How Student Loans Work: Federal vs Private

Almost everything that matters about a student loan is decided before the money arrives. Who lends it sets the rate. The rate and the balance set the payment. And the lender you picked decides what happens if you lose your job in year three.

That last part is the piece most families skip. Two loans can carry nearly the same interest rate and behave nothing alike once repayment starts. This page walks through how student loans work on both sides, using the 2026–27 numbers the government actually published. Rates come from Federal Student Aid, limits come from the Department of Education’s own rules, and every calculation is shown in full. DollarVisor takes no payment for placement, so no lender bought its way into anything below.

Here is a short video overview before the numbers.

1. What Is a Student Loan, and Who Lends It?

Quick Answer: A student loan pays your school directly for tuition, fees, and living costs, and you repay it later with interest. Two lender types exist: the federal government, and private companies. Of all the borrowing options families compare, this is the only one where the lender’s identity changes your legal rights.

Federal loans are made by the U.S. Department of Education. You qualify by filing the FAFSA, not by having good credit. Undergraduates are not credit-checked at all, the rate is identical for every borrower in a given year, and the loan comes bundled with rights written into federal law.

Private loans come from banks, credit unions, and online lenders. They are ordinary consumer debt with a school attached. Approval depends on credit and income, so most undergraduates need a cosigner, and the rate you get depends on whose credit is on the file.

Three differences do most of the work in how student loans work day to day:

• How the price is set. Federal rates are published once a year and apply to everyone. Private rates are quoted per applicant and can be fixed or variable.
• What happens when you cannot pay. Federal loans have income-driven plans, deferment, and forbearance built in. Private lenders offer whatever their contract says, which is usually much less.
• Whether the debt can end early. Federal loans are cancelled on death or total disability and can qualify for public service forgiveness. Private loans usually survive both.

2. What Do Federal Student Loans Cost in 2026–27?

Quick Answer: Undergraduate federal loans disbursed between July 1, 2026 and June 30, 2027 carry a fixed 6.52% rate. Graduate unsubsidized loans are 8.07% and PLUS loans are 9.07%. Every rate is set by one Treasury auction, so unlike a personal loan priced on your credit file, your score changes nothing.

Federal rates are formula-driven. The Treasury holds a 10-year note auction before June 1, and each loan type adds a fixed margin on top of that yield. The May 12, 2026 auction produced a 4.468% high yield, which set every rate below. Once a loan is disbursed the rate is fixed for life.

The origination fee is the part borrowers miss, because it comes off the top. Federal Student Aid’s own examples put the fee at $58.13 on a $5,500 loan and $422.80 on a $10,000 Parent PLUS advance. You repay the full amount either way.

3. How Much Can You Actually Borrow?

Quick Answer: A dependent undergraduate can borrow $5,500 in year one, rising to $7,500 from year three, capped at $31,000 across a degree. Graduate and parent borrowing was capped hard on July 1, 2026. Terms like subsidized and aggregate limit are defined in our plain-English money glossary.

Undergraduate limits did not move. What changed is everything above them. The table shows both sets of rules, because students already enrolled before July 1, 2026 may keep the old limits under an interim exception.

These caps are published in Federal Student Aid’s loan limits guidance, and two details bite. The $65,000 parent cap applies per dependent student and counts amounts already repaid or forgiven. So does the $257,500 lifetime cap.

4. What Changed for Borrowers on July 1, 2026?

Quick Answer: Grad PLUS is gone for new borrowers, parent borrowing is capped, and the tangle of repayment plans collapses into two. Anyone weighing whether to keep federal loans or move them should read that alongside current student loan refinancing rates, because refinancing federal debt is now a bigger trade-off.

The 2025 reconciliation law, signed as the One Big Beautiful Bill Act and since renamed the Working Families Tax Cuts Act, rewrote the loan program. The Department of Education finished the rulemaking in November 2025 and the changes took effect this July. Four items matter to a household deciding how to pay for school:

• Grad PLUS ends for new borrowers. The Department confirmed it will eliminate the Grad PLUS program and cap graduate borrowing at $20,500 a year. Cost-of-attendance borrowing for graduate school is over.
• Two repayment plans replace forty. New borrowers get the Repayment Assistance Plan or a Tiered Standard plan of 10 to 25 years based on balance.
• Payments run 1% to 10% of income. Under RAP, the payment scales with earnings and drops $50 a month per dependent.
• Interest can no longer snowball. Unpaid monthly interest is waived on on-time payments, and if a payment cuts principal by under $50 the government matches the difference up to $50.

The Department’s own worked example: a single borrower with $35,000 of debt earning $45,000 pays $150 a month under RAP instead of $176, with $40 of interest waived and $50 of principal matched, per its June 2026 repayment fact sheet. Balances now fall every month a payment lands on time.

5. What Does the Same $10,000 Cost at Different Rates?

Quick Answer: Borrowing $10,000 over ten years costs $3,638 in interest at the 6.52% federal undergraduate rate and $8,632 at 14%. The gap is bigger than most families expect, and you can test your own figures in the loan payoff calculator.

Private rates are quoted per borrower, so no honest page can publish one number. What we can do is hold the balance and term steady and show what each rate band costs, using the published federal rate as the anchor point.

