Student Loans Explained: What You Need to Know

A college education doesn’t come cheap. For the 2025–2026 school year, annual tuition and fees for a full-time student at an in-state, public four-year college were $11,950, according to College Board. Student loans can help bridge the gap and make college more affordable, but understanding the types of loans available and how they work can be confusing. Here’s what to know before taking out student loans.

What are student loans and how do they work?

Student loans are installment loans to help pay for education costs. After graduating, you’re responsible for repaying what you borrowed (plus interest) once your grace period expires. You can choose to make interest-only payments while you’re in school, but this generally isn’t required.

Student loans are available from the federal government, as well as financial institutions like banks. In most cases, the money is disbursed directly to the school, which takes out what you owe for tuition, fees, housing, and so forth. Any leftover money then goes to you. Interest may start accruing while you’re in school, but if you have a subsidized student loan, the federal government will cover the interest during this time.

Federal student loans vs. private student loans

There are two main types of student loans. Here’s a breakdown of how they work so you can decide which one is right for you.

Federal student loans

These student loans are provided by the U.S. federal government and have fixed interest rates. For federal student loans disbursed between July 1, 2026 and June 30, 2027, the rate for an undergraduate direct loan is 6.52%.

Federal student loans offer three key benefits:

• There’s no credit requirement (unless you’re applying for a PLUS loan).
• You might be eligible for need-based subsidies that can reduce your overall loan costs.
• You may qualify for an income-driven repayment plan or loan forgiveness.
• Deferment or forbearance may be an option if you’re experiencing financial hardship.

Private student loans

Private student loans are funded by financial institutions like banks and online lenders. Interest rates can be fixed or variable. As of July 2026, rates started at about 2.29% and were capped at 17.10%, according to the Education Data Initiative.

Private student loans are different from federal loans in that:

• They have stricter credit requirements and may require a cosigner on the loan.
• Depending on your credit, your rate may be higher with a private student loan than a federal one.
• Repayment plans are less flexible and typically range from 10 to 15 years. In some cases, you may need to make payments while you’re still in school.
• Most private student loans do not offer financial hardship relief or loan forgiveness.

Which should you choose?

The right loan for you will depend on your financial situation and goals, but it’s usually wise to exhaust your federal student loan options first. They typically cost less and are easier to repay, according to the Consumer Financial Protection Bureau.  They also offer more protections for borrowers who experience financial hardship down the road.

Types of federal student loans

If you opt for federal student loans, there are three main types to choose from. The biggest difference is interest: for one, the government pays it while you're enrolled. On the other two, it accrues from the day the money is disbursed.

‍‍How to apply for student loans

The application process for a federal student loan is fairly straightforward:

1. Fill out the FAFSA. If you haven’t already, you’ll need to submit your Free Application for Federal Student Aid (FAFSA) form. The results will determine if your college extends a financial aid offer.
2. Review your financial aid offer. If you qualify for federal aid, your school should provide instructions on how to accept your federal student loan. You can contact your school’s financial aid office if you have questions.
3. Accept only what you need. Just because you’re offered an amount doesn’t mean you need to accept all of it. Think about your finances and accept only what you need. Once you decide, you’ll need to complete mandatory counseling that explains your financial responsibility. You’ll also need to sign a master promissory note, or a contract you sign agreeing to the loan terms.

Read more → Can you apply for FAFSA with poor credit

Applying for private loans

Every lender is different, which means that eligibility criteria, interest rates, and loan terms can vary. If you’ve exhausted federal student loans, you can shop around for private student loans and compare your options. Having a creditworthy cosigner can help increase your odds of getting approved.

Getting prequalified with multiple lenders can be a good idea. This involves a soft credit inquiry and can provide a more accurate loan estimate. When you find a lender that feels right, you can complete their application process.

How much should you borrow in student loans?

The answer depends on your education goals and if you plan on paying for any college costs out of pocket. Here are important things to consider before applying for student loans.

