Get familiar with the terms of federal and private student loans and how they can factor into your responsibilities as a borrower.
December 27, 2023
Paying back your student loans? You’re not alone. Recent research from Education Data Initiative shows that over half (54.1%) of independent undergrads accept federal student loans. Whether you have a federal student loan, private student loan or both, it’s important to understand the terms of all your loans so you can set up a responsible repayment plan.
Here’s everything you need to know about student loan terms and how they can impact repayment.
Before diving into specific loan terms, let’s discuss the 2 main types of student loans: federal and private. They both help you pay for school, but they can vary significantly in their sources, regulations, interest rates, repayment options, borrower protections and eligibility criteria.
Federal student loans are loans offered by the U.S. Department of Education to eligible students for education-related expenses.
These loans typically have fixed interest rates and flexible repayment plans, including income-driven options. They don’t usually require a credit check for eligibility, which makes them accessible to a broad range of students.
Federal student loans also offer benefits such as deferment, forbearance and potential loan forgiveness. In some cases, the government covers the interest during specific periods.
Private student loans are offered by banks or credit unions to help students cover educational expenses not met by federal aid, scholarships or grants.
These loans typically require a credit check and may have fixed or variable interest rates based on the borrower’s creditworthiness. They also typically have fixed repayment plans.
Both federal and private student loans typically have terms and conditions that outline important aspects of the loan, including repayment, interest rates, grace periods and more. However, the specific terms can vary based on the lender (federal vs. private), type of loan and individual circumstances.
Here’s a general overview of important terms and terminology associated with student loans and how they can factor into your responsibilities as a borrower.
This is the cost of borrowing the money and is usually expressed as a percentage. The interest rate on student loans can be fixed (meaning it stays the same over the life of the loan) or variable (meaning it can change over time).
Federal student loans typically offer fixed interest rates set by the government, providing stability over the loan term. Private student loans may offer fixed or variable interest rates determined by the lender.
The repayment period is the length of time you have to repay the loan.
Federal student loans often offer flexible and extended repayment terms, ranging from 10 to 25 years. Private student loans may have shorter repayment periods and fewer options for extending the repayment term.
Various repayment plans may be available when your loan comes due. Each plan has different terms regarding how much you’ll pay each month and for how long.
Federal student loans offer diverse repayment plans, including standard repayment, income-driven repayment plans, graduated repayment and extended repayment. Private student loans usually have fewer repayment plan options, with fixed monthly payments.
A grace period is a set period of time after you graduate, leave school or drop below half-time enrollment when you’re not required to make payments. The length of the grace period varies by loan type.
Federal loans typically offer a grace period after leaving school, which provides a buffer before repayment begins. Private loans may or may not offer a grace period. If they do, the length and terms can vary widely.
Deferment and forbearance are options that can allow you to temporarily postpone or reduce your federal student loan payments.
Federal loans generally provide more generous deferment and forbearance options. Borrowers will be allowed to temporarily halt payments during financial hardships or other qualifying situations. Private loans may have more restrictive deferment and forbearance conditions, so they may not offer as much relief if you’re facing financial challenges.
Having your student loans forgiven, or discharged, means you’re no longer obligated to repay the remaining balance of your loans. You may qualify for loan forgiveness or discharge in certain circumstances, such as working in public service or experiencing total and permanent disability.
Federal loans offer various options for loan forgiveness, particularly for those in public service or facing certain hardships. Private loans typically don’t offer forgiveness programs, so borrowers must fully meet repayment obligations.
There are limits on the amount you can borrow each academic year, and in total, for both federal and private student loans.
Federal loans have set borrowing limits based on factors such as the student’s year in school and dependency status. Private loans often allow borrowers to request higher amounts, potentially covering the full cost of education (subject to credit approval).
Some loans may have fees associated with their disbursement or repayment.
Federal loans often have standardized and regulated loan fees, while private loans may have varying fees based on the lender. In either case, fees can impact the overall cost of borrowing.
Some loan terms allow you to make extra payments or pay off the loan early without incurring penalties.
Both federal and private loans generally allow prepayment without penalties, which can help borrowers pay off their loan amounts faster and reduce interest costs.
Refinancing through a private lender is an option for both federal and private student loans. Borrowers can combine student loans into 1 private loan to simplify payments, but the terms and benefits may vary by lender.
Keep in mind that once you refinance your federal student loans into private student loans, you won’t be eligible for any benefits such as forbearance or forgiveness that are available on federal student loans.
Default results when a borrower doesn’t make payments for an extended period of time. Defaulting on student loans can have serious consequences, such as damage to your credit score, wage garnishment and legal action.
The terms of federal student loans typically are more forgiving for defaulting, including rehabilitation and flexible repayment options. Private student loan defaults tend to come with stricter penalties, legal action and severe damage to your credit score.
Student loan terms significantly impact borrowers’ financial commitments, repayment experiences and overall financial stability. Understanding how they affect you is an important part of managing your responsibilities as a borrower—both in accepting student loans and in paying them back.
When it’s time to start thinking about student loan repayment, the terms of your loans can have a significant impact in how you plan for paying back your loans. Consider the following as you strive to stay on top of student loan repayment: