Control over student loans is split among four players. The U.S. Department of Education owns almost every federal student loan. Congress writes the statutes that set borrowing limits, interest rate formulas, and eligibility rules the Department has to follow. Private companies called servicers handle billing and customer service, but they don’t own the debt and can’t change its terms. Private student loans sit entirely outside that system, owned and controlled by the banks, credit unions, or online lenders that funded them. The name on your monthly statement almost always belongs to a servicer, not the entity that actually holds your loan, and knowing who controls which piece of the system is what lets you get the right answer when something goes wrong.
The Department of Education Owns Federal Loans
Federal student loans are made directly by the Secretary of Education through the William D. Ford Federal Direct Loan Program. The regulations are explicit that the promissory note a borrower signs “is the property of the Secretary,” so the federal government itself holds legal title to the debt.1eCFR. 34 CFR Part 685 – William D. Ford Federal Direct Loan Program No bank, no investor, no servicer. The Department.
That ownership is what gives the Department its real power over your loan. It designs the repayment plans, sets servicer performance standards, runs forgiveness programs, and decides how defaulted accounts are handled. It also charges an origination fee on every disbursement. For loans disbursed through September 30, 2026, the fee is 1.057% on Direct Subsidized and Unsubsidized Loans and 4.228% on Direct PLUS Loans, reflecting a small sequestration surcharge on top of the 1% and 4% statutory base.2Federal Student Aid (FSA) Partners. FY 26 Sequester-Required Changes to the Title IV Student Aid Programs The fee is pulled proportionally from each disbursement, so your school actually receives slightly less than the loan amount on your paperwork.
Congress Writes the Rules the Department Has to Follow
The Department’s authority isn’t unlimited. Congress sets the statutory framework for federal student aid, and the Department operates inside it. No executive action can override what Congress has written into law, which is why so many announced policy changes have been stopped in court when they stretched beyond statutory authority.
Borrowing Limits
Federal statute caps total borrowing for most dependent undergraduates at $31,000 in combined subsidized and unsubsidized loans, with no more than $23,000 of that in subsidized loans.3Federal Student Aid. Direct Subsidized and Direct Unsubsidized Loans Independent undergraduates get a higher aggregate cap of $57,500. Graduate and professional students can borrow up to $138,500 in total Direct Loans, including any undergraduate borrowing. Your school can set a lower limit based on your cost of attendance, so many borrowers never reach the statutory ceiling.
Interest Rate Formula
The Bipartisan Student Loan Certainty Act of 2013 ended the practice of Congress setting fixed rates by hand and replaced it with a permanent formula tied to Treasury yields. Each year, the rate on new loans is set using the 10-year Treasury note yield from the last auction before June 1, plus a fixed margin that varies by loan type. The rate is then locked for the life of the loan.4GovInfo. Bipartisan Student Loan Certainty Act of 2013
For loans first disbursed between July 1, 2025, and June 30, 2026, the resulting rates are 6.39% for Direct Subsidized and Unsubsidized Loans to undergraduates, 7.94% for Direct Unsubsidized Loans to graduate and professional students, and 8.94% for Direct PLUS Loans. Statute also sets ceilings: 8.25% for undergraduate loans, 9.5% for graduate loans, and 10.5% for PLUS Loans.5Federal Student Aid (FSA) Partners. Interest Rates for Direct Loans First Disbursed Between July 1, 2025 and June 30, 2026 If Treasury yields spike, those caps prevent new rates from climbing above a fixed level.
Repayment and Forgiveness Programs
The Department designs income-driven repayment plans and administers Public Service Loan Forgiveness under authority Congress has granted it, but courts police the boundaries of that authority. The SAVE Plan was struck down by federal courts and is being formally ended through a settlement; borrowers who had enrolled in SAVE were placed into a general forbearance where no payments are due, interest accrues, and the time doesn’t count toward forgiveness.6Federal Student Aid. IDR Plan Court Actions – Impact on Borrowers The plans still accepting enrollees are Income-Based Repayment, Pay As You Earn, and Income-Contingent Repayment. The One Big Beautiful Bill Act also expanded access to IBR by allowing borrowers without a partial financial hardship to enroll.
Servicers Handle Billing, Not Decisions
Federal Student Aid contracts with private companies to run the daily operations of its loan portfolio. The current servicers include MOHELA, Nelnet, EdFinancial, Maximus Education, and Central Research.7Federal Student Aid. About Us – MOHELA – Federal Student Aid They do not own your debt. They process payments, recalculate amounts when you switch repayment plans, handle deferment and forbearance requests, and answer account questions.
What a servicer cannot do is change the underlying terms of your loan, waive requirements set by statute, or grant forgiveness on its own. Servicers execute policy; they don’t make it. That distinction matters when a representative on the phone tells you something that conflicts with what you’ve read on studentaid.gov. The official guidance controls. The servicer’s statement does not.
What Happens When Your Account Is Transferred
The Department periodically reassigns borrower accounts from one servicer to another, and transfers have been a consistent source of lost paperwork and miscounted payments. Your outgoing servicer is required to send you notice, typically about 15 days before the transfer, with the name and contact information for your new servicer.8Federal Student Aid. So Your Loan Was Transferred – Whats Next The new servicer should also reach out once your account is loaded.
In practice, payment counts for income-driven repayment and PSLF sometimes get miscounted during transfers, autopay settings don’t always carry over, and account information can take weeks to appear at the new servicer. Keep your own records of payment history and correspondence. You can always verify your loan details and your current servicer by signing in at studentaid.gov.
Private Lenders Own and Control Their Own Loans
Private student loans exist entirely outside the federal system. Banks, credit unions, and online lenders fund them with their own capital and retain full ownership of the debt.9Federal Student Aid. Federal Versus Private Loans Because the Higher Education Act doesn’t govern them, private lenders set their own credit requirements, interest rates, and repayment terms through individual loan contracts. The contract is the rulebook.
Variable rates on private student loans are typically benchmarked to the Secured Overnight Financing Rate, which replaced LIBOR as the industry standard. Fixed-rate options exist, and the rate you receive depends heavily on your credit score and whether you have a co-signer. None of the federal income-driven repayment plans, deferment protections, or forgiveness programs apply. Refinancing a federal loan into a private one permanently gives up access to all of them.10Federal Student Aid. Should I Refinance My Federal Student Loans Into a Private Loan
Co-signers Share Control and Liability
Many private lenders require a co-signer when the primary borrower has limited credit history. The co-signer is equally liable for the full balance. Some lenders offer co-signer release after the borrower makes a specified number of consecutive on-time payments and meets credit thresholds, but release is never guaranteed, and the specific criteria sit in the loan agreement.11Consumer Financial Protection Bureau. If I Co-signed for a Private Student Loan, Can I Be Released From the Loan Some contracts also contain an auto-default clause that makes the co-signer immediately responsible for the remaining balance if the primary borrower dies or files bankruptcy.
States Add Their Own Limits on Private Lenders
Federal student loans have no time limit on collection, but private student loans are subject to a statute of limitations that varies by state. Depending on where you live, a private lender typically has between three and ten years from your last payment to sue to collect. After that window closes, the lender loses the right to sue, though the debt itself doesn’t disappear and can still appear on credit reports. Making a payment or acknowledging the debt in writing can restart the clock, so anyone past the limitation period should be careful with any contact from collectors.
Who Polices the System
Several agencies oversee the players who control student loans. The Consumer Financial Protection Bureau has authority under the Dodd-Frank Act to supervise large servicers and private lenders, and it has used that power to identify deceptive practices including servicers that improperly charged late fees during grace periods and told borrowers their loans could never be discharged in bankruptcy.12Consumer Financial Protection Bureau. CFPB Supervision Report Highlights Risky Practices in Student Loan Servicing State attorneys general also enforce consumer protection laws against both federal servicers and private lenders operating within their borders.
If you’ve tried to resolve a problem with your servicer and gotten nowhere, the Federal Student Aid Ombudsman is a last-resort resource for federal loans. You need to have attempted to fix the issue through servicer customer support first. When you open a case, identify the problem, explain the steps you’ve taken, and provide documentation. The easiest route is the online dispute portal at studentaid.gov.13FSA Partner Connect. Office of the Ombudsman FSA For private loans, or for patterns of servicer misconduct, complaints go to the CFPB, which tracks the data across companies and uses it to open investigations.