Where student loans come from and how to start

Student loans come from two main sources: the federal government and private lenders. Federal loans are the most common route because they have fixed interest rates, income-based repayment options, and no credit check required. Private loans come from banks, credit unions, and online lenders, and they require a credit check or a cosigner.

To get a federal student loan, you start by completing the Free Application for Federal Student Aid (FAFSA). This form tells the Department of Education about your finances so they can calculate how much aid you need. You submit it online at fafsa.gov, and it takes about 10 to 14 days for the government to process it and send your results to your school.

Your school's financial aid office then uses your FAFSA results to build a financial aid package. That package lists all the aid you're offered — grants (money you don't repay), work-study jobs, and loans. You don't automatically get the loans; you have to accept them. The school will tell you which loans are offered and how much of each type.

Key Takeaways

  • Federal student loans require you to complete the FAFSA, which takes about 10 to 14 days to process and must be submitted each year you want aid.
  • Your school's financial aid office builds your aid package based on your FAFSA results, and you must accept the loans in writing before they disburse.
  • Federal loans do not require a credit check, but private loans do and usually require a cosigner if you have no credit history.
  • Before you borrow, you must complete entrance counseling and sign a Master Promissory Note, which are legal requirements that explain your repayment obligations.
  • Loans are usually split into two disbursements per academic year — one at the start of each semester — and sent directly to your school to pay tuition and fees first.

Federal loans: the FAFSA and what happens next

The FAFSA opens on October 1 each year and remains open through June 30 of the following year. You will need your Social Security number, driver's license or state ID, and tax information from the prior year. If you are a dependent student, you will also need one parent's information. You can file the FAFSA yourself on fafsa.gov; you do not need to pay anyone to do it for you.

After you submit the FAFSA, the Department of Education sends you a Student Aid Report (SAR) that shows what you entered and your Expected Family Contribution (EFC) — the amount the government thinks your family can pay toward school costs. Your school uses this number to calculate how much federal aid you need. The lower your EFC, the more aid you will be offered.

Once your school receives your FAFSA results, the financial aid office will contact you with your aid package. This package lists the types and amounts of loans, grants, and work-study offered to you. You will see the loan names — usually Stafford loans for undergraduates, or Grad PLUS loans for graduate students — and the interest rate for each. You then log into your school's financial aid portal and accept or decline each loan.

Types of federal loans and how much you can borrow

Undergraduate students can borrow Subsidized Stafford Loans and Unsubsidized Stafford Loans. Subsidized loans do not accrue interest while you are in school at least half-time; the government pays the interest. Unsubsidized loans accrue interest from the day they are disbursed, even while you are in school. The interest rate for both is set by Congress and changes each year.

The amount you can borrow depends on your year in school. First-year dependent students can borrow up to $5,500 per year in Stafford loans (the exact split between subsidized and unsubsidized varies). This amount increases in later years. Independent students and students whose parents are denied a Parent PLUS loan can borrow more — up to $12,500 in the first year.

Graduate and professional students can borrow Grad PLUS Loans, which have no annual limit — you can borrow up to the full cost of attendance minus other aid you receive. Grad PLUS loans require a credit check, and if you have an adverse credit history, you will need to get a cosigner or submit a written statement explaining your situation.

Parents of dependent undergraduates can borrow Parent PLUS Loans to cover the cost of education that other aid does not cover. Parent PLUS loans also require a credit check. The interest rate is higher than Stafford loans, and repayment begins within 60 days of disbursement unless you request a deferment.

Private student loans and how they differ

Private loans are offered by banks, credit unions, and online lenders. They are not backed by the federal government, so they have different terms and protections. Private loans require a credit check, and if you have no credit history or a low credit score, you will need a cosigner — usually a parent or guardian with established credit.

Interest rates on private loans vary by lender and by your creditworthiness. Some private loans have variable rates that change over time; others have fixed rates. Private loans do not offer income-based repayment plans or the same forgiveness options as federal loans. If you are considering a private loan, compare rates from at least three lenders before you choose one.

