How student loans work and where to start
A student loan is money borrowed from a lender — the federal government, a bank, or a private company — to pay for education costs. You borrow the money, use it for tuition or living expenses while in school, and then repay it after you graduate or drop below half-time enrollment. The lender charges interest, which is a percentage of what you borrowed added on top of the amount you owe.
The first step is to decide which type of loan fits your situation. Federal student loans come from the U.S. Department of Education and have fixed interest rates set by Congress. Private student loans come from banks and credit unions and have interest rates that vary by lender and your credit history. Most students start with federal loans because the terms are more predictable and repayment options are more flexible.
To get a federal student loan, you must complete the Free Application for Federal Student Aid (FAFSA). This single form determines what federal aid you may receive — grants, work-study, and loans. You fill it out once per year, and your school uses it to build your financial aid package. The FAFSA opens October 1 each year and remains open through June 30, though some schools and states have earlier deadlines.
Key Takeaways
- Federal student loans require you to complete the FAFSA, which opens October 1 each year and determines what aid you may receive.
- You must be enrolled at least half-time at an accredited school and be a U.S. citizen or may be able to access noncitizen to borrow federal loans.
- Federal loans disburse directly to your school, which applies them to tuition and fees first, then sends any remaining balance to you.
- Private student loans require a credit check and often a cosigner, and you can borrow only what your school certifies you need for that year.
- Repayment begins after you graduate or drop below half-time status, though some loans allow you to defer payments while in school.
Completing the FAFSA and what happens next
Go to fafsa.gov and create a login using your Social Security number or Individual Taxpayer Identification Number. You will need your driver's license or state ID, your Social Security card, and your tax return from the previous year (or your parents' tax return if they claim you as a dependent). Have your school's Federal School Code ready — you can find it on your school's financial aid website or search for it on fafsa.gov.
The FAFSA asks about your income, assets, family size, and household members in college. It calculates your Expected Family Contribution (EFC), which is the amount the government estimates your family can pay toward education. The difference between your school's cost of attendance and your EFC is your financial need. This number determines how much federal aid you may receive.
After you submit the FAFSA, you receive a Student Aid Report (SAR) by email within three days. Review it for errors — if your income or family information is wrong, the aid calculation will be wrong. You can correct it on fafsa.gov. Your school receives your FAFSA data automatically and uses it to create your financial aid package, which lists all aid offered to you: grants, loans, and work-study.
Types of federal student loans and how much you can borrow
Direct Subsidized Loans are available to undergraduate students with demonstrated financial need. The government pays the interest while you are in school at least half-time. You do not owe interest that accrues during school. Borrowing limits depend on your year in school: first-year undergraduates can borrow up to $3,500, second-year up to $4,500, and third-year and beyond up to $5,500 per year. The total you can borrