Borrowing for college is one of the biggest financial decisions a family will ever make, and the first choice matters more than most people realise: should the loan come from the federal government, or from a private lender? Federal loans come with fixed interest rates set by law, built-in repayment protections and forgiveness programmes. Private loans are priced on your credit history, and their terms are whatever the lender writes into the contract.
This guide explains how each type works, what it costs in the 2026–27 academic year, how much you can borrow, and the order in which to borrow. Every rate, limit and deadline below was checked against Federal Student Aid (studentaid.gov) and the U.S. Department of Education on 12 November 2026. Rates change every year, so always confirm the current figures at studentaid.gov before you sign anything.
What Is a Federal Student Loan?
A federal student loan is made by the U.S. Department of Education through the William D. Ford Federal Direct Loan Program. You apply by filing the FAFSA, the Free Application for Federal Student Aid, and your school tells you which loans you qualify for in your financial aid offer. The terms are written into federal law, so every borrower with the same loan type pays the same fixed interest rate, whatever their credit history.
There are three main types of federal Direct Loan. Direct Subsidized Loans go to undergraduate students who demonstrate 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 authorised periods of deferment. Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need, but interest starts accruing from the day the money is disbursed — if you do not pay it while studying, it is added to your balance. Direct PLUS Loans are for parents of dependent undergraduates (Parent PLUS) and, with limits, graduate students; they require a check for adverse credit history, though not a minimum credit score.
One important change took effect on 1 July 2026: Graduate PLUS loans are no longer available to new graduate or professional student borrowers under the 2025 budget reconciliation law (the One Big Beautiful Bill Act). Parent PLUS loans continue, but with new caps, explained below.
What Is a Private Student Loan?
A private student loan is an ordinary consumer loan that happens to be used for school. Banks, credit unions and online lenders offer them, and each lender sets its own terms. Approval and pricing depend on credit: the lender reviews your income and credit score — or, more often for undergraduates, your cosigner’s — and quotes a rate accordingly. Because most students have little or no credit history, private lenders usually require a creditworthy cosigner, often a parent, who becomes equally responsible for the debt.
Private loans can carry fixed or variable interest rates. A variable rate can rise after you borrow, which makes the total cost harder to predict. Most private lenders charge no origination fee, but they also offer far fewer safety nets: generally no income-driven repayment, no federal forgiveness programme, and less flexibility if you lose your job or face hardship.
What Federal Loans Cost in 2026–27
Federal interest rates are fixed for the life of each loan and are set once a year by a formula in federal law, tied to the 10-year Treasury note auction each May. For loans first disbursed between 1 July 2026 and 30 June 2027, the rates are:
- Direct Subsidized and Unsubsidized Loans for undergraduates: 6.52% fixed
- Direct Unsubsidized Loans for graduate and professional students: 8.07% fixed
- Direct PLUS Loans: 9.07% fixed
Federal loans also charge an origination fee, deducted from each disbursement, so you receive slightly less than you borrow but repay the full amount. For loans disbursed before 1 October 2027, the fee is 1.057% on Direct Subsidized and Unsubsidized Loans and 4.228% on Direct PLUS Loans. Borrowers who repay by automatic debit can also receive an interest rate reduction, which rose to a total of 1.00% from 1 July 2026.
Private loan rates, by contrast, vary by lender and borrower. A borrower with excellent credit and a strong cosigner may be quoted a rate below the federal rate; a borrower with thin credit may be quoted far more. That range is exactly why private loans should be compared carefully, lender by lender, and only after federal options are exhausted.
How Much Can You Borrow?
Federal loans have annual and lifetime caps set by law. For dependent undergraduate students — most students under 24 — the combined annual limits for subsidized and unsubsidized loans are $5,500 in the first year (no more than $3,500 of it subsidized), $6,500 in the second year (no more than $4,500 subsidized), and $7,500 in the third year and beyond (no more than $5,500 subsidized). The lifetime, or aggregate, limit for dependent undergraduates is $31,000, including no more than $23,000 in subsidized loans.
Independent undergraduates — generally students aged 24 or older, married students, veterans, and others the FAFSA classifies as independent — can borrow more: $9,500 in the first year, $10,500 in the second, and $12,500 in the third year and beyond, up to an aggregate of $57,500. Dependent students whose parents are unable to obtain a Parent PLUS Loan qualify for the same higher limits.
