Subsidized loans.
$138,500 for graduate or professional students
No more than $65,500 of this amount may be in Subsidized loans.
The graduate aggregate limit includes all federal loans received for undergraduate study.

Most private lenders will allow you to borrow above these limits. 

Both federal and private loans, however, are generally capped at the school-certified cost of attendance. This includes tuition costs, textbooks, and living expenses.

When do you have to start repaying student loans? 

Many federal student loans do not require repayment while you’re enrolled in school at least half-time. 

Most federal loans have a six-month grace period after graduation in which no payment is due. 

Private loans may also allow you to defer loan repayment until you graduate, though some lenders may expect you to make payments while in school.

How student loans work while in college

While you’re in college, you may not need to pay anything toward your loans. That’s an advantage if you have limited income or savings to spare while you’re working toward your degree. 

It’s important to understand whether your loans accrue interest while you’re in school. Accrued interest can increase the amount you have to repay later. 

Although you’re not often required to make payments while in school, paying interest on your unsubsidized federal loans and private loans could help keep your balance from growing.

Federal student loans have specific rules regarding when payment begins. Private lenders are not obligated to follow those guidelines, though they may take a similar approach to repaying loans while in school. Knowing which type of loan you have matters for understanding when payment is due.

Federal student loans

Federal student loans do not often require you to pay anything toward the principal or interest while you’re in school at least half-time. Instead, your loans are subject to in-school deferment. Once you graduate, drop below half-time enrollment, or leave school, you’ll start paying on your loans after the grace period ends. 

Interest continues growing on Unsubsidized Loans while you’re in school. This interest could compound onto your principal balance, so you’ll pay interest on interest. You could, however, combat the interest growth by making interest-only payments toward your loans throughout your enrollment. 

Interest doesn’t accrue on Subsidized Loans while you’re receiving an in-school deferment. This means no extra interest is added to your balance. Student loan exit counseling is required for federal student loan borrowers to help you prepare to begin repaying your loans. 

Private student loans

Private student lenders may offer several repayment options while you’re in school. 

They may include:

  • Deferring payments until after graduation
  • Making a flat monthly payment
  • Making interest-only payments

Deferring payments until you graduate can ease your financial burden if you’re working part-time or not working at all while in school. Making interest-only payments can help you chip away at what you owe and reduce your monthly payments once you graduate. 

For example, if you chose a 15-year repayment term, you might make 57 interest-only payments while you’re in school and during the grace period. When you graduate, you’d make 180 slightly higher payments to pay down the rest of the balance. If you defer repayment, you could pay much more in interest over the life of the loan.

If you can make your full regular payment while in school, you may pay off private student loans at a faster pace. However, that’s unrealistic for many students who are attending school full-time and have a limited income. 

How does student loan repayment work? 

Entering student loan repayment for federal or private loans requires planning. It’s important to understand:

  • When payments begin
  • What type of repayment plan you’re enrolled in
  • How much you’ll pay
  • Where to send payments
  • What happens if you can’t pay

The type of loan you have can determine what repayment options are available. All the details of repayment should be in your loan agreement or promissory note. 

You should be able to contact your loan servicer to ask for clarification if there’s anything about repayment that you don’t understand. 

Student loan servicers

If you have federal loans, you will be assigned a student loan servicer that works with the Department of Education. Your loan servicer is where you’ll send your monthly payments, as well as where you’ll enroll in a repayment plan and direct any questions you have about student loan repayment.

Federal student loan servicers include:

  • FedLoan Servicing (PHEAA)
  • Great Lakes Educational Loan Services Inc.
  • Edfinancial
  • Aidvantage
  • Nelnet
  • OSLA Servicing
  • ECSI
  • Default Resolution Group

If you’re unsure who your loan servicer is, you should be able to find that information in your Department of Education account dashboard

Grace periods

A grace period means a period in which no payment is due on your loans after you graduate or leave school. Most federal student loans have a six-month grace period, with a nine-month grace period allowed for Perkins Loans. 

If you’re a graduate student with PLUS Loans, you’ll have a 60-day interim after graduation in which no payment is due. That’s because the Department of Education assumes you’re already on a career path and have sufficient income to make payments on your loans. There is no grace period for Parent PLUS Loans.

Many private lenders offer a grace period as well, although the length can vary by lender. If your loans have no grace period, you must begin making payments right away. One potential workaround is to refinance your loans to a new lender that offers grace periods, which can give you more time to plan your repayment budget. 

Is repayment the same for all student loans? 

Repayment is not the same for all student loans. Federal loans have different repayment options than private student loans. Neither federal loans nor private loans have just one repayment option. 

That allows for flexibility in choosing a repayment schedule that works for your budget. If you do not choose a repayment plan, your loan servicer or lender may choose one for you. 