Estimate your total cost of attendance

Are you planning to attend an in-state public university? Or go out of state or explore a private college? Your answers directly affect how much you need to borrow in student loans.

Estimate your total cost of attendance from start to finish, accounting for:

• Tuition and fees
• Housing
• Books and supplies
• Transportation
• Food and living expenses

Also consider if you plan to work a part-time job or enroll in a work-study program to offset your total costs. Federal work-study offers part-time jobs to college students who demonstrate financial need. Jobs are often in community service or related to the student’s course of study.

Borrow less than your expected starting salary

Do research to see what the average starting salary will be in your professional field. If you aren’t sure what to study, meeting with a career counselor or academic advisor can help point you in the right direction. You can share your interests and ask questions about different career paths and earning potential.

Once you have an accurate idea of what to expect, it’s wise to borrow less than your anticipated starting salary. You struggle to pay back your student loans when you’re out of school.

Exhaust free money first

You may be eligible for more free money than you think. Explore the following options before taking out student loans.

Scholarships and grants

This is a type of gift aid that doesn’t need to be repaid. Grants are typically need-based and awarded based on your financial situation. Scholarships, on the other hand, tend to be merit-based. That means they’re given to students who meet certain eligibility requirements, whether that’s related to academics, athletic talent, or other skills or accomplishments. Grants and scholarships are available from:

• Federal and state governments
• Colleges and universities
• Private organizations like companies, foundations and community groups

You may need to complete the FAFSA and the CSS Profile to apply for grants and scholarships. The CSS Profile collects information that’s used by colleges and scholarship programs to dole out financial aid that doesn’t come from the federal government. You can also research scholarships directly through College Board.

Student loan repayment plans

The federal government offers several repayment plans based on when you took out your student loans.

‍For federal student loans disbursed before July 1, 2026

For federal student loans disbursed on or after July 1, 2026

How student loans affect your credit

When you enter the repayment phase of a student loan, the account will appear on your credit report. Your loan servicer w report your account activity to the three major credit bureaus: Experian, Equifax, and TransUnion. Making on-time payments can help you build a positive credit history and a healthy credit score.

But missing payments can have a negative impact on your credit. Late payments stay on your credit report for up to seven years. Defaulting on your loan will have a more serious negative effect. It’s possible to bring a federal student loan out of default, but private student loans are another story and may go to collections.

If you’re struggling to pay your student loans, contact your loan servicer ASAP to see what your options are. If you have federal loans, you might qualify for a repayment assistance plan.

Can student loans be discharged in bankruptcy?

Student loan debt isn’t automatically discharged (or erased) when someone files for bankruptcy. However, if you can prove that your student loan payments present an undue hardship, you can file an adversary proceeding to have the debt discharged. It may be difficult to get a court to rule in your favor, but it is possible.

One thing worth noting is that non-qualified private education debt can be discharged during bankruptcy like any other consumer debt. However, one of the following things must be true, according to the Consumer Financial Protection Bureau:

• The loan exceeded the school’s official Cost of Attendance.
• The loan was used at a non-eligible school (like an unaccredited trade school, for example).
• The loan was used to pay for living expenses and fees incurred while preparing for a professional exam.
• The loan was used to pay for living expenses, moving costs and fees associated with a dental or medical residency.
• The loan was used by a student who was enrolled in school less than half-time.

Bankruptcy is a complex legal process. Talk with a licensed attorney or nonprofit credit counselor for personalized guidance. The National Foundation for Credit Counseling (NFCC) offers free or low-cost counseling at 1-800-388-2227.

Bottom line

For many, student loans are an essential part of paying for college. Taking advantage of federal loans, and being mindful of how much you borrow, can help you use this type of financing responsibly. Paying back your student loans on time can also help you build a healthy credit score.

If you’re new to the credit world, we’ve got you covered. The Kikoff Credit Account reports your on-time payments to the major credit bureaus, so you can start building credit before you ever need it — for an apartment application, a car loan, or a lower insurance rate down the road.