Whether a loan is federal or private matters more than its interest rate — and refinancing the first into the second is a door that only opens one way.
The distinction that decides everything
Before interest rates, before balances, before anything: know whether each loan is federal or private. They are different products that happen to share a name.
Federal loans come with protections written into law: income-driven repayment, deferment and forbearance if you lose your job, forgiveness programmes for public service, and discharge if you die or become permanently disabled. The rate is fixed and set by Congress.
Private loans are ordinary consumer debt from a bank or lender. Rates may be variable, they depend on your credit, and the protections above generally do not exist. Some lenders offer hardship programmes; none are guaranteed.
If you do not know which you have, log in to studentaid.gov. Everything federal is listed there. Anything not listed is private.
Subsidised, unsubsidised, and the interest that grows while you study
Among federal undergraduate loans, subsidised means the government pays the interest while you are enrolled at least half-time and during the grace period. Unsubsidised means interest accrues from the day the money is disbursed — including while you are still in class.
That unpaid interest does not just sit there. At certain points it is capitalised: added to your principal, so you begin paying interest on interest. A borrower who never made a payment during four years of study can start repayment owing noticeably more than they borrowed.
Paying even the interest while enrolled stops capitalisation from happening. Small payments, disproportionate effect.
The grace period is not a gift
Most federal loans give you six months after leaving school before payments begin. Interest on unsubsidised loans keeps accruing throughout.
Use those months to do three things: find out exactly what you owe and to whom, confirm your servicer has your current address and email, and pick a repayment plan deliberately rather than being auto-assigned one.
Standard versus income-driven
The standard plan clears federal loans in ten years with fixed payments. It costs the least in total interest and has the highest monthly payment.
Income-driven repayment sets your payment as a percentage of discretionary income, recalculated annually. Payments can be dramatically lower — sometimes zero — and any balance remaining after the plan's term may be forgiven.
The trade-off is real and worth stating plainly: lower payments over a longer term mean more total interest, and on some plans the balance grows even while you pay. Income-driven repayment is a cash-flow tool for people who need it, not a cheaper way to borrow.
A private lender may offer a lower rate to refinance federal debt. Accepting converts it permanently into private debt: income-driven repayment, forbearance and every forgiveness programme are gone, and there is no path back. For a high earner with stable income and no interest in forgiveness, the maths can favour it. For everyone else, the protections you surrender are worth more than the rate you gain.
Public Service Loan Forgiveness
If you work full time for a government body or a qualifying non-profit, PSLF can forgive your remaining federal balance after 120 qualifying monthly payments on an eligible plan — ten years of work, not necessarily consecutive.
The programme has a long history of borrowers being disqualified on technicalities: the wrong loan type, the wrong plan, an employer that did not certify. If you are pursuing it, submit the employment certification form every single year rather than discovering a problem a decade in.
If you cannot pay
The one thing that never works is silence. Federal default carries consequences most consumer debt does not — wage garnishment and seizure of tax refunds without a court judgment.
Before that point you have options: switch to an income-driven plan, request deferment or forbearance, or consolidate to regain eligibility for programmes. All of them require contacting your servicer. Private lenders have fewer options, but a call before you miss a payment is always received better than one after.
A note on how fast this area changes
Student loan rules in the United States have been unusually unstable — repayment plans introduced, challenged in court, replaced and renamed within a few years. The structure described here is the durable part. For which plans exist today and what they are called, go to studentaid.gov rather than trusting any article, including this one.
This is educational content, not personalised advice. Your loan terms are in your own promissory note and servicer account.