Federal and Private Loans: Know What You Owe

Most people with student loans cannot say, without looking, how many loans they have, who services each one, or which kind they are. That gap matters more than it seems. Whether you can lower your payment to a share of your income, whether a balance can be forgiven, and whether refinancing is safe all depend on two facts about each loan: is it federal or private, and when was it first paid out. This chapter explains the difference, shows how interest builds before your first payment, and walks you through building the one-page inventory every later decision in this book relies on.

Federal and private loans are different products

A federal student loan is lent by the U.S. Department of Education. Its terms are set by law, not by your credit score: the interest rate is fixed for the life of the loan, and the same rules apply to every borrower in the same program. In exchange for that uniformity you get a set of protections no private lender is required to offer: repayment plans that set the payment as a share of income, forgiveness programs, deferment and forbearance when you cannot pay, and discharge if you die or become totally and permanently disabled.

A private student loan comes from a bank, credit union or online lender. It is a contract like any other consumer loan. The rate depends on your credit (and often a cosigner's), it may be fixed or variable, and the protections are whatever the contract says. Some lenders offer short hardship pauses or reduced payments; none offer federal forgiveness or income-driven plans.

Two details sit behind that table. For private loans made since late 2018, federal law requires the lender to release a cosigner if the student borrower dies; for older loans it depends on the contract. And federal collections are real: the Department of Education resumed collecting on defaulted loans in 2025, including by taking tax refunds.

The kinds of federal loans

Federal loans come in a few types, and the type sets how interest behaves.

• Direct Subsidized Loans go to undergraduates with financial need. The government pays the interest while you are enrolled at least half time, during the six-month grace period after you leave school, and during deferment.
• Direct Unsubsidized Loans go to undergraduate and graduate students regardless of need. Interest starts the day the money is paid out.
• Direct PLUS Loans go to graduate students (Grad PLUS) and to parents of undergraduates (Parent PLUS). They require a check for adverse credit history and carry a higher rate and fee.
• Direct Consolidation Loans combine several federal loans into one.
• FFEL and Perkins loans are older programs that no longer make new loans. Some of them only reach today's repayment plans and forgiveness programs after consolidation into a Direct Loan.

Every Direct Loan also carries an origination fee, taken out of each disbursement, so the amount that reaches the school is a little less than the amount you owe.

What changed in 2025. The budget law passed in July 2025 (Public Law 119-21) ends Grad PLUS loans for new borrowers from July 1, 2026, and puts new annual and lifetime caps on graduate and Parent PLUS borrowing. Some students already enrolled in a program keep the old limits for a limited time. The exact caps and who qualifies for the transition are set out on studentaid.gov; check there before planning how to pay for a degree, because the old rule of thumb that federal loans could cover the full cost of graduate school no longer holds.

How interest builds before you pay anything

On an unsubsidized loan, interest accrues every day from disbursement, through school and the grace period. It is simple interest on the principal, but it does not disappear: if you do not pay it, it sits on the account, and at certain events it is capitalized, meaning added to the principal so that from then on you pay interest on it too. Federal rules removed several capitalization triggers in 2023, but some remain, such as leaving Income-Based Repayment. Private loans usually capitalize when repayment begins.

Paying the interest while you are in school, even partly, keeps the balance you start repayment with close to what you borrowed. It is one of the few moves that costs little and helps under every repayment strategy.

Fixed and variable rates

A federal rate is fixed: the rate for each new loan is set once a year from the May auction of 10-year Treasury notes plus a margin written into law, with a cap, and then it never changes for that loan. Private lenders offer fixed rates and variable ones, which move with a market benchmark. A variable rate often starts lower, and that is its appeal. The risk is what happens if rates rise.

A $30,000 loan repaid over ten years at 6.0% costs $333 a month and $9,967 in interest. If a variable rate climbs to 9.0% and stays there, the payment becomes $380 and the interest $15,603. In practice a variable rate moves in steps over the life of the loan, so the real outcome lands somewhere around these two, but the example shows the size of the risk. A variable rate suits someone who expects to repay quickly, before the rate has much time to move; for a loan you will carry for a decade, a fixed rate buys certainty.

When you compare private offers, compare the APR, which folds in fees, not the advertised rate.

Build your loan inventory

Everything later in this book starts from one list. Build it once and update it every year.

Federal loans. Log in to your account at studentaid.gov. The dashboard lists each federal loan with its type, balance, interest rate, first disbursement date, current repayment plan and servicer. You can also download your full aid data as a file. Your servicer is the company that sends bills and processes payments; the government reassigns servicers from time to time, so confirm the name here rather than relying on an old statement.

Private loans. These do not appear at studentaid.gov. Pull your free credit reports from AnnualCreditReport.com, the official source under federal law, to catch every private loan and its lender, then get the current terms from each lender's statements.

Record, for each loan:

With this list in hand, the rest of the book becomes a matter of choosing a lane for each loan.