Choosing a repayment plan that aligns with your financial situation matters so you don’t run the risk of falling behind on payments. Missed or late payments to student loans can result in a number of financial consequences, including:

  • Credit score damage
  • Inability to take out new federal loans if you’re in default on existing loans
  • Federal student loan collection actions, including tax refund offsets and property liens
  • Civil collection actions for private loans, including wage garnishments or bank account levies

For those reasons, it’s important to be aware of when your loans are due and how much you’ll need to pay to remain in good standing. 

Federal repayment plans

The federal government offers several ways to repay student loans. You’re enrolled in the Standard repayment unless you choose another option. 

Here’s how federal student loan repayment plans compare. 

Standard repayment
Repayment term10 years
Who qualifies?All borrowers
Eligible loansDirect Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
Parent and Grad PLUS loans
Consolidation Loans (Direct or FFEL)
Qualifies for Public Service Loan Foriveness (PSLF)?No
Graduated repayment
Repayment termPayments are lower at first and then increase every 2 years.
Payment amount ensures your loans are paid off within 10 years (up to 30 years for Consolidation Loans).
Who qualifies?All borrowers
Eligible loansDirect Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
Parent and Grad PLUS loans
Consolidation Loans (Direct or FFEL)
Qualifies for PSLF?No
Extended repayment
Repayment termPayments may be fixed or graduated, and will ensure that your loans are paid off within 25 years.
Who qualifies?If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans.
Eligible loansDirect Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
Parent and Grad PLUS loans
Consolidation Loans (Direct or FFEL)
Qualifies for PSLF?No
Revised Pay As You Earn (REPAYE)
Repayment termMonthly payments are 10% of discretionary income. 
Outstanding balance is forgiven if you haven’t repaid your loan in full after 20 years (if all loans were taken out for undergraduate study) or 25 years (if any loans were taken out for graduate or professional study).
Who qualifies?All Direct Loan borrowers
Eligible loansDirect Subsidized and Unsubsidized Loans
Direct PLUS Loans made to students
Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
Qualifies for PSLF?Yes
Pay As You Earn (PAYE)
Repayment termMonthly payments are 10% of discretionary income. 
Outstanding balance is forgiven if you haven’t repaid your loan in full after 20 years.
Who qualifies?New borrowers who took out loans on or after October 1, 2007, and received a Direct Loan disbursement on or after October 1, 2011
Eligible loansDirect Subsidized and Unsubsidized Loans
Direct PLUS Loans made to students
Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
Qualifies for PSLF?Yes
Income-Based Repayment
Repayment termMonthly payments will be either 10% or 15% of discretionary income (depending on when you received your first loans), but never more than you would have paid under the 10-year Standard Repayment Plan.
Outstanding balance is forgiven if you haven’t repaid your loan in full after 20 or 25 years, depending on when you received your first loans.
Who qualifies?Borrowers with a high debt relative to income
Eligible loansDirect Subsidized and Unsubsidized Loans
Subsidized and Unsubsidized Federal Stafford Loans
PLUS loans made to students
Consolidation Loans (Direct or FFEL) that do not include PLUS loans (Direct or FFEL) made to parents
Qualifies for PSLF?Yes
Income-Contingent Repayment
Repayment termYour monthly payment will be the lesser of:
20% of discretionary income, OR
The amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
Outstanding balance is forgiven if you haven’t repaid your loan in full after 25 years.
Who qualifies?Any Direct Loan borrower with an eligible loan
Eligible loansDirect Subsidized and Unsubsidized Loans
Direct PLUS Loans made to students
Direct Consolidation Loans
Qualifies for PSLF?Yes

Note: You may pay income tax on amounts forgiven under any of the income-driven repayment plans listed. An exception is loans forgiven through Public Service Loan Forgiveness (PSLF). The IRS does not count those amounts as taxable income. 

Private student loan repayment plans

When you take out loans from a private lender, you may have your choice of repayment terms. 

For example, you might be able to make level payments to your loans over a period of five, seven, 10, or 15 years. Your lender may also allow you to select your payment date. 

Whether you can change your payment due date will depend on the lender. You’re often required to keep the same repayment terms for the life of the loan. You may only be able to change your repayment terms by refinancing your loans with a new lender. 

Private lenders may also provide certain benefits to you to help make repayment easier, including:

  • Interest-rate discounts for enrolling in automatic payments
  • Cash rewards for earning good grades while in school
  • Skip-a-payment option, which allows you to skip one loan payment every 12 months

Lenders may also offer the option to pause student loan payments if you’re experiencing financial hardship. That can help you to avoid falling behind or, worse, defaulting on your loans. 

Find out  more about what options are available for you if you are struggling in our Can’t Pay My Student Loans Guide.

How to save money on repayment

Student loan repayment can be a challenge, but you have several options to pay off your loans faster and save on interest. 

