Federal student loans come from the U.S. Department of Education, not from banks
The largest source of student loans is the federal government, not private banks. The U.S. Department of Education runs the Direct Loan program, which includes Subsidized Loans, Unsubsidized Loans, PLUS Loans, and Consolidation Loans. You request these through your school's financial aid office, and the money flows through your school to you. The government sets the interest rates, which are fixed and typically lower than private loans.
Private banks and lenders do offer student loans, but they are a secondary option after federal loans. Banks that make private student loans include Sallie Mae, Earnin, LendingClub, Discover, Wells Fargo, and others. Private loans require a credit check, often need a cosigner if you have no credit history, and carry variable or fixed interest rates set by the lender. They typically have fewer protections than federal loans—no income-driven repayment plans, no automatic forgiveness programs, and stricter terms if you fall behind.
Key Takeaways
- Federal Direct Loans from the U.S. Department of Education are the primary source and do not come from banks; you request them through your school's financial aid office.
- Private student loans from banks like Sallie Mae, Discover, and Wells Fargo exist but typically carry higher interest rates and fewer repayment protections than federal loans.
- Federal loans have fixed interest rates set by Congress and offer income-driven repayment options; private loans require a credit check and often need a cosigner.
- You must exhaust federal loan options first through your school before turning to private lenders, since federal loans are almost always cheaper and more flexible.
How federal student loans work through schools
When you fill out the Free Application for Federal Student Aid (FAFSA), the Department of Education determines how much you can borrow in federal loans. Your school's financial aid office then tells you the amount and type of loan you are offered. You sign a Master Promissory Note (MPN) once, and the school certifies each loan before the money is sent to you.
The federal government does not require you to have a credit score or a cosigner for Subsidized or Unsubsidized Loans. For Parent PLUS Loans or Graduate PLUS Loans, the government does a basic credit check but does not require a cosigner. The interest rates are set by Congress and do not change year to year—they are the same for every borrower in the same loan type.
Private banks that offer student loans
Sallie Mae is the largest private student loan lender. It offers loans for undergraduate and graduate study, with fixed or variable interest rates. Sallie Mae requires a credit check and typically asks for a cosigner if you have limited credit history.
Discover Student Loans offers both undergraduate and graduate loans with fixed rates. Discover does not require a cosigner, though interest rates are better with one. Wells Fargo, LendingClub, and Earnin also make private student loans, though availability and terms vary by state and borrower profile.
Private lenders set their own interest rates based on your credit score and income. Rates are typically between 4% and 13%, though they can go higher. Variable-rate loans start lower but can increase over time. Most private loans do not offer the income-driven repayment plans or loan forgiveness programs that federal loans do.
When to use private loans instead of federal
You should only turn to private loans after you have borrowed the maximum in federal loans. Federal loans are almost always cheaper because Congress sets lower interest rates, and they offer protections private lenders do not—such as income-driven repayment, deferment options, and Public Service Loan Forgiveness.
Private loans make sense only if you have exhausted federal borrowing and still have a gap between your school costs and what you can cover with federal loans, scholarships, and savings. If you use a private loan, compare rates from at least three lenders before choosing. A cosigner with good credit can lower your interest rate significantly.
Interest rates and repayment terms
Federal Direct Loans have fixed interest rates that Congress sets each year. For the 2024–2025 school year, undergraduate Unsubsidized Loans carry a 6.53% fixed rate, and Graduate Unsubsidized Loans carry 8.05%. These rates do not change over the life of the loan. Federal loans offer a standard 10-year repayment plan, but you can also choose income-driven plans that stretch payments over 20 or 25 years.
Private loans vary widely. Fixed-rate private loans typically range from 5% to 12%, depending on your credit and the lender. Variable-rate loans may start at 4% but can rise to 10% or higher as interest rates change. Most private loans have a 10-year repayment term, though some allow up to 15 years. Private lenders do not offer income-driven repayment, so if your income drops, you cannot lower your payment.
What happens if you cannot pay
Federal loans have built-in protections. If you lose your job or face financial hardship, you can request deferment or forbearance, which pauses your payments temporarily. Income-driven repayment plans can lower your monthly payment to as little as $0 if your income is very low. After 20 or 25 years of payments under an income-driven plan, any remaining balance is forgiven.
Private loans have no such protections. If you miss a payment, the lender can report it to credit bureaus immediately, and your interest rate may increase. Most private lenders do not offer deferment or forbearance. If you default, the lender can sue you or send your account to a collection agency. Some private lenders offer hardship programs, but these are not may provide and vary by lender.
How to compare and choose between lenders
Start by filling out the FAFSA and borrowing all available federal loans through your school. Check your financial aid award letter to see exactly what federal loans you have been offered. If you still need money after federal loans, contact at least three private lenders and ask for a loan estimate. Most lenders provide estimates without a hard credit pull.
Compare the interest rate, whether it is fixed or variable, the repayment term, and any fees. Ask whether the lender offers a cosigner release option—this lets you remove your cosigner after a certain number of on-time payments. Check the lender's customer service reviews and whether they have a grace period before repayment begins. Once you choose a lender, complete the full application and review the promissory note before signing.
Frequently Asked Questions
Can I get a student loan directly from a bank without going through my school?
Federal loans must go through your school's financial aid office. Private loans can be obtained directly from a bank or lender without school involvement, though some lenders require you to certify that the money will be used for school costs. You cannot skip your school and go straight to a bank for federal loans.
What is the difference between a cosigner and a co-borrower?
A cosigner signs the loan but is not the primary borrower; they are responsible only if you default. A co-borrower is equally responsible for the loan from the start. Most private student loans use cosigners. Federal Parent PLUS Loans make the parent the primary borrower, not a cosigner.
Do I have to use the same bank for private loans that I use for checking?
No. You can borrow from any lender that offers student loans, regardless of where you bank. Shop around and choose based on interest rate and terms, not on banking convenience. Many borrowers use different lenders for different loans.
Can I refinance a private student loan with a different bank?
Yes. Refinancing means taking out a new loan from a different lender to pay off the old one. You can refinance to get a lower interest rate or change your repayment term. However, refinancing federal loans into a private loan means you lose federal protections like income-driven repayment and forgiveness programs, so refinance federal loans only if you are certain you do not need those protections.
What credit score do I need to get a private student loan?
Most private lenders prefer a credit score of 650 or higher, though some work with scores as low as 600. If your score is below 650, adding a cosigner with good credit will improve your chances of approval and lower your interest rate. Some lenders do not require a credit check at all if you have a strong cosigner.