Student loans are the primary way most Americans pay for college, and the decisions you make about borrowing can follow you for decades. Federal loans offer fixed interest rates and flexible repayment options, while private loans fill gaps but come with fewer protections. Whether you’re about to borrow for the first time or already carrying a balance, here’s what matters most.
Federal Loans vs. Private Loans
Federal student loans come directly from the U.S. Department of Education and should almost always be your first choice. They carry fixed interest rates, offer income-based repayment plans, and provide options like deferment, forbearance, and loan forgiveness that private lenders rarely match.
Private student loans come from banks, credit unions, and online lenders. They can offer lower rates for borrowers with strong credit (starting around 3.39% for fixed-rate loans), but rates can climb as high as 17.99%, and many come with variable rates that fluctuate over time. Most private lenders don’t offer income-based payment options, none offer loan forgiveness, and forbearance policies vary widely. If you can’t make payments during a rough stretch, a federal loan gives you far more room to maneuver.
The general rule: borrow federal first, up to the annual limits, and turn to private loans only for the remaining gap after exhausting grants, scholarships, and federal aid.
Current Federal Interest Rates
Federal loan rates are set once a year based on the 10-year Treasury note yield, then locked in for the life of the loan. For loans first disbursed between July 1, 2025, and June 30, 2026, the rates are:
- Undergraduate Direct Loans (subsidized and unsubsidized): 6.39%
- Graduate and professional Direct Unsubsidized Loans: 7.94%
- Direct PLUS Loans (for parents and grad students): 8.94%
These rates are fixed, meaning they won’t change after disbursement regardless of what happens in the broader economy. A subsidized loan is only available to undergraduates with financial need, and the government covers the interest while you’re in school at least half-time. On an unsubsidized loan, interest starts accruing the day the money is disbursed, even while you’re still in class.
How Much You Can Borrow
Federal loans have strict annual and lifetime caps. The amount depends on your year in school and whether you’re considered a dependent or independent student on the FAFSA.
For dependent undergraduates, annual limits start at $5,500 in the first year (with a maximum of $3,500 in subsidized loans), rise to $6,500 in the second year, and reach $7,500 for the third year and beyond. The lifetime aggregate cap is $31,000, of which no more than $23,000 can be subsidized.
Independent undergraduates (and dependent students whose parents can’t get a PLUS loan) can borrow more: $9,500 in year one, $10,500 in year two, and $12,500 for subsequent years. Their aggregate cap is $57,500, with the same $23,000 subsidized maximum.
These limits often don’t cover the full cost of attendance, especially at private universities. That gap is where Parent PLUS loans, private loans, or out-of-pocket payments come in. PLUS loans don’t have a fixed borrowing cap, which makes them flexible but also dangerous. Parents can borrow up to the full cost of attendance minus other aid, and at 8.94% interest, the balance grows quickly.
Applying Through the FAFSA
The Free Application for Federal Student Aid (FAFSA) is the single form that unlocks federal loans, grants, and work-study. Most state aid programs and many colleges also use FAFSA data to determine their own awards, so filing it is essential even if you think you won’t qualify for need-based help.
The FAFSA for the 2026-2027 award year must be submitted by June 30, 2027, but that federal deadline is misleading. Many colleges and states set their own deadlines months earlier, sometimes as early as February or March. Filing as close to the opening date as possible gives you the best shot at aid that’s distributed on a first-come, first-served basis. Check your school’s financial aid office for its specific deadline, and look up your state’s higher education agency for the state deadline.
You’ll need your Social Security number, federal tax information, and records of untaxed income. The form pulls tax data directly from the IRS for most filers, which simplifies the process considerably.
Repayment Plans and Monthly Payments
After graduation (or dropping below half-time enrollment), most federal loans give you a six-month grace period before payments begin. The standard repayment plan spreads your balance over 10 years with fixed monthly payments. On a $30,000 loan at 6.39%, that works out to roughly $340 per month.
If that payment is unmanageable, income-driven repayment (IDR) plans cap your monthly bill at a percentage of your discretionary income. Several IDR plans exist, including Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR). Under these plans, any remaining balance is forgiven after 20 or 25 years of qualifying payments, depending on the plan and when you borrowed.
The landscape for IDR plans is in flux. The Department of Education introduced the SAVE Plan (Saving on a Valuable Education) as a more generous replacement for earlier options, but a federal court blocked its implementation in March 2026. Borrowers who had enrolled in or applied for the SAVE Plan were placed into forbearance and now must select a different repayment plan. If you’re in this situation and don’t choose a new plan, your loan servicer will move you to one automatically, and the plan they pick may not be the best fit for you.
Looking ahead, the existing variety of IDR plans is being consolidated into a single program called the Repayment Assistance Plan (RAP). Starting July 1, 2026, new loans will only be eligible for RAP or the standard plan. Borrowers currently on other IDR plans will need to transition by 2028. RAP adjusts payments based on income and family size, with borrowers paying up to 10% of their adjusted gross monthly income over a repayment term of up to 30 years.
Loan Forgiveness Options
Public Service Loan Forgiveness (PSLF) wipes out your remaining federal Direct Loan balance after you make 120 qualifying payments (10 years) while working full-time for a qualifying employer. That includes federal, state, local, and tribal government agencies, the U.S. military, and most 501(c)(3) nonprofits.
Only Direct Loans qualify. If you hold older Federal Family Education Loans (FFEL) or Perkins Loans, you can consolidate them into a Direct Consolidation Loan to become eligible, though consolidation resets your payment count to zero.
IDR forgiveness works differently. After 20 or 25 years of payments on an income-driven plan, the remaining balance is discharged. The forgiven amount may be treated as taxable income, unlike PSLF forgiveness, which is tax-free.
Federal loans are also discharged if the borrower dies or becomes totally and permanently disabled.
Subsidized vs. Unsubsidized Loans
This distinction matters more than most borrowers realize because it directly affects how much you’ll owe by graduation. With a subsidized loan, the government pays the interest that accrues while you’re enrolled at least half-time, during your grace period, and during certain deferment periods. With an unsubsidized loan, interest accumulates from day one. If you don’t pay it as it accrues, it capitalizes, meaning it gets added to your principal balance, and you start paying interest on a larger amount.
For a student borrowing $5,500 per year in unsubsidized loans at 6.39%, roughly $1,400 in interest can pile up over four years of school before a single payment is due. Paying even small amounts toward interest while enrolled can save you real money over the life of the loan.
What to Consider Before Borrowing
The most important question isn’t whether you can borrow, but how much your degree will realistically help you earn. A good benchmark: try to keep your total borrowing below your expected first-year salary after graduation. If you’re pursuing a field where entry-level pay is $45,000, borrowing $80,000 puts you in a difficult position regardless of which repayment plan you choose.
Interest is not the only cost. Federal loans charge a loan origination fee that’s deducted from each disbursement before the money reaches you. You receive slightly less than the amount you technically borrow, but you repay the full amount.
Every dollar you borrow in federal loans counts toward your aggregate limit. If you hit the cap as a junior, you won’t be able to take out additional federal loans for your senior year without paying down existing balances. Planning your borrowing across all four years, rather than year by year, helps you avoid that crunch.