Graduate and professional students can borrow up to $20,500 a year in Direct Unsubsidized Loans. For students who had not received a Direct Loan disbursement before 1 July 2026, new aggregate limits apply: $100,000 for graduate students and $200,000 for professional students.
Parent PLUS loans are now capped too. Since 1 July 2026, parents can borrow up to $20,000 per year and $65,000 in total per dependent student. Private loans have no statutory cap — the lender decides — which is one reason they can quietly become much larger debts.
Repayment: Where Federal Loans Really Differ
Repayment is where the gap between federal and private loans becomes widest. Federal loans come with a six-month grace period after you leave school before payments begin. You can choose from several repayment plans, including income-driven options that tie your monthly payment to your earnings. The 2025 law created a new Repayment Assistance Plan and set new rules for borrowers taking out loans after 1 July 2026, while some older plans are being phased out for existing borrowers — check your servicer and studentaid.gov for the plan that applies to you.
Federal loans also offer deferment and forbearance if you return to school, lose your job, or face hardship, and they can qualify for Public Service Loan Forgiveness after 120 qualifying payments while working for a qualifying employer. Private loans may offer short forbearance periods, but these are at the lender’s discretion, usually limited in length, and interest normally keeps accruing.
The Right Order to Borrow
Financial aid advisers and Federal Student Aid itself point to the same sequence, and it is worth following in order:
- Grants and scholarships first. Money you do not repay. File the FAFSA to be considered for federal grants such as the Pell Grant — the maximum Pell Grant is $7,395 for 2026–27 — and apply for scholarships from your school, community groups and employers. The 2027–28 FAFSA opened on 23 September 2026 at studentaid.gov; for a full walkthrough see our guide FAFSA Explained: How to Apply and Deadlines for 2026–27, and for free money before you borrow, Scholarships Explained: How to Find Them, Apply and Avoid Scams.
- Federal Direct Subsidized Loans. The cheapest borrowing available: a fixed rate, no credit check, and the government pays the interest while you study.
- Federal Direct Unsubsidized Loans. The same fixed rate and protections, without the interest subsidy.
- Parent PLUS Loans, if needed. Higher rate and fee, but still federal protections, and now capped at $20,000 a year.
- Private loans last. Only for the remaining gap, after comparing at least three lenders on fixed versus variable rates, fees, cosigner release options and hardship policies.
Before you accept any loan, compare the total cost, not just the monthly payment: a lower rate over a longer term can still cost more overall. Your school’s financial aid office can walk through your award letter line by line, and it costs nothing to ask.
Private Loans: What to Check Before You Sign
If a gap remains after grants, scholarships and federal loans, a private loan may be the only way to cover it. Shop carefully. Compare the annual percentage rate, not just the advertised “starting at” rate; ask whether the rate is fixed or variable, and what happens if it rises. Ask about fees, late-payment penalties, and whether the lender offers cosigner release after a set number of on-time payments — a feature that can free a parent from the debt later. Ask what happens if you need to pause payments, and how long forbearance lasts. Get every answer in writing, and never borrow more than the gap you actually need. Be wary of any lender that pressures you to sign quickly, charges upfront fees to apply, or guarantees approval regardless of credit.
The Bottom Line
Federal loans should almost always come first. They cost the same for every borrower, carry fixed rates — 6.52% for undergraduates in 2026–27 — and include repayment, hardship and forgiveness protections no private lender matches. Private loans have their place as a last resort for a genuine funding gap, but they are priced on your credit and often need a cosigner. File the FAFSA, take the subsidised loan first, borrow only what you need, and check the current figures at studentaid.gov every year before you borrow again.
Sources
- U.S. Department of Education, Federal Student Aid — Interest Rates and Fees for Federal Student Loans (studentaid.gov)
- U.S. Department of Education, Federal Student Aid — Annual and Aggregate Loan Limits (studentaid.gov)
- U.S. Department of Education, Federal Student Aid — 2027–28 FAFSA Form Now Available (23 September 2026) (studentaid.gov)
- The Institute for College Access & Success (TICAS) — Amounts and Terms for Loans Issued in 2026–27 (ticas.org)
- U.S. Department of Education — Federal Student Aid Handbook, Loan Limit Proration