How Do Federal Student Loans Work?

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| Updated on

| Updated on

October 1, 2026

Student Loans

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College can be expensive. In fact, tuition and fees have nearly doubled in the past 20 years, and for many young Americans, college affordability is a serious fiscal challenge.

When scholarships, grants, and personal savings aren’t enough to cover college costs, students often turn to loans. So, we decided to break down what student loans are, the types available to Americans, and how interest and repayment work.

If you’re planning on applying for federal student loans — or know someone who is — keep reading.

‍What are federal student loans?

A federal student loan is money borrowed from the government to pay for college, graduate school, or another eligible education program. Unlike scholarships and most grants, student loans must be repaid with interest. Interest is the additional cost of borrowing that lenders charge.

‍What are the different types of student loans?

Federal student loans are issued by the U.S. Department of Education. Students apply for federal aid by completing the Free Application for Federal Student Aid, better known as the FAFSA.

The main types of federal loans include:

Direct Subsidized Loans: Available to undergraduate students with financial need. Interest does not accumulate while the borrower is enrolled at least half-time and during a six-month grace period after leaving school.
Direct Unsubsidized Loans: Available to undergraduate, graduate, and professional students enrolled at least half-time in an eligible degree or certificate program. Financial need is not required, and interest begins accumulating as soon as the loan is issued.
Direct PLUS Loans: Available to parents of undergraduate students and to graduate or professional students. Unlike most other federal student loans, eligibility includes a review of the borrower’s credit history. Financial need is not required, and interest begins accumulating as soon as the loan is issued.
Direct Consolidation Loans: Allow borrowers to combine eligible federal loans into one loan with one monthly payment. Consolidation can simplify repayment, but it may increase the repayment period and total interest paid.

Federal law limits how much students can borrow. The limit depends on factors including the student’s year in school and whether they receive parental support.

‍How does repayment work?

Borrowers generally do not need to repay federal Direct Subsidized or Unsubsidized Loans while enrolled at least half-time. After graduating, leaving school, or dropping below half-time enrollment, they typically receive a six-month grace period before payments begin.

Federal borrowers can choose from repayment options that fall into two groups:

Standard repayment plans: Monthly payments are based primarily on the amount owed and are designed to pay off the loan within a set period.
Income-based plans: Monthly payments are calculated using the borrower’s income and family size. Depending on the plan, any remaining balance may be forgiven after the borrower makes qualifying payments for a specified number of years.

‍How much will students pay?

For someone on a standard repayment plan, it is relatively simple. The amount originally borrowed is called the principal. The government also charges interest. Together, the principal and interest determine how much the borrower ultimately repays. Those payments are normally spread out evenly on a monthly basis over the course of 10 years.

For someone on an income-based plan, the amount they pay each month can vary drastically depending on their income after graduation. Borrowers pay a portion of their discretionary income each year, divided into monthly payments. Discretionary income is the money someone has left over after paying taxes and essential living expenses.

That means that the more someone earns after graduating, the more they’ll pay in monthly student loan repayments (up to a limit set by the specific repayment plan).

To find out more about estimated loan repayment costs, head to the Department of Education’s Federal Student Aid Repayment Calculator.

What This Means for You

Student loans are a financial commitment that can impact your budget long after you leave school. Before borrowing, students should understand their loan’s interest rate, repayment timeline, and total expected cost.

The growing national debt may also contribute to higher rates on new federal student loans. As the government borrows more, it can put upward pressure on Treasury yields. Federal student loan rates are tied to these yields, so higher Treasury yields can make student loans more expensive. Check out our article on student loans and the national debt to learn more.

Want to stay informed about student loans and other policy developments that could affect you? Sign up for our newsletter for the latest updates.

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