How student loans work and where to start
To take out a student loan, you complete a Free Application for Federal Student Aid (FAFSA), wait for your school to calculate how much aid you can receive, and then accept loan offers through your school's financial aid office. Federal loans go through the U.S. Department of Education; private loans come from banks, credit unions, and online lenders. The process differs between the two, and which one you can access depends on your enrollment status, citizenship, and credit history.
Start with federal loans first. They have fixed interest rates set by Congress, income-driven repayment plans, and forgiveness programs that private loans do not offer. You cannot borrow private loans until you have exhausted federal options, and many employers and income-based repayment programs only recognize federal debt.
Key Takeaways
- Complete the FAFSA to determine your federal loan may be able to access; this is free and opens October 1 each year for the following academic year.
- Your school's financial aid office will send you a financial aid package showing federal loans, grants, and work-study you may receive.
- You must accept the loans in writing through your school's system before money is disbursed, usually in two payments per academic year.
- Private loans require a credit check and typically a cosigner if you have no credit history, and they do not offer the protections or repayment flexibility of federal loans.
- Borrowing federal loans requires you to complete entrance counseling and sign a Master Promissory Note before your first disbursement.
Filing the FAFSA and understanding your aid package
The FAFSA opens October 1 each year and covers the academic year starting the following fall. You file at fafsa.gov using your Social Security number, tax information, and school code. If you are a dependent student, you will need one parent's information as well. The form takes 10 to 15 minutes if you have your tax return handy.
After you submit the FAFSA, the Department of Education sends your results to every school you listed. Each school then calculates your Expected Family Contribution (EFC) — the amount you and your family are expected to pay — and sends you a financial aid package. This package shows how much federal loan money you can borrow, plus any grants (money you do not repay) and work-study positions. You will receive this package by email or through your school's student portal, usually within two to four weeks of filing the FAFSA.
Read the package carefully. It lists the loan type, amount, and interest rate for each federal loan offered. Unsubsidized loans accrue interest while you are in school; subsidized loans do not. The package also shows the school's cost of attendance and subtracts grants and loans to show what you still owe out of pocket.
Accepting federal loans and completing required paperwork
You accept or decline each loan through your school's financial aid portal. Declining a loan does not affect other aid. Once you accept, you must complete entrance counseling — a 20-minute online course explaining loan terms, repayment options, and your rights as a borrower. This is required before your first disbursement and is free.
You will also sign a Master Promissory Note (MPN), a legal document promising to repay the loan. You sign this once, and it covers all federal loans you take out at that school. The school submits both the entrance counseling completion and the MPN to the Department of Education before releasing funds.
Federal loans disburse in two payments per academic year — one in fall and one in spring — directly to your school's bursar office. The school applies the money to tuition, fees, and room and board first, then refunds any remainder to you. This usually happens within two weeks of the start of each semester.
Federal loan types and borrowing limits
The federal government offers four types of loans to undergraduate students. Direct Subsidized Loans are available to students with financial need; the government pays the interest while you are in school. Direct Unsubsidized Loans are available regardless of need; interest accrues from the day the loan is disbursed. Direct PLUS Loans are for parents of dependent undergraduates and require a credit check. Direct Consolidation Loans combine multiple federal loans into one after you graduate.
Undergraduate borrowing limits are set by law and depend on your year in school. First-year students can borrow up to $5,500 in Direct Loans (no more than $3,500 subsidized). These limits increase each year, with a total cap of $31,000 for dependent undergraduates and $57,500 for independent undergraduates. Graduate students have higher limits. Your school's financial aid office can tell you your specific limit based on your enrollment status.
Interest rates on federal loans are fixed and set by Congress. Rates change each year for new loans but stay the same for the life of each loan you take out. The Department of Education website lists current rates.
Private student loans and how they differ
Private loans come from banks, credit unions, and online lenders and are not backed by the federal government. You apply directly to the lender, not through your school. Private loans require a credit check; if you have no credit history or poor credit, you will need a cosigner — usually a parent — who is equally responsible for repayment.
Private loans have variable or fixed interest rates, depending on the lender and loan terms. Rates are typically higher than federal rates and depend on your credit score. You do not file a FAFSA to get a private loan, and the lender does not verify your school enrollment or cost of attendance.
Private loans do not offer income-driven repayment plans, deferment, or forgiveness programs. If you face hardship, your options are limited to forbearance (pausing payments) or refinancing. Most private lenders require you to begin repayment six months after graduation, though some allow in-school deferment.
Repayment plans and what happens after graduation
Federal loans enter a six-month grace period after you graduate, leave school, or drop below half-time enrollment. You do not make payments during this time, though interest on unsubsidized loans continues to accrue. After the grace period ends, you must choose a repayment plan.
The Standard Repayment Plan fixes your payment at an amount that pays off the loan in 10 years. Income-Driven Repayment Plans tie your monthly payment to your income and may extend repayment to 20 or 25 years. Some income-driven plans forgive remaining balance after the repayment period ends, though forgiveness is taxable income. You can change repayment plans at any time by logging into your account at studentaid.gov.
Private loans do not have grace periods or income-driven options. You begin repayment on the schedule set by your lender, usually six months after graduation. If you cannot afford payments, contact your lender to discuss forbearance or refinancing options.
What to know about cosigners and parent borrowing
If you are a dependent student with no credit history, private lenders will ask for a cosigner. A cosigner is legally responsible for the loan if you do not pay. The cosigner's credit score affects the interest rate you receive, and the loan appears on the cosigner's credit report. If you default, the lender can pursue the cosigner for payment.
Parents can also borrow federal Direct PLUS Loans on behalf of dependent undergraduates. PLUS loans require a credit check but not a cosigner. The parent is the borrower and is responsible for repayment, not the student. PLUS loans have a higher interest rate than Direct Unsubsidized Loans and do not offer income-driven repayment, though parents can consolidate them after the student graduates.
Before becoming a cosigner or taking a PLUS loan, understand the legal obligation. If the primary borrower cannot pay, the cosigner or parent is responsible. Many families do not discuss this clearly and face conflict later.
Frequently Asked Questions
Do I have to take out loans if I receive a financial aid package?
No. A financial aid package shows what you may receive, but you choose which parts to accept. You can decline loans and accept only grants or work-study. Declining a loan does not affect other aid or your school enrollment.
What if I do not file the FAFSA on time?
You can file the FAFSA anytime during the academic year, but filing late may reduce the amount of aid available. Some schools and states have priority deadlines; missing them can mean fewer grants. Federal loans are usually available year-round, but filing early gives you the most options.
Can I borrow more than my school's cost of attendance?
Federal loans are capped at your school's cost of attendance minus other aid you receive. Private loans have no such limit, but lenders set their own maximum based on your credit and income. Borrowing more than you need increases your total debt and interest paid over time.
What happens if I leave school before graduating?
You enter the six-month grace period on federal loans when you drop below half-time enrollment, whether you graduate or not. You must repay the loans you borrowed, even if you did not finish your degree. Contact your loan servicer to discuss repayment options if you leave school.
Can I refinance federal loans into private loans?
Yes, but you lose federal protections. Federal loans offer income-driven repayment, deferment, forbearance, and forgiveness programs. Private refinance loans do not. Refinancing makes sense only if you have stable income, good credit, and do not need federal protections.