What's the difference between federal and private student loans?

Federal student loans come from the U.S. government, have fixed interest rates set by law, and offer income-driven repayment and forgiveness options. Private loans come from banks or credit unions, are approved based on credit, can have fixed or variable rates, and typically offer fewer repayment protections.

Do student loans accrue interest while I'm in school?

It depends on the loan type. Federal subsidized loans do not accrue interest while you're in school at least half-time. Federal unsubsidized loans and virtually all private loans accrue interest from the day the loan is disbursed, even while you're still studying.

What is a grace period on student loans?

A grace period is the window after you graduate, leave school, or drop below half-time enrollment before repayment begins. Federal loans commonly have a six-month grace period; private loans vary by lender.

What is income-driven repayment?

Income-driven repayment plans cap your federal student loan payment at a percentage of your discretionary income, recalculated annually, with any remaining balance forgiven after 20-25 years depending on the plan. They're available only for federal loans, not private ones.

Should I pay off student loans early?

It depends on the interest rate compared to what you could earn investing, whether you're pursuing forgiveness (which extra payments would undermine), and whether you have higher-interest debt like credit cards to prioritize first. There's no single right answer for everyone.

How Do Student Loans Work?

Federal vs private loans, how interest actually accrues, and the repayment options most people never learn about until after graduation.

Student loans are one of the few major financial products most people take on before they've had to manage a real budget. Understanding the basics — before you borrow, and again once repayment starts — makes a real difference in how much you ultimately pay.

Federal vs private student loans

These are fundamentally different products, even though they're both called "student loans":

Feature	Federal loans	Private loans
Lender	U.S. Department of Education	Bank, credit union, or online lender
Approval basis	Enrollment, no credit check (undergrad)	Credit score and income (often needs a cosigner)
Interest rate	Fixed, set annually by law	Fixed or variable, varies by lender/credit
Repayment plans	Multiple, including income-driven	Limited, lender-specific
Forgiveness eligible	Yes, several programs	Generally no

The general rule of thumb from financial aid offices: exhaust federal loan options first, since they carry more protections, before turning to private loans to cover any remaining gap.

How interest actually accrues

This is the part that surprises the most borrowers. Subsidized federal loans don't accrue interest while you're enrolled at least half-time — the government covers it. Unsubsidized federal loans, along with nearly all private loans, start accruing interest from the day the money is disbursed, even while you're still in school and not making payments. That unpaid interest can capitalize (get added to your principal) at certain points, meaning you end up paying interest on interest.

The grace period

Most loans don't require payments the moment you graduate. Federal loans typically include a six-month grace period after you graduate, leave school, or drop below half-time enrollment. Private lenders set their own grace periods, which can be shorter, longer, or nonexistent — check your specific loan terms.

Once you know your balance and rate, use the Debt Payoff Calculator to see exactly how long payoff will take and how much extra payments would save in interest.

Repayment plan options (federal loans)

Standard repayment — fixed payment over 10 years. Pays the least interest overall for those who can afford the payment.
Graduated repayment — starts lower and increases every two years, over 10 years. Useful if you expect rising income.
Extended repayment — up to 25 years, lowering the monthly payment but increasing total interest paid.
Income-driven repayment — caps payments at a percentage of discretionary income, recalculated yearly, with remaining balance forgiven after 20-25 years.

Private loans don't offer income-driven options — repayment terms are whatever you agreed to when you signed, though some lenders offer limited hardship deferment or forbearance.

Should you pay extra toward student loans?

This depends on a few factors that don't have a universal answer:

Interest rate — a 3-4% federal loan is a very different decision than a 9-11% private loan.
Forgiveness eligibility — if you're pursuing Public Service Loan Forgiveness or another forgiveness track, paying extra can actually work against you by shrinking the balance that would otherwise be forgiven.
Other debt — high-interest credit card debt should almost always be paid off before extra payments go toward lower-rate student loans.
Emergency savings — build at least a partial cushion before aggressively prepaying any fixed-rate, relatively low-interest debt.

Comparing a lower-rate personal loan against high-interest debt? The Personal Loan vs Credit Card guide breaks down when consolidating makes sense.

This article is general information, not financial advice. Federal loan programs and rates change over time — check studentaid.gov for current, authoritative terms.