Moving one $10,000 loan from 6.52% to 14% costs an extra $4,994: half the amount borrowed.

A cosigned loan at 8.5% and an uncosigned loan at 14% are the same product with a different credit file attached. That is usually the single largest lever a family controls on the private side.

6. When Does a Private Student Loan Make Sense?

Quick Answer: Only after federal aid is maxed out, and mainly when a strong cosigner can beat the federal rate outright. Because pricing follows the credit file, the same borrower can be quoted several points apart depending on how credit scores are built.

Private lending is not automatically a bad deal. It is a narrower deal. It fits a household that has already claimed every grant and federal dollar, still faces a funding gap, and has a parent or relative with excellent credit willing to sign.

The cosigner is not a formality. In the Bureau’s report to Congress on private student loans, more than 90% of new private loans were co-signed. Getting off that loan later is harder still: the CFPB found that 90% of cosigner release applications were rejected.

Three risks a cosigner should price in before signing:

• The debt is fully theirs. A missed payment lands on the cosigner’s credit report as well as the student’s.
• Death and disability may not cancel it. Federal loans discharge; many private contracts do not, which is one reason families sometimes review which types of insurance they actually need alongside a cosigned balance.
• Release is rare. Assume the cosigner stays attached for the full term unless the contract says otherwise in writing.

7. What Happens After You Leave School?

Quick Answer: Federal loans give a six-month grace period, then a monthly bill from a servicer. Most borrowers pay on time, but a large minority do not, and default damages credit for years in ways that also raise the cost of any borrowing priced by score.

How student loans work in year one and how they work in year five are different questions, and the federal portfolio is the clearest picture of the second one. As of March 31, 2026, it covered 42.6 million recipients and $1.7 trillion, and the status mix is not evenly split.

Federal Student Aid also reports that 20% of recipients in active repayment are more than 30 days late, with roughly 1.4 million at risk of default within six months. Those borrowers have income-driven options. A private borrower in the same position usually has a phone number and a hardship form.

8. How Do You Apply, Step by Step?

Quick Answer: File the FAFSA, read the school’s award letter, accept free money first, then take subsidized before unsubsidized federal loans. Only close a remaining gap privately. A payoff projection before you accept beats a surprise bill six months after graduation.

1. File the FAFSA as early as you can. It is the single gateway to grants, work-study, and every federal loan, and some aid is first-come.
2. Read the award letter as two lists. Grants and scholarships never repay. Loans do. Schools often print them in one column.
3. Accept subsidized loans before unsubsidized. The government pays interest on subsidized loans while you are enrolled, so the same dollar costs less.
4. Borrow only the gap, not the maximum offered. You may decline part of any loan, and declining now is cheaper than repaying later.
5. Shop privately only for what is left. Compare fixed against variable, and get at least two quotes before the cosigner signs anything.

9. The Verdict

Quick Answer: Take federal loans first, every time, because 6.52% with income-based repayment beats a private quote that only looks cheaper. Use private credit for the gap that federal limits leave, and only with a cosigner who understands what they signed.

Once you see how student loans work on both sides, the order is obvious. Our pick for nearly every undergraduate is the full federal allocation before a single private dollar. The rate is public, the payment can fall with your income, and the debt ends if you die or become disabled. That package is not for sale privately at any price.

The honest exception is a household with excellent credit, a modest gap, and a plan to repay on schedule. There, a cosigned private loan below the federal rate can be the cheaper instrument, as long as everyone signing accepts that the safety net does not come with it.

10. Frequently Asked Questions

What is the difference between subsidized and unsubsidized student loans?

The government pays the interest on a subsidized loan while you are enrolled at least half-time and during the grace period. On an unsubsidized loan, interest accrues from the day the money is disbursed and is added to your balance if you do not pay it. Both carry the same 6.52% rate for undergraduates in 2026–27, so subsidized is strictly better when you qualify.

Do federal student loans require a credit check?

Subsidized and unsubsidized loans do not. Eligibility runs through the FAFSA, not a credit score, which is why they are available to students with no credit history. PLUS loans are the exception: they check for adverse credit history, though not for a minimum score in the way a private lender would.

Can I still get a Grad PLUS loan in 2026?

Not as a new borrower. Grad PLUS ended for borrowers who were not already enrolled and borrowing before July 1, 2026. Graduate students are now capped at $20,500 a year and $100,000 in total, while professional students may borrow $50,000 a year up to $200,000.

How long do I have before repayment starts?

Federal loans carry a six-month grace period after you graduate, leave school, or drop below half-time enrollment. Interest still accrues on unsubsidized loans during that window. Private lenders set their own terms and some require payments while you are still enrolled, so read the promissory note.

Is it worth refinancing federal student loans privately?

Sometimes, but the trade is steeper now. Refinancing privately converts a federal loan into private debt, permanently giving up income-driven repayment, the new interest waiver, and death and disability discharge. It makes sense mainly for high earners with stable income and a rate cut large enough to justify losing those rights.

This page is information, not financial advice. Rates, fees, and program rules change; verify current terms with Federal Student Aid or your lender before borrowing. See our disclaimer.