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Many students in the U.S. take out loans to help pay for the cost of college, which now averages $38,270 a year, according to the Education Data Initiative.
The two major types of student loans are federal student loans and private student loans. Knowing how these different types of student loans work can help you figure out the best way to pay for your education.
Key Points
• Federal student loans offer flexible repayment options, as well as benefits such as deferment and forgiveness.
• With Direct Subsidized Loans, the government pays the interest while the borrower is in school.
• The government does not cover the interest on Direct Unsubsidized Loans.
• Direct Consolidation Loans may simplify repayment by merging multiple federal loans into one.
• Refinancing private loans can potentially lower interest rates but forfeits federal benefits.
Federal vs Private Student Loans
There are important distinctions between federal and private student loans. Federal student loans are backed by the U.S. Department of Education. Borrowers do not need to undergo a credit check to take out most of these loans, and the loans come with federal benefits and protections, such as income-driven repayment (IDR), deferment, forbearance, and access to the Public Service Loan Forgiveness (PSLF) program. The interest rates on newly issued federal student loans are fixed and set by law.
Private student loans are offered through financial institutions, including banks, online lenders, and credit unions. Students must undergo a credit check — or have a student loan cosigner to help them qualify. Each lender has its own interest rates and terms. Private student loans are not eligible for federal benefits like deferment and forgiveness.
For many borrowers, it makes sense to take out federal student loans first because they come with flexible repayment options and other federal benefits. Students may then want to fill any gaps with private loans.
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Federal Student Loans
There are several different types of federal student loans. Understanding each type can be helpful as you work on financing your education.
Direct Subsidized Loans
Direct Subsidized Loans are based on students’ financial need. The government covers the accrued interest on these loans while the borrower is enrolled in school, during the six-month grace period after graduation, and during any periods of deferment. Direct subsidized loans are for undergraduate students only.
The interest rate for Direct Subsidized Loans disbursed after July 1, 2025 and before July 1, 2026 is 6.39%.
Direct Unsubsidized Loans
These loans are available to undergrads, graduate students, and professional students. The government does not pay the interest on Direct Unsubsidized Loans. Payments are not required as long as borrowers are full-time students, but the interest accrues and is added to the loan’s principal.
The interest rate for Direct Unsubsidized Loans for undergraduates that are disbursed after July 1, 2025 and before July 1, 2026 is 6.39%. The rate for Direct Unsubsidized Loans for graduate and professional students is 7.94%.
Interest Capitalization and Federal Borrowing Limits
Unpaid interest can capitalize on Direct Unsubsidized student loans. Interest capitalization is when unpaid interest accrues over time and gets added to the principal loan balance, and then accrues more interest. This results in borrowers paying more over the life of the loan.
Students have the option to make interest-only payments on their Direct Unsubsidized Loans while they’re in school and during other periods of deferment, which can help prevent interest capitalization.
The borrowing limits for federal student loans vary depending on a student’s year in school and whether they are a dependent or independent student. For example, first-year undergrads who are dependents (generally meaning they receive parental financial support) have a maximum borrowing limit of $5,500 their first year; of that amount, only $3,500 can be subsidized. Students who are considered independent have a maximum borrowing amount of $9,500 annually, with the same $3,500 cap on subsidized loans.
PLUS Loans
Direct PLUS Loans can currently be borrowed by a graduate student (these loans are often referred to as Grad PLUS Loans) or by an undergrad’s parents (known as Parent PLUS Loans). Like the other Direct loans, PLUS loans have fixed interest rates and federal benefits, such deferment and forgiveness. Unlike other federal loans, PLUS loans require a credit check. Interest rates for all Direct PLUS Loans disbursed after July 1, 2025 and before July 1, 2026 is 8.94%.
The maximum yearly amount a Grad PLUS Loan borrower can currently take out is $20,500. The maximum amount a Parent PLUS Loan borrower can receive is the cost of attendance at their child’s school minus any other financial assistance received.
However, due to upcoming changes to student loans as part of the new domestic policy bill, Grad PLUS Loans will be eliminated for new borrowers on July 1, 2026. There will be just one type of federal student loan available to graduate and professional students as of July 1, 2026 — the Direct Unsubsidized Loan.
In addition, graduate students will have new lending limits through the Direct Unsubsidized Loan program. This includes an annual limit of $20,500 for graduate students with a $100,000 lifetime limit. Professional students, such as medical and dental students, may qualify for a Direct Unsubsidized Loan with a yearly limit of $50,000 and a lifetime limit of $200,000.
Borrowers who already have Grad PLUS Loans before the above changes take place can continue to borrow money under the current limits for three additional academic years.
Parent PLUS loans will also have new borrowing limits. For loans disbursed on or after July 1, 2026, parents can borrow $20,000 a year, with a lifetime limit of $65,000 per student.
Direct Consolidation Loans
Borrowers who have a number of different federal student loans may want to combine all their federal loans into one loan to simplify payment. They can do this with student loan consolidation.
A Direct Consolidation Loan allows students to combine their federal student loans to make managing their loans easier. This loan will not typically lower your interest rate, however. The interest rate on a Direct Consolidation Loan is a weighted average of the interest rates on your existing student loans, rounded up to the nearest eighth of a percent.
