How Do Student Loans Work?

How do student loans work? Your loan type, interest rate, and term affect your total loan costs and your repayment options.

As you prepare to enter college, you may be worried about paying for school. If you’re like most students, you’ll use student loans for at least some of the cost. According to the Federal Reserve, 30% of all adults took out some debt to pay for their education. When you only look at those that attended college, the number is much higher; in fact, 62% of college graduates in 2019 left school with student loan debt. 

While student loans are common, they’re frequently misunderstood. So how do student loans work? By understanding the basics, you can become an informed borrower. 

How Do Student Loans Work? 

Student loans are a form of installment loan, meaning you take out a certain amount and repay it with monthly payments over a predetermined period. As long as you make all of your minimum monthly payments on time, you’ll pay off your loan by the end of your loan term. 

When it comes to student loans, there are two main types: federal and private. Which type of education loan you have will impact your eligibility, interest rates, and repayment options. 

How Do Federal Student Loans Work? 

Federal student loans usually have lower interest rates and more repayment options than private loans. That’s why the majority of borrowing is in the form of federal loans. 

  • Application process: To apply for federal student loans, you must complete the Free Application for Federal Student Aid (FAFSA). It’s what the government and schools use to determine your eligibility for loans and other forms of financial aid, such as grants. 
  • Lender: If you qualify for federal student loans, the U.S. Department of Education is your lender. 
  • Repayment terms: All federal loans have a standard repayment term of 10 years. However, you might qualify for a longer loan term if you are eligible for an alternative payment plan. 
  • In-school payments: As a student, you aren’t required to make payments until six months after you graduate. 
  • Interest rate: Federal student loans have fixed interest rates, meaning they stay the same for the entirety of your repayment term. All borrowers receive the same interest rate, regardless of credit or past borrowing history. 
  • Credit checks: Most federal student loans do not require a credit check. The only exceptions are Grad and Parent PLUS Loans. 
  • Limits: There are limits on how much you can borrow in federal loans annually and over your lifetime. 

Types of Federal Loans

Loan Name

Borrower Type

Interest Rate*

Disbursement Fees**

Direct Subsidized




Direct Unsubsidized

Undergraduate or Graduate

  • 3.73% for undergraduate students
  • 5.28% for graduate students



Graduate or parents of undergraduate

  • 6.28% 


*Interest rates for loans disbursed on or after July 1, 2021, and before July 1, 2022

**Disbursement fees for loans disbursed on or after October 1, 2020, and before October 1, 2022

How Do Private Student Loans Work? 

If you’ve reached the borrowing caps for federal loans or aren’t eligible for federal financial aid, private student loans can be useful financing options. 

They play an important role in paying for school. The Institute for College Access & Success reported that 16% of outstanding education debt is in the form of private student loans. 

However, private student loans differ from federal loans in several key ways: 

  • Application process: To apply for a loan, you must submit an application with the individual lender. The lender will review your application, including your income and credit score, to determine whether to approve you. 
  • Lender: Private student loan lenders can be banks, credit unions, or financial institutions. 
  • Repayment terms: Private loans can have different repayment terms. Depending on the lender, you could have a term of five to 25 years. 
  • In-school payments: While some lenders allow you to defer payments until after graduation, that isn’t the case for all companies. Some lenders require at least partial payments while you’re in school. 
  • Interest rate: Private student loans can have fixed or variable interest rates. While fixed rates stay the same, variable interest rates can change over time. The interest rate you receive is based on your credit, loan amount, and repayment term. 
  • Credit checks: Private lenders will perform credit checks. To qualify for a loan, you’ll need a source of income and good to excellent credit. If you don’t meet the borrower criteria, you will need a co-signer on your application. 
  • Limits: Most private student loan lenders do not have borrower maximums. Instead, you can borrow up to 100% of the school-certified cost of attendance. 

Types of Private Loans

There are several different types of private student loans: 

  • Undergraduate loans: If you are attending a community college or four-year school, you can use private undergraduate loans. 
  • Graduate loans: Private graduate loans are for students pursuing a master’s or doctoral degrees. 
  • Parent loans: If you are a parent and want to help pay for your child’s education, parent student loans can help. 
  • International and DACA loans: If you are an international student or undocumented immigrant, you can use international or DACA student loans to pay for school. 
  • Student loan refinancing: If your loans are in repayment, student loan refinancing can help you get a better interest rate and save money. 

Loan Type


Interest Rate

Disbursement Fee


Undergraduate students

  • Fixed: 3.34% - 11.78%
  • Variable: 1.04% - 10.44%



Graduate or professional students

  • Fixed: 3.34% - 6.20%
  • Variable: 1.04% - 5.83%



Parents of undergraduate students

  • Fixed: 3.34% - 11.78%
  • Variable: 1.04% - 10.44%


DACA student loans

International students or DACA students

7.52% to 10.91%



Parents of college students or student borrowers

  • Fixed: 3.34% - 11.78%
  • Variable: 1.04% - 10.44%


Applying for Student Loans

By understanding how student loans work, you can prevent surprises after graduation. If you know what kind of loans you have, their interest rates, and repayment terms, you can come up with a repayment plan that works for you. 

If you still need to borrow money for school, join Juno to get access to the lowest possible interest rates and exclusive deals. 

Juno can help you to find a student loan or refinance a loan at the most competitive possible rate. We get groups of buyers together and negotiate on their behalf with lenders to save them money on private student loans and private student loan refinance loans. 

Join Juno today to find out more about your options for affordable private student loans to help fund your degree.

Kat Tretina
Written By
Kat Tretina

Kat Tretina is a freelance writer based in Orlando, FL. She specializes in helping people finance their education and manage debt. Her work has been featured in Forbes, The Huffington Post, MarketWatch, and many other publications.

Related Articles

View All Articles
20 Most Valuable Majors in 2021

Trying to figure out the return for your money for various college majors? Here are the 20 most valuable degrees in 2021 as well as some key takeaways.

Read more
USAA Student Loans Are No Longer Offered: Here Are the Best Alternatives

If you’re looking for USAA student loans, they’re no longer an option. Read on to learn about the best alternatives to USAA student loans.

Read more
Best MBA Internships Ranked

An MBA internship can help you gain experience and stand out from your peers. Read on to learn about the best MBA internships and how to land one.

Read more
Education Loan Finance Review: Student Loan Refinancing and Private Student Loans

Read this Education Loan Finance review to learn about the company’s options for student loan refinancing and private student loans.

Read more
Splash Financial Review: Student Loan Refinancing

Splash Financial is a student loan refinancing marketplace featuring multiple lenders. Learn more about if Splash student loan refinancing is right for you.

Read more
Student Loan Refinance Rates Comparison All Lenders

We have assembled a list of rates across all of the student loan refinance companies as of December 21, 2021.

Read more
All Categories: