A student loan is money you borrow to pay for school and repay later, with interest. That’s the easy part. The part that trips people up is everything around it: which loans charge interest while you’re still in class, what happens in the six months after you leave, how your payment is set, and what the government can take if you stop paying.
The rules also just changed more than they have in decades. On July 1, a new law capped what graduate students and parents can borrow, ended Grad PLUS loans for new borrowers, and replaced most repayment options with two plans: a fixed Tiered Standard Plan and an income-based plan called RAP. The SAVE plan is gone. Forgiveness after 20 or 25 years of income-driven payments is taxable again. This guide walks through how student loans work now, from the first FAFSA to the last payment, and what to do in the situations where the usual advice doesn’t fit.
Seven Straight Answers Before You Borrow or Pay
These are the questions people search for most, answered plainly. The details and exceptions follow further down.
You borrow through the FAFSA (federal) or a lender (private), the money goes to your school, interest builds at a set rate, and you repay monthly once you leave school, usually after a six-month grace period.
On subsidized loans, no; the government covers it. On unsubsidized and PLUS loans, interest starts the day the money is paid out, even though no payment is due yet.
A dependent undergraduate can borrow $5,500 to $7,500 a year in federal loans, up to $31,000 total. Graduate students now max out at $20,500 a year and $100,000 total; professional students at $50,000 and $200,000.
For $27,000 at 6.52%, about $307 a month over 10 years or $236 over 15. On the income-based RAP plan, it depends on income: roughly $100 a month at $40,000 a year with no dependents.
No. A court ended SAVE in March. Former SAVE borrowers must pick IBR, RAP or a standard plan, or they’ll be placed on one automatically.
Forgiveness at the end of an income-driven plan is federally taxable again as of January 1. Public Service Loan Forgiveness, and discharges for death or total and permanent disability, remain tax-free.
After 90 days, the late payment is reported to credit bureaus. After 270 days, the loan defaults, and the government can take tax refunds, part of Social Security and up to 15% of your disposable pay without suing you.
How Student Loans Work, Step by Step
Most borrowers never see the money. It moves from the lender to the school, and what you see is a smaller tuition bill and, eventually, a monthly statement. Here’s what happens in between.
You file the FAFSA
The Free Application for Federal Student Aid is the gateway to every federal loan, grant and work-study job. It’s free on StudentAid.gov, and it opens each fall for the following school year. You file it every year you want aid. Grants and scholarships come first in an aid offer; loans fill the gap after that.
The school builds your aid offer
Your school’s financial aid office decides how much you can borrow, within federal limits, based on its cost of attendance minus other aid. Schools can now set lower program-level limits than the federal maximum. You can accept all, part or none of any loan offered. Accepting less than the maximum is one of the most effective ways to keep payments manageable later.
You sign a promissory note
First-time federal borrowers complete entrance counseling and sign a Master Promissory Note, a legal promise to repay. One note usually covers loans for up to 10 years at the same school. Private lenders have their own contracts, often with a cosigner who becomes just as responsible for the debt as you are.
The money goes to the school, minus a fee
Federal loans are paid out in at least two installments, usually one per term. A small origination fee comes off the top before the school gets it: 1.057% on Direct Subsidized and Unsubsidized loans and 4.228% on PLUS loans. A $20,000 Parent PLUS loan, for example, delivers about $19,154 to the school but must be repaid in full. Anything left after tuition, fees and housing is refunded to you for other education costs.
Grace period, then repayment
Once you graduate, leave school or drop below half-time enrollment, most federal loans give you six months before the first payment. Your loan servicer, the company that handles billing for the Department of Education, contacts you to set up a plan. If you don’t pick one, you’re placed on a standard plan.
From there, you pay monthly until the loan is gone, forgiven or discharged. You can pay extra any time without a penalty, on federal and private loans alike.
When we worked through the numbers on a single freshman-year loan, the in-school interest was bigger than most students expect. A $5,500 unsubsidized loan at 6.52% builds about $359 of interest a year, roughly 98 cents a day. Over four years of school and the six-month grace period, that’s around $1,614 the student owes before making a single payment. Paying $30 a month while in school, about the price of a couple of takeout meals, covers that interest and keeps the balance at $5,500.