Consolidating your federal student loans could lower your monthly payment by extending your repayment timeline. But you’ll generally end up paying more overall because of the additional interest incurred when lengthening your loan term.
How to Apply for a Federal Student Loan
To be eligible for a federal student loan, students must fill out the Free Application for Federal Student Aid (FAFSA®). On the form, they’ll answer questions about their family finances, as well their education plans. Even students who don’t think they will qualify for financial aid should still fill out the FAFSA. That’s because some schools use information from the FAFSA to determine eligibility for other types of aid like scholarships or grants. The FAFSA must be filled out and resubmitted every year.
After filling out the FAFSA, students may receive a financial aid package of grants, work study, and federal loans. Depending on your financial circumstances, the loans will either be subsidized or unsubsidized.
It can be helpful to consult a FAFSA guide before you start working on the application.
Private Student Loans
Students who don’t receive enough federal aid may want to consider private student loans to help finance their education. Private loans are offered by banks, online lenders, and credit unions, and they require a credit check, unlike federal loans.
Undergraduate Loans
Private undergraduate student loans may have fixed or variable interest rates. Students, who typically don’t have a robust credit history at this point in their lives, may want to apply with a cosigner to help qualify for a lower interest rate.
Graduate Loans
Some private lenders offer private student loans specifically for graduate students. These graduate loans may come with special features, such as longer grace periods and in-school deferment. Graduate students, who might have had more time to develop a solid credit history, may not need a cosigner.
Parent Loans
There are also private loans that parents can take out to help pay for their child’s education. Like other private student loans, parent loans typically have fixed or variable interest rates. Private loans for parents may require that payments begin right away. But some lenders offer an option for interest-only payments while your child is in college. Shop around with different lenders for the most favorable terms.
Student Refinancing Loans
Another option is student loan refinancing. When you refinance your loans with a private lender, you exchange your old loans for a new loan with new rates and terms. If you qualify for a lower interest rate, it could reduce the amount of interest you pay over the life of the loan and help you save money.
You could also lower your monthly loan payments by extending your loan terms. However, you pay more interest over the life of the loan if you refinance with an extended term.
It’s possible to refinance both private and federal student loans. But it’s important to note that refinancing federal loans makes them ineligible for federal programs and protections. If you think you might need these programs, refinancing may not be the best option for you.
How to Apply for a Private Student Loan
Borrowers interested in private student loans can fill out a loan application with a lender. Before applying, you can prequalify to see what rate you can get. This can be helpful for shopping around and evaluating different lenders for the best crates and terms.
The terms, interest rates, and borrowing limits on private loans vary by lender. Lenders use factors like the borrower’s credit score to determine the interest rate they qualify for. When borrowing a private student loan you’ll generally have the option to choose between a fixed or variable interest rate.
Private lenders offer different student loan repayment options. Some offer deferment plans while the borrower is enrolled in school, and others require payments to start as soon as the loan is disbursed.
The Takeaway
The two main types of student loans are private and federal. Federal loans are backed by the government, have a fixed interest rate, and are eligible for a variety of federal benefits. Private student loans are offered by private lenders. They involve a credit check, and you may need a cosigner on the loan to get the best rates and terms. Borrowers can choose fixed or variable rates.
It’s possible to refinance student loans in the future for a lower rate and more favorable terms if you are eligible.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
What is the difference between federal and private student loans?
Federal student loans are offered by the U.S. Department of Education to help students cover the cost of college. These loans typically don’t require a credit check, and they have fixed interest rates that are set each year. Federal loans have federal benefits and protections, such as deferment and forgiveness.
Private student loans are offered by private lenders, such as banks, credit unions, and online lenders. These loans require a credit check and students may need a cosigner in order to qualify. Each lender offers its own interest rates and terms. Private student loans are not eligible for federal benefits.
How do I know which type of student loan I have?
You can identify the types of federal student loans you have on the Federal Student Aid website (StudentAid.gov). Log into your account and go to the “My Loans” section of your dashboard to see a list of your student loans with information about each one, including the type of loan it is.
For private student loans, contact your loan servicer — their contact information should be listed on your monthly billing statement. You can also check your credit report (you can get a free copy from one of the three credit bureaus) for information about all your student loans, including private loans.
Can I refinance both federal and private student loans together?
Yes, you can refinance federal and private student loans together. You’ll replace your existing loans with one new private loan with new rates and terms. Just be aware that refinancing federal student loans means you’ll lose access to federal benefits like federal deferment and forgiveness. Make sure you won’t need those programs before you refinance federal student loans.
Do all student loans require a credit check?
No, most federal student loans, such as Direct Subsidized and Unsubsidized student loans, do not require a credit check. The only federal loans that require a credit check are Federal Direct PLUS Loans for graduate and professional students and parents. Private student loans do require a credit check.
Which student loan type offers the best repayment flexibility?
Federal student loans generally offer more flexible repayment options than private loans do. Borrowers with federal student loans can currently choose from income-driven repayment, student loan deferment or forbearance to temporarily postpone payments, and access to student loan forgiveness programs. Private student loans typically have limited repayment plans, though some do offer options like interest-only payments and limited deferment or forbearance.
SoFi Student Loan Refinance
Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi Loan Products
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
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