Ways to save money on student loans and potentially pay them off faster include:

  • Enroll in your lender’s autopay discount if offered
  • Ask about other rate discounts 
  • Have someone with good credit cosign your loans, which could help you qualify for better rates
  • Consider refinancing private loans if you’re able to do so at a lower rate
  • Pay your loans before the due date to reduce the amount of principal that accrues interest
  • Consider paying your loans biweekly, which can add up to one full extra payment each year
  • Apply your tax refunds or other windfalls to your principal balance
  • Research whether you may qualify for loan forgiveness

You can also look into whether your employer offers any type of student loan reimbursement. If you qualify, that could help you to pay off a decent portion of your loans and save money. 

How student loan interest works

Both federal and private student loans require you to pay interest. The interest on your loan is a premium you pay for the privilege of borrowing money. When interest begins accruing on your loans can depend on the type of loans you have. 

Student loan rates are often expressed as an annual percentage rate (APR). The APR on a student loan represents how much the loan costs you when interest and fees are annualized. Rates may be fixed, meaning they remain the same for the life of the loan, or variable. 

Variable rate student loan rates can fluctuate over time following changes to an underlying benchmark rate. Only private student loans have variable rates. It’s important to know whether your loans have variable rates because a change could raise or lower your monthly payment. 

How interest is applied to your loan

Understanding how interest is applied to your student loans can help you determine what you’ll pay over the life of the loan. It’s helpful to know:

  • What your interest rate is
  • How interest accrues
  • How interest capitalizes, or is added to your balance

Interest is charged to federal student loans daily. 

To calculate the interest accrued on your loans, use this formula:

Interest = Loan balance x (Annual interest rate / Number of days in the year) x Number of days in the accrual period

Here’s an example: 

Say you have $30,000 in federal student loans. Your annual interest rate is 4.5%, and you’re trying to calculate the accrued interest for a 30-day period. The numbers would look like this:

$30,000 x (0.045 / 365) x 30 = $110.96

You’d know your accrued interest for that month is $110.96.

Student loan interest is front-loaded, meaning as you pay off more of your loan, the less you pay in interest. This makes sense because the interest that accrues correlates to your principal balance. 

See how much a student loan would cost with interest, as well as what your monthly payments would be, by using our Student Loan Payment Calculator.

How lenders decide on interest rates

Federal loan programs offer the same interest rates to all borrowers, no matter their credit scores. Congress sets these interest rates, and they differ depending upon the academic year, the loan program, and whether the borrower is an undergraduate or graduate student.

Rules of thumb for federal loan rates include:

  • Undergraduate borrowers generally get the lowest rates.
  • Rates reset annually on July 1, based on the last 10-year Treasury Note auction held in May.
  • Consolidating federal loans will result in a new rate that reflects the average of all your rates.

Private lenders can set their own rates, which vary based on your credit score, loan term, and other factors. Private lenders also offer fixed and variable interest rates, while all federal student loans have fixed rates.

See current interest rates on all types of student loans , or find out more about how student loan interest works.

Are there taxes on student loans?

Student loan forgiveness may be taxable, depending on how your loans are forgiven. You won’t need to pay taxes on loans forgiven under federal Public Service Loan Forgiveness, though you may have to pay taxes on amounts forgiven under an income-driven plan if you’re ineligible for PSLF. 

The IRS offers a tax deduction for interest paid to student loans for yourself, your spouse, or an eligible dependent. This benefit extends to all student loans, both federal and private. As of December 27, 2022, the maximum annual deduction is $2,500. 

In addition to deducting student loan interest, you may qualify for other tax breaks, including:

  • The American Opportunity Credit, which allows you to claim up to $2,500 per year for the first four years of school
  • The Lifetime Learning Credit, which allows you to claim up to $2,000 per year for costs paid toward tuition, fees, books, supplies, and equipment

These credits have phase-out limits, which may reduce the amount of credit you claim. 

You cannot claim both credits for the same expenses in the same year. You can learn more in our guide to student loans and taxes.

Are there any fees on student loans? 

Federal student loans have loan fees, which are calculated as a percentage of your loan amount. 

These fees are deducted from your loan funds when they’re disbursed. The fee you pay depends on the type of loan you have. 

Loan TypeFee
Direct Subsidized and Unsubsidized Loans disbursed on or after October 1, 2020, and before October 1, 20231.057%
Direct PLUS Loans disbursed on or after October 1, 2020, and before October 1, 20234.228%

You’re responsible for repaying the entire amount borrowed, including amounts deducted for loan fees. 

Private lenders may also charge fees for student loans, including:

  • Origination fees
  • Disbursement fees
  • Late payment fees
  • Returned check fees
  • Prepayment penalties

The origination fee is a fee you pay the lender to write the loan. Lenders may charge a fee equal to a percentage of the amount you borrowed or a flat fee. As with federal loans, the origination fee is deducted from your loan proceeds before they’re disbursed. 

Loan fees are an important consideration when comparing private student loan options. In addition to the lowest interest rates, you should prioritize loans with no origination fees, disbursement fees, or prepayment penalties. 

Comparing the best private student loan lenders can make it easier to see how the fees stack up.

Find out more about the history of student loans.