Key Things To Know About Student Loans

Many students take out loans to pay for their education. According to the Congressional Research Service, 1 in 6 American adults had federal student debt as of February 2025. 

If you need financial aid for school and are considering borrowing, there are a few things to know about student loans to make sure you understand the obligation you're taking on.

Here are some student loan basics to be aware of, including how student loans work, how much interest costs, your student loan repayment options, and more.

Current private student loan rates

What are student loans and how do they work?

Student loans are a type of financial aid that helps students and their families pay for higher education. You can find education loans through the federal government, through your state or school, or through private lenders, including commercial and local banks or credit unions.

When you take out student loans, you agree to repay the original amount plus interest. You'll pay back your loan over a predetermined period, such as 10 or 15 years. To finalize the loan, you’ll sign a promissory note that outlines your loan details and responsibilities as a borrower. 

With most loans, interest starts accruing on the loan as soon as it’s disbursed to you or your school, and repayment typically starts after you leave school.

What’s the difference between federal vs. private student loans?

Student loans fall under one of two categories: federal and private student loans. Although both can be used to help finance your education, there are differences in the process of applying for student loans, as well as differences in loan terms and student loan repayment options. 

Dan Kennedy, chief marketing officer at College Ave, emphasizes that students who are borrowing should exhaust opportunities for federal student loans before turning to private loans, with one potential exception.

“If you are a graduate student, it may make sense to weigh your private graduate student loan options. If you have a strong credit history and good credit, you may be able to access a lower interest rate than those offered by the federal government,” says Kennedy, noting that private student loans also generally don’t charge origination fees.

By comparison, you’ll pay origination fees for federal student loans. For loans that are disbursed on or after Oct. 1, 2020, through Sept. 30, 2026, the loan fee is 1.057% of the total loan amount for subsidized and unsubsidized Direct Loans. The fee for Direct PLUS Loans is 4.228%. This fee is automatically deducted during disbursement.  

Below are a few more key features that currently differentiate federal vs. private student loans.

How does interest on student loans work?

Interest is the cost of borrowing. Interest on student loans can be charged at a fixed or variable rate. 

• A fixed rate never changes during the loan term, so you’ll always have the same monthly payment. 
• A variable rate can go up or down, which makes it harder to anticipate what you’ll pay month to month. 

Federal student loan interest rates are always fixed. Private student loan rates can be fixed or variable, depending on the lender.

It's also important to know that interest sometimes capitalizes on student loans. This occurs when unpaid interest is added to the principal, increasing your total repayment costs and causing you to pay interest on interest. 

If you take out a Direct Unsubsidized Loan and choose not to pay the interest while you’re in school, the accrued interest capitalizes, ballooning your student debt. If you can afford it, making interest-only payments while in school can help you save money on interest over time by avoiding capitalization.

Also, keep in mind that you must reapply for student loans annually. Unfortunately, it can be impossible to anticipate the student loan interest rate you’ll pay in future academic years. Both private and federal student loan rates change over time due to market and economic shifts.

“Every year, [federal] student loans have a new rate,” explains Nancy Goodman, founder and executive director of nonprofit College Money Matters. “The old ones stay the same, but any new borrowing is at a different rate. This means there is no good way to plan on what loans will cost over four years.”

Annual federal loan rates are set by federal law and closely follow the yield of 10-year U.S. Treasury notes.

What should you know before taking out student loans?

Understanding how student loans work and learning about the difference between federal vs. private loans is essential before racking up student debt. 

Here are a few other things to know about student loans before borrowing: 

• Borrowing limits: Federal student loans have annual and aggregate borrowing limits based on your enrollment year and your dependency status. For example, the aggregate loan limit for dependent students is $31,000 in unpaid subsidized and unsubsidized Direct Loans. 
• Cosigner considerations: Private student loan lenders might require that student borrowers add a cosigner to apply for student loans. A cosigner must meet the lender’s eligibility requirements. They’re also legally obligated to repay the loan if you can’t make your payments. Some lenders offer a cosigner release, which lets you remove your cosigner after you successfully make a set number of on-time payments. 
• Grace periods: Some student loan lenders let you postpone your first payment for 6 months after leaving school. This is called a “grace period,” and it’s a feature of federal student loans and many private student loans.   
• Long-term financial impact: If mismanaged, student loan debt can take a toll on your overall financial health. Your repayment history impacts your credit, and monthly payments can impact your monthly budget for 10 or more years.

What repayment options are available after graduation?

The Standard Repayment Plan is the default federal student loan repayment plan. It offers fixed, equal payments over a 10-year term. Other payment plans include:

• The Graduated Plan, which starts with a low payment that increases over 10 years
• The Extended Plan, which offers payments that can be fixed or graduated over a 25-year term 

Income-driven repayment (IDR) plans are also among the top federal student loan benefits that borrowers can access. These plans calculate your monthly payment based on your family size and discretionary income. 

You must make your payments on an income-driven plan to qualify for federal student loan forgiveness programs, including Public Service Loan Forgiveness. 

As of 2025, the three available (IDR) plans are: 

• Income-Based Repayment (IBR)
• Income-Contingent Repayment (ICR) 
• Pay As You Earn (PAYE) 

A fourth option, the SAVE Plan, has been put on hold. 

However, the passage of the “One, Big, Beautiful Bill Act” in July 2025 has ushered in fundamental changes. 

In July 2026, the Extended, Graduated, ICR, PAYE, and SAVE Plans will sunset for new borrowers. The IBR plan will remain an option, but only for current borrowers who take out no new loans after July 1, 2026, and who enroll in IBR before July 1, 2028.

New borrowers with loans disbursed on or after July 1, 2026, will have just two repayment options: a modified Standard Repayment Plan with a 10- to 25-year term based on their loan balance, or the Repayment Assistance Plan, a new income-driven option.