What Is an Education Loan?

A student studies on campus grounds

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Education loans are a specific type of loan used to pay for the costs of an academic program—usually at a college or trade school, but they may also be used for private K-12 education.

Key Takeaways

  • An education loan is also called a student loan.
  • Student loans may be issued by the U.S. government or by private lenders.
  • You can usually take out student loans up to the school-certified cost of attendance.
  • Applying for federal student loans requires completing the Free Application for Federal Student Aid (FAFSA).
  • It can be easier to qualify for federal student loans than private loans, which generally require a good credit score and proof of income.

How Education Loans Work

Education loans are a type of financial aid available to help cover the costs of an academic program such as college, professional school, or career training. Unlike grants or scholarships, education loans must be repaid.

Students and parents can apply for education loans from the Department of Education by completing the Free Application for Federal Student Aid (FAFSA). They can also apply for education loans from private lenders.

  • Alternate name: Student loans

Direct Loans, issued by the U.S. Department of Education, are an example of student loans. Students attending eligible schools can apply for direct loans to cover their higher-education costs. Parents can also apply for Direct PLUS loans, which are a type of direct loan available to parents of undergraduates, to graduates, and to professional students.

Federal vs. Private Student Loans

Education loans can be broadly divided into two categories: federal student loans and private student loans. Both are available only to qualifying students and, in some cases, to their parents. Students are not allowed to borrow more than the school-certified cost of attendance for either type of loan.

To apply for federal loans, students need to complete the FAFSA.


Both federal and private loans need to be repaid, although loan forgiveness might be an option for federal loans.

Federal Student Loans

The William D. Ford Federal Direct Loan Program (aka, Direct Loans) is the Department of Education’s program for student loans. To be eligible, students typically must be enrolled at least half time in a qualifying program and have a valid Social Security number. Some federal loans, such as Direct Subsidized Loans, require demonstrated financial need, but your credit score is not a factor in determining eligibility.


Federal loans may be either subsidized or unsubsidized. Subsidized loans have more favorable terms and are based on financial need (unsubsidized loans are not).

Other loans, such as Direct PLUS Loans for parents or graduate students are not need based, but they may not be available to borrowers with adverse credit.

Benefits and Terms

Federal student loans come with a fixed interest rate that is generally very competitive, and all students who are approved get the same rate. Plus, federal loans have flexible payoff terms and borrowers can change repayment plans at any time for free, including to income-driven plans, which base your payment on income.

It's also possible for qualifying students to earn forgiveness of some of their federal educational loans. This includes Public Service Loan Forgiveness (PSLF) options for borrowers who work for the government or an eligible nonprofit.


Unfortunately, there is a limit on direct subsidized and unsubsidized loans for both graduates and undergrads. For example, undergraduates can qualify for a maximum of $5,500 to $12,500 annually, depending on what year they’re in school and their dependency status. However, parents may qualify for a direct PLUS loan that covers any remaining college costs.


If you have exhausted your eligibility for direct loans, you may choose to apply for private loans from a bank or other private lender.

Private Student Loans

Private student loans work very differently than federal loans in many ways.

Instead of applying via the FAFSA, students and/or their parents must apply with individual lenders and meet qualifying criteria, including having good credit and proof of sufficient income. Many student borrowers apply with a co-signer, which is usually a parent or guardian.

Benefits and Terms

Private loans have either a fixed or variable interest rate, which can vary among lenders; the rate you’re eligible for is determined based on your financial credentials, including your credit score, or those of your co-signer.


Private loans don't tend to offer income-driven repayment plans. Borrowers make monthly payments, and repayment plans typically don’t change after borrowing unless you refinance. However, some lenders may allow borrowers to lower their monthly payments through alternate programs. Those programs might include a graduated repayment option that steadily increases the amount of your monthly payment, and an extended repayment option that extends the loan’s term.


Private lenders do not forgive student loan debt even if you work in a public service position. Forgiveness is an option only for federal aid in certain circumstances.

Types of Education Loans

The different types of education loans include the following:

  • Direct subsidized loans: These are issued by the Department of Education on the basis of financial need. No interest accrues while in school at least half time or during eligible deferment periods. The interest rate is variable, and does not exceed 8.25%.
  • Direct unsubsidized loans: The Department of Education offers these loans regardless of financial need. Although they have favorable fixed interest rates and other borrower benefits, interest does accrue while you're in school, even if you defer payments until you're out of college. The interest rate is variable, and does not exceed 8.25%.
  • Direct PLUS loans: Graduate students and parents of undergraduate students can take out PLUS loans to help pay for school. The maximum amount you can receive is the total cost of attendance minus other financial aid. Interest rates, which are variable, do not exceed 9%.
  • Direct consolidation loans: These are made by the Department of Education to enable borrowers to consolidate, or combine, existing federal student loans. When you consolidate, you'll only have one payment to manage, and you can change the term of your loan. Interest rate is based on a weighted average of the loans being consolidated, but it is capped at 8.25%.
  • Private loans: These are made by private lenders. Compared to federal loans, interest rates may be higher, qualifying may be more difficult, and you won’t likely receive as many borrower benefits. However, students may turn to private loans to help cover additional education costs after exhausting federal loan eligibility.

Frequently Asked Questions (FAQs)

How much can you take out in student loans?

Undergraduates can borrow up to $12,500 a year in Direct Subsidized and Direct Unsubsidized Loans. And graduate students are limited to $20,500 a year in Direct Unsubsidized Loans annually.
Graduate or professional students, as well as the parents of undergraduate students can also take out Direct PLUS Loans, which are capped at the cost of attendance minus the amount of other financial aid received.

What qualifies as an education loan?

For tax purposes, a qualified student loan is a loan you take out only for higher education expenses for you, your spouse, or someone who was a dependent when you took out the loan. Up to $2,500 in interest paid on these loans may be tax deductible, depending on your income.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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  2. Consumer Financial Protection Bureau. "Student Loan Payback Book."

  3. Federal Student Aid. "Federal Student Loans for College or Career School Are an Investment in Your Future."

  4. Consumer Financial Protection Bureau. "What Are Private or Alternative Education Loans?"

  5. Consumer Financial Protection Bureau. "How Long Does It Take To Pay Off a Student Loan?"

  6. Consumer Financial Protection Bureau. "What Is Public Service Loan Forgiveness?"

  7. GovLoans.gov. "Stafford Loans for Students." 

  8. GovLoans.gov. "Direct PLUS Loans."

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  11. IRS. "Topic No. 456 Student Loan Interest Deduction."

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