Your aid offer lists a federal Direct Loan, and a bank's ad promises a "better rate" on a private one. They are both called student loans, and they behave nothing alike once you leave school, because one is a government program with protections written into law and the other is a credit contract priced on you.
Two flavors of federal loan: subsidized and unsubsidized
Federal Direct Loans for undergraduates come in two types, and the whole difference is who pays the interest while you are in school.
| Direct Subsidized | Direct Unsubsidized | |
|---|---|---|
| Based on financial need? | Yes | No |
| Interest while you are enrolled at least half-time | Paid by the Department of Education | Accrues to you |
| Interest during the six-month grace period | Paid by the Department | Accrues to you |
| Interest in deferment | Paid by the Department in most deferments | Accrues to you |
| Rate | Same fixed rate | Same fixed rate |
With a subsidized loan the balance you borrowed is the balance you start repaying. With an unsubsidized loan interest accrues from the day the money is disbursed, and whatever you have not paid is capitalized (added to your principal) when repayment starts. The next lesson follows that gap through a full payoff.
The 2026–27 rates, fee and limits
Federal rates are fixed for the life of the loan and set each year by formula from the 10-year Treasury yield. Loans first disbursed between July 1, 2026 and June 30, 2027 carry these rates, and a loan fee of 1.057% comes off each disbursement before the money reaches your school.
| Loan | Fixed rate (2026–27) | Annual limit |
|---|---|---|
| Direct Subsidized and Unsubsidized, undergraduate | 6.52% | $5,500 first year, $6,500 second, $7,500 after that (dependent students) |
| Direct Unsubsidized, graduate | 8.07% | $20,500 a year, $100,000 total, for loans made on or after July 1, 2026 |
| Direct Unsubsidized, professional degree | 8.07% | $50,000 a year, $200,000 total, for loans made on or after July 1, 2026 |
| Direct PLUS, parents | 9.07% | $20,000 a year and $65,000 per student, for loans made on or after July 1, 2026 |
The dependent undergraduate total is $31,000 (at most $23,000 subsidized); independent undergraduates can borrow up to $57,500. Grad PLUS loans ended for new borrowers on July 1, 2026, and everyone who takes a loan made on or after that date has a $257,500 lifetime federal limit. Those caps are the main reason families reach for private loans at all.
What federal loans protect that private loans do not
The rate is only half the reason federal loans come first. The other half is what happens if money gets tight years later.
| Feature | Federal Direct Loans | Private loans |
|---|---|---|
| Rate | Fixed by law for the life of the loan | Fixed or variable, set by the lender |
| Approval based on credit? | No (except PLUS) | Yes, driven by your credit score |
| Cosigner usually needed? | No | Usually, for a student with a thin credit file |
| Income-driven repayment | Yes: the Repayment Assistance Plan, 1% to 10% of income | No |
| Deferment and forbearance | Standardized, by law | At the lender's discretion |
| Public Service Loan Forgiveness | Yes, after 120 qualifying payments | No |
| Discharge on death or total and permanent disability | Yes | Depends on the contract |
Income-driven repayment ties your federal payment to what you earn, so a low income means a low payment. Deferment and forbearance pause payments under defined rules. PSLF cancels the remaining balance after ten years of qualifying public-service work. Repaying without drowning covers each one in dollars. Private lenders offer none of them as a right.
How private loans are priced
A private loan is underwritten like a car loan: the lender pulls your credit and prices the risk. Most 18-year-olds have no credit history, so private lenders usually require a cosigner, a parent or relative whose credit backs the loan. A cosigner is fully liable for the debt, it appears on their credit report, and a late payment marks both of you.
Private rates come fixed or variable. A variable rate starts lower and rises with market rates, which changes your payment over a loan that can run ten years or more. Strong credit, or a strong cosigner, gets a competitive rate; a thin file gets the lender's highest tier, the same spread the credit-scores track describes for any borrowing.
Putting the order together
The sequence follows from the table: free money, then subsidized federal loans, then unsubsidized federal loans, then private loans only for what the federal caps leave uncovered. Each step down the list costs more or protects less. The interest, APR and amortization lesson shows the math behind every payment figure above.