Private loans are usually a second choice after you have borrowed the maximum federal loans available to you. Federal loans offer better protections: you can pause payments if you face hardship, you can consolidate your loans at a lower rate, and you may be able to have some or all of your debt forgiven after 20 to 25 years of payments under an income-driven plan.

Entrance counseling and the Master Promissory Note

Before your school disburses any federal loan money, you must complete entrance counseling. This is an online tutorial that explains how loans work, what your repayment obligations are, and what happens if you default. It takes about 30 minutes and is free. Your school will send you a link to complete it, usually through your financial aid portal.

You must also sign a Master Promissory Note (MPN), which is a legal contract between you and the Department of Education. The MPN states the loan amount, the interest rate, and your promise to repay the loan according to the terms. You sign it electronically through your school's portal or through studentloans.gov. One MPN covers all the federal loans you borrow during your time at that school, so you only sign it once.

Your school will not disburse loan funds until both entrance counseling and the MPN are complete. If you do not finish these steps, your loans will be held up, and you may not have the money to pay tuition by the deadline. Check your financial aid portal regularly to see whether these tasks are marked complete.

When and how loan money reaches your account

Federal loans are usually split into two disbursements per academic year — one at the start of the fall semester and one at the start of the spring semester. The money is sent directly to your school, not to you. Your school first applies the loan money to tuition, fees, and room and board if you live on campus. Any leftover money is refunded to you, usually by check or direct deposit, within 14 days.

The exact timing depends on your school's disbursement schedule. Some schools disburse on the first day of classes; others wait until after the add/drop period ends. You can find your school's schedule on the financial aid office website or by calling the office directly. If you need the money by a specific date, ask the financial aid office when they will disburse and plan accordingly.

Private loans follow a similar process, but the timing and method vary by lender. Some private lenders disburse directly to your school; others send the money to you. Ask your lender for their disbursement timeline before you sign the loan agreement.

What to do if you are denied or offered less than you need

If your FAFSA results show that your family can contribute more than you expected, you may be offered less aid than you need. You can file a FAFSA appeal with your school's financial aid office if your financial situation has changed since you submitted the form — for example, if a parent lost a job or had a medical emergency. Bring documentation of the change, such as a termination letter or medical bills.

If your appeal is denied or if you still need more money, you can borrow additional private loans or ask about work-study jobs. Some schools also offer institutional loans — loans made by the school itself — which may have better terms than private loans. Ask your financial aid office what options are available to you.

If you cannot borrow enough to cover your costs, you may need to reduce your expenses by living off-campus, attending part-time, or starting at a community college and transferring later. These choices delay graduation but reduce the amount you need to borrow.

Frequently Asked Questions

Do I have to borrow the full amount my school offers me?

No. You can accept some loans and decline others. If your school offers you $5,000 in subsidized loans and $2,000 in unsubsidized loans, you can accept only the subsidized portion. Borrow only what you need, because every dollar you borrow must be repaid with interest.

What if I don't may have access to for federal loans?

Federal loans do not require a credit check, so most students may have access to. However, if you are not a U.S. citizen or permanent resident, or if you are in default on a previous federal loan, you may be ineligible. Contact your school's financial aid office to find out whether you may have access to. If you do not, private loans may be an option, though they require a credit check and a cosigner.

Can I borrow more than my school's cost of attendance?

No. Federal loans are capped at your school's cost of attendance minus any other aid you receive. This is called your "financial need." Your school calculates this number and uses it to limit how much you can borrow. Private loans also cannot exceed this amount.

What happens if I drop out before my loans are disbursed?

If you withdraw from school before your loans are disbursed, your school will not send the money. If you have already received the money, you may be required to return it. Contact your school's financial aid office immediately if you plan to withdraw so they can explain what happens to your loans and aid.

Can I use student loans to pay for living expenses, not just tuition?

Yes. Your school's cost of attendance includes tuition, fees, room and board, books, supplies, and transportation. Loan money can be used for any of these costs. After your school applies the loan to tuition and fees, any remaining money is refunded to you and can be used for other expenses.