Exorbitant tuition fees and living expenses have forced 45.6 million Americans to turn to student loans for higher education, resulting in an outstanding debt of $1.77 trillion in 2025. Students and parents need to understand the different student loans available to ensure they select the one that meets their budget and needs.
You can use student loans to pay for tuition, books and living expenses, but you’ll have to repay the borrowed money with interest, whether the lender is the federal government or a private institution.
Federal Student Loans
These types of student loans are the most common because they usually offer better terms than private loans. The U.S. Department of Education offers direct subsidized, direct unsubsidized and direct Plus loans.
Direct Subsidized Loans
U.S. citizens or eligible non-citizens who are undergraduate students enrolled at least half-time in a degree or certificate program demonstrating a financial need may qualify for a direct subsidized loan. Loans disbursed until 1 July 2025 incur a 6.53% interest rate.
Students with no or limited credit history can apply because eligibility is based on need, not credit status.
The main advantage of subsidized over direct unsubsidized loans is that the government pays the interest during periods of deferment(eg. economic hardship or further studies), 6-month grace period after leaving school and while the student is enrolled at least half-time in school.
Annual limits are $3,500 in first-year undergrad, $4,500 for the second year, and the third year and beyond is $5,500, with a total limit of $23,000.
The first repayment is required only 6 months after leaving school and the standard plan is fixed payments over 10 years. With the graduated plan, payments are initially low but increase every two years, with a 10-year term. Income-Driven Repayment(IDR) requires 10-20% of discretionary income as payments during a 20 to 25-year term. The Department may forgive the remaining balance after the term (eg. Income-Based Repayment[IBR] or Pay As You Earn[PAYE]). The extended plan enables borrowers with loan balances over $30,000 to pay up to 25 years.
Borrowers working full-time in public service may qualify for Public Service Loan Forgiveness (PSLF) of the remaining balance after 120 qualifying payments. The Teacher Loan Forgiveness is available to borrowers teaching for five consecutive years in a low-income school, up to $17,500. These programs have strict eligibility criteria.
The Department of Education deducts 1.057% from the loan amount before disbursing it to the borrower.
After 270 days of non-payment, the borrower’s wages can be garnished, tax refunds and social security benefits can be ceased, credit score is damaged and eligibility for further aid is lost. You can use IDR plans, deferment or forbearance.
To apply for a direct subsidized loan, you need to complete the Free Application for Federal Student Aid (FAFSA) at fafsa.gov and sign a Master Promissory Note (MPN) to agree to the loan terms after being approved.
Direct Unsubsidized Loans
Undergraduate and graduate students enrolled in at least half-time in a degree or certificate program are eligible for a direct unsubsidized loan. It’s available to a broader range of students because a financial need isn’t a requirement.
A fixed interest rate of 6.53% applies to loans disbursed to undergraduate students before 1 July 2025 and 8.08% for graduate students.
Unlike direct subsidized, unsubsidized loans accrue interest from the date of disbursement. A grace period of 6 months after leaving school is permitted before repayment begins. You can make interest-only payments during school to minimize capitalization.
The loan limits for dependent undergraduates are $5,500 for the first year (up to $3,500 subsidized), $6,500 for the second year (up to $4,500 subsidized), and $7,500 for the third year and beyond (up to $5,500 subsidized). For independent undergraduates, the subsidized portion for each year is the same as for dependent undergraduates. Although the first-year limit is $9,500, the second-year is $10,500, and the third-year and beyond is $12,500. Graduate students are limited to $20,500 per year, all unsubsidized.
Aggregate limits for dependent graduates is $31,000 or $57,500 for independent, including subsidized and unsubsidized loans. The total for graduate students is $138,500—includes undergraduate loans and a maximum of $65,000 subsidized.
The origination fee, repayment plans and forgiveness programs are the same as for direct subsidized loans, but the forgiveness amount for unsubsidized loans may be higher because of the interest that accrues at disbursement.
Direct PLUS Loans
Direct PLUS loans are available to graduate students, professional students enrolled in professional programs and parents of dependent undergraduate students. Borrowers should not have an adverse credit history but may still qualify with an endorser.
Interest accrues immediately upon disbursement at 9.08% if received before 1 July 2025, and unpaid interest is capitalized.
Direct PLUS loans are suitable for borrowers seeking to cover large funding gaps since aggregate caps aren’t enforced.
One of the key differences between direct subsidized/unsubsidized loans and PLUS loans is that the origination fee for the latter is 4.228% as opposed to 1.057% for subsidized/unsubsidized if disbursed before 1 October 2025. That means the lender will deduct 4.228% of the PLUS loan before disbursing to the borrower.
Repayment plans are the same as direct subsidized/unsubsidized loans, but parent PLUS borrowers aren’t eligible for most income-driven repayment (IDR) plans unless consolidated into a Direct Consolidation Loan. Repayment for parent PLUS usually begins immediately after full disbursement. Deferment is available while the student is enrolled at least half-time and for 6 months after.
This loan includes parent PLUS liability, making parents liable for the loan repayment, even if the student doesn’t graduate or encounters financial difficulty.
Private Loans
Private lenders such as banks, credit unions and other financial institutions offer student loans to undergraduate, graduate and professional students. International students may also qualify with a U.S.-based co-signer, and approval depends on the borrower’s credit score, income and debt-to-income ratio.
Interest rates are usually fixed between 4% and 15%, but variable rates that fluctuate with market indices may be applicable. Interest accrues immediately after disbursement and unpaid interest may be capitalized.
Private loans cover the cost of attendance (COA) minus financial aid, and repayment terms are usually between 5 to 20 years. Repayment options include principal and interest payments, which start during school, interest-only payments require interest to be paid while in school and deferred payments provide a 6-month grace period after graduation.
Private loans don’t qualify for federal protection and non-payments of 120 to 180 days may lead to damaged credit, lawsuits or collection.
You can apply directly with the lender, and you may be required to sign a promissory note.
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