Types of Student Loans and How Much You Can Borrow
Every student loan falls into one of two families: federal loans from the Department of Education, and private loans from banks, credit unions, online lenders and some states. They behave very differently once repayment starts.
| Loan | Who gets it | Rate this year | Interest in school | Annual limit | Credit check |
|---|---|---|---|---|---|
| Direct Subsidized | Undergrads with financial need | 6.52% | Paid by government | $3,500–$5,500 | No |
| Direct Unsubsidized | Undergrads, graduate students | 6.52% undergrad, 8.07% grad | Accrues | Up to $20,500 grad | No |
| Professional (unsubsidized) | Medicine, law, similar programs | 8.07% | Accrues | Up to $50,000 | No |
| Parent PLUS | Parents of dependent undergrads | 9.07% | Accrues | $20,000 per student | Adverse history only |
| Grad PLUS | Closed to new borrowers | 9.07% | Accrues | Ended July 1 | Adverse history only |
| Private loan | Students, often with a cosigner | Varies by credit | Usually accrues | Up to cost of attendance | Yes |
Undergraduate limits haven’t changed
Dependent undergraduates can borrow $5,500 in their first year (no more than $3,500 of it subsidized), $6,500 in the second year and $7,500 each year after, with a $31,000 cap overall. Independent students, and dependent students whose parents are denied a PLUS loan, can borrow more: $9,500, $10,500 and $12,500 a year, up to $57,500 total. All of it counts toward a new lifetime federal cap of $257,500 that excludes Parent PLUS.
The big changes hit everyone else. Graduate students who didn’t already have a federal loan before July 1 can borrow $20,500 a year and $100,000 total, with no Grad PLUS to fill the gap. Professional students, such as those in medicine and law, can borrow $50,000 a year and $200,000 total. Parents can now take only $20,000 a year and $65,000 in total Parent PLUS loans per student, no matter how many parents borrow.
Private loans are where the gap gets filled now, especially for graduate school. They aren’t automatically bad. A borrower or cosigner with strong credit can sometimes beat the 8.07% federal graduate rate. But a private loan won’t qualify for RAP, Public Service Loan Forgiveness, federal deferment or the federal disability discharge rules. Use federal loans first, and treat a private loan as the last layer, borrowed only for what the federal limit doesn’t cover.
How Student Loan Interest Works
Federal student loan interest is simple daily interest, not compound interest on a credit card. That sounds reassuring, and it mostly is. The catch is when unpaid interest gets added to your principal.
The formula is set by Congress: the May 10-year Treasury note auction’s yield plus 2.05 points for undergraduates, 3.60 for graduate students and 4.60 for PLUS loans, capped at 8.25%, 9.50% and 10.50%. That’s why a senior who borrowed in four different years may hold four loans at four different rates. Your credit score doesn’t affect federal rates, except that Parent and Grad PLUS loans deny applicants with certain serious negative credit history.
Interest accrues daily on the principal. When a payment arrives, it goes first to any fees, then to interest that has built up, and only then to principal. That order is why an income-based payment that doesn’t cover the monthly interest used to make balances grow. Under the new RAP plan, any interest your on-time payment doesn’t cover is waived, which ends that particular trap for RAP borrowers.
Capitalization is the moment unpaid interest stops being a separate pile and gets folded into your principal, after which you pay interest on that interest. Federal rules have limited the events that trigger it in recent years, but it can still happen in situations such as leaving certain income-driven plans or ending a forbearance on some older loans. The simplest defense is the same one that works in school: whenever you can, pay at least the interest that’s accruing, so there’s nothing left to capitalize.
One quick win almost everyone qualifies for: most federal servicers take 0.25 percentage points off your rate when you sign up for automatic payments. On a $27,000 balance, that trims the interest by a few hundred dollars over a 10-year plan, and it guarantees you won’t miss a due date during a hectic month.
Repayment Plans: What Changed and Which One You Can Use
Which plans you can use now depends mostly on when your loans were made. Loans made before July 1 keep access to the older Income-Based Repayment plan. Loans made on or after that date get two choices.
The Tiered Standard Plan
This is a fixed monthly payment, but the length now depends on how much you owe: 10 years for balances under $25,000, 15 years from $25,000 to under $50,000, 20 years from $50,000 to under $100,000, and 25 years at $100,000 or more. It’s also the only plan for new Parent PLUS loans, which can’t use RAP.
We found a cost hiding in that design. A student who borrows the full four-year undergraduate amount, $27,000, lands just over the $25,000 line and gets a 15-year term. At 6.52%, that’s about $236 a month and roughly $15,390 in total interest. Paying the same loan off in 10 years, at about $307 a month, costs around $9,820 in interest. Choosing to pay the extra $71 a month saves about $5,570, and federal loans never charge a penalty for paying early.
If you do pay extra, tell your servicer how to use it. By default, an extra payment can be treated as paying your next bill early, which advances your due date but doesn’t always target the loan that costs you most. Ask in writing, or through the servicer’s online payment screen, to apply extra money to principal on your highest-rate loan first. Graduate and PLUS loans usually carry the highest rates, so they’re the natural first target.
The Repayment Assistance Plan (RAP)
RAP sets your payment as a percentage of your adjusted gross income, the AGI on your tax return. The percentage climbs one point for each $10,000 of income: 1% for $10,001 to $20,000, 2% for the next $10,000, and so on up to 10% above $100,000. Income of $10,000 or less pays a flat $10. Divide the annual figure by 12, subtract $50 for each dependent you claim, and the payment never drops below $10. Remaining balances are forgiven after 360 qualifying payments, which is 30 years.
Two features matter more than the percentage. Any interest an on-time payment doesn’t cover is waived, so your balance can’t grow from unpaid interest. And if your payment knocks less than $50 off principal, the government adds a match so your principal still drops by up to $50 that month. RAP payments also count toward Public Service Loan Forgiveness.
That stair-step shape is the most useful thing we found when we ran the RAP formula across incomes. Because the new percentage applies to your entire AGI, crossing a bracket line by a single dollar raises the payment for the whole year. At $50,000, the payment is about $167 a month; at $50,001, it’s about $208. Borrowers sitting just above a line can often drop back under it with pre-tax 401(k), 403(b) or HSA contributions, which lower AGI. A $1,000 contribution that saves $500 a year in loan payments, on top of the tax savings, is an unusually good trade.
If your loans are older: IBR stays, the rest are closing
Loans made before July 1 can stay on, or switch to, Income-Based Repayment. IBR sets payments at 10% of discretionary income with forgiveness after 20 years for borrowers whose first loans came after July 1, 2014, and 15% with 25 years for earlier borrowers. Pay As You Earn and Income-Contingent Repayment close by July 1, 2028, and anyone still in them will move to IBR or RAP. Older borrowers can also choose RAP, and qualifying payments already made carry over.
| Plan | Payment | Forgiveness | Who can use it | Watch out for |
|---|---|---|---|---|
| Tiered Standard | Fixed | None; paid off in 10–25 years | All Direct loans, including new Parent PLUS | Long terms raise total interest |
| RAP | 1%–10% of AGI, minimum $10 | After 30 years (taxable) | Direct loans except Parent PLUS | Bracket jumps; no $0 payment |
| IBR | 10% or 15% of discretionary income | After 20 or 25 years (taxable) | Loans made before July 1 | Annual income recertification |
| PAYE, ICR | 10% or 20% of discretionary income | After 20 or 25 years | Current enrollees only | Closing by July 1, 2028 |
| SAVE | — | — | No one | Ended by court order in March |
Student Loan Payment Calculator: Both New Plans Side by Side
Enter what you owe and what you earn. The tool shows your Tiered Standard payment, your estimated RAP payment, and how much interest the fixed plan costs over its full term.
Estimates only. Your servicer calculates the official amount.
The defaults match the example used throughout this page: $27,000 at 6.52% and a $40,000 income. The fixed plan comes out to about $236 a month for 15 years; RAP comes out to $100. Monthly interest on that balance is about $147, so on RAP the borrower’s $100 payment doesn’t cover it. The government waives the difference and adds a $50 principal match, so the balance still falls about $50 a month instead of growing. Try raising the income to $40,001 to see the bracket jump, or adding a dependent to see the $50 credit.
Which Situation Sounds Like Yours?
Most explanations of student loans assume an 18-year-old borrowing for a four-year degree and starting a salaried job afterward. Here’s how the answers change for everyone else.
Accept subsidized loans first, then unsubsidized, and borrow only what the bill actually requires after grants and scholarships. If you can, pay the interest on unsubsidized loans while you’re in school; it’s often under $30 a month for a single year’s loan. Write down your servicer’s name as soon as you get a notice, and log in to StudentAid.gov once a year to see every federal loan in one place.
New Parent PLUS loans now cap at $20,000 a year and $65,000 per student, carry a 9.07% rate and a 4.228% fee, and can only be repaid on the Tiered Standard Plan. They can’t use RAP. The old workaround of consolidating to reach income-driven repayment required consolidation before July 1, so that door is closed for new loans.
Before signing, compare the total cost with what your student could borrow in their own name. If a parent is denied a PLUS loan, the student becomes eligible for the higher independent-student limits, which carry a lower 6.52% rate and full access to RAP. Parents nearing retirement should also remember that Social Security benefits can be partly offset if a federal loan ever defaults.
Without Grad PLUS, the federal ceiling is $20,500 a year for most master’s and doctoral programs and $50,000 for professional programs. Ask the financial aid office whether your program counts as professional under the new definition; the list is narrower than many students assume. For costs above the limit, compare institutional aid, assistantships and employer tuition benefits before private loans. If you had a federal loan disbursed for your current program before July 1, you may keep the older limits for up to three more years.
SAVE ended by court order in March, and servicers began sending 90-day notices on July 1. If you don’t choose a plan by your deadline, you’ll be placed on one, usually a standard plan with a higher payment. Months spent in the SAVE forbearance didn’t count toward forgiveness, so moving to IBR or RAP sooner restarts your progress. Use the Loan Simulator on StudentAid.gov to compare both with your actual loans before deciding.
Public Service Loan Forgiveness cancels the remaining balance tax-free after 120 qualifying monthly payments while you work full time for a government agency or qualifying nonprofit. Payments must be on a qualifying plan, and RAP, IBR and the 10-year standard plan all qualify. Certify your employment with the PSLF Help Tool every year or whenever you change jobs, rather than waiting until year ten to find out a stretch didn’t count.
Recertify your income right away instead of waiting for your annual date. On RAP, an AGI of $10,000 or less means a $10 payment, and on IBR the payment can fall to $0. Deferment and forbearance are short-term pauses, but interest usually keeps building during forbearance, and for loans made on or after July 1, 2027, unemployment and economic hardship deferments go away and forbearance is limited. A low income-based payment is usually better than a pause.
Forgiveness at the end of IBR, PAYE, ICR or RAP is federally taxable again for discharges after December 31, and you may receive a Form 1099-C. If your debts exceed your assets right before forgiveness, the IRS insolvency exclusion (Form 982) can reduce or erase the tax. Some states tax forgiveness on their own terms. Start setting money aside, or talk to a tax preparer, a year or two before your expected forgiveness date.
Your grace period starts the day you drop below half-time, whether or not you earned a degree, and the loans are owed in full. Borrowers who didn’t finish default at higher rates, often because they never set up a payment. Enroll in RAP or IBR right away if money is tight. If your school closed while you were enrolled or within a short time after you left, or misled you about the program, look into closed school discharge or borrower defense on StudentAid.gov.
A cosigner owes the full debt, and late payments show up on both credit reports. Ask the lender whether it offers cosigner release, which usually requires a run of on-time payments and a credit check of the primary borrower. Check whether the loan includes a death and disability discharge; federal tax law keeps those discharges tax-free for private loans too.
What Happens If You Can’t Pay, and How to Get Back on Track
Default is the costliest place a federal borrower can end up, and it’s more common than most people realize. About 9 million borrowers owing roughly $220 billion were in default as of March, according to Federal Student Aid.
Involuntary collections on defaulted federal loans have been on hold since the Education Department paused them in mid-January. In recent weeks, several reports have indicated the government is preparing to restart wage garnishment and tax refund offsets, with Treasury taking a larger role in collecting defaulted loans. No firm date had been announced as of October 24. If you’re in default, the safest assumption is that collections could resume with only the required written notice.
| Where you are | What it means | Do this first | Then |
|---|---|---|---|
| Can’t afford the bill | Not late yet | Apply for RAP or IBR on StudentAid.gov | Ask the servicer for forbearance while it processes |
| 1–89 days late | Delinquent | Call your servicer; pay or change plans | Set up autopay for the 0.25% discount |
| 90–269 days late | Credit damage underway | Get on an income-based plan now | Ask whether a forbearance can bring the account current |
| In default | Collections can start | Call the Default Resolution Group | Choose rehabilitation or consolidation |
| Garnishment notice arrived | 30 days to act | Request a hearing in writing before the deadline | Start rehabilitation; ask about hardship |
| Scam call about “forgiveness” | Likely fraud | Never pay upfront fees or share your FSA ID | Report to the FTC |
Rehabilitation means making nine voluntary, reasonable, affordable monthly payments within 10 months, often based on income. When you finish, the default notation comes off your credit report, though the earlier late payments stay. Rehabilitation has long been a one-time option per loan, so it’s worth getting right.
Consolidation means combining defaulted loans into a new Direct Consolidation Loan and agreeing to an income-based plan, or making three on-time payments first. It’s faster, but the default record stays on your credit history. Either route restores access to repayment plans and stops new involuntary collections once it’s complete.
About 3 million borrowers 62 and older still owe federal student loans, including many Parent PLUS borrowers. If a federal loan defaults, part of a Social Security check can be offset, with the first $750 a month protected. If you’re on a fixed income, an income-based plan or a disability discharge application is far better than letting a loan drift into default.
A note on scams, since they spike every time the rules change. Every federal repayment plan, consolidation and PSLF form is free on StudentAid.gov. A company that charges an upfront fee, asks for your FSA ID password, or promises “new forgiveness programs” that require you to act today is a red flag. The Education Department will never charge you to enroll in a plan.
Our Verdict
Max out grants and scholarships, then take federal loans in this order: subsidized, unsubsidized, and only then PLUS or private. Borrow for what the bill requires, not what’s offered. Paying the interest while in school is the cheapest favor you can do your future self.
If you can afford it, use the Tiered Standard Plan but pay on a 10-year schedule; the savings in interest can run into thousands. If money is tight or you work in public service, RAP or IBR keeps payments tied to income and the balance moving down. Set up autopay either way.
Act before day 270. An income-based payment of $10 is always better than default. If you’re already in default, start rehabilitation or consolidation now rather than waiting for collections to restart.
Questions people still ask
Do student loans affect my credit score?
Yes. Federal and private student loans appear on your credit report. On-time payments build credit history, and payments 90 or more days late on a federal loan are reported and can lower your score significantly.
Can student loans be discharged in bankruptcy?
It’s harder than with most debts, but possible. You have to file a separate proceeding and show undue hardship. Federal agencies adopted a simpler attestation process for federal loans in late 2022, and more borrowers have succeeded since then than many people assume. A bankruptcy attorney can tell you whether the process still applies to your case.
Should I refinance my federal loans with a private lender?
Only if you’re confident you won’t need income-based repayment, PSLF or federal deferment. Refinancing can lower your rate if you have strong credit, but it permanently turns federal loans into private ones.
Is student loan interest tax-deductible?
You can deduct up to $2,500 a year of student loan interest you paid, without itemizing, if your income is below the IRS limits. Your servicer sends Form 1098-E if you paid $600 or more in interest.
What happens to student loans if I die?
Federal student loans are discharged when the borrower dies, and Parent PLUS loans are discharged if either the parent or the student dies. Under the new tax law, those discharges are permanently tax-free. Private lenders set their own rules, so check the loan agreement.
How do I find out who my servicer is?
Log in to StudentAid.gov with your FSA ID. Your dashboard lists every federal loan, its balance, its rate and the company servicing it. Private loans appear on your credit report but not on StudentAid.gov.
How this page was checked. Interest rates, fees, loan limits, repayment plan rules and default timelines come from Federal Student Aid and the Department of Education’s guidance on the July 4, 2025 reconciliation law, cross-checked against university financial aid offices. Portfolio and default figures come from Federal Student Aid’s March data. Tax treatment reflects IRS rules after the American Rescue Plan exclusion expired on December 31. The status of the SAVE plan and of involuntary collections reflects court actions and official announcements as of October 24. Payment examples and charts are our own calculations. Your servicer’s figures are the final word.
This page is independent and not affiliated with any lender or loan servicer. It is general information, not legal, tax or financial advice.
Key sources: Federal Student Aid · U.S. Department of Education · IRS · Consumer Financial Protection Bureau · Federal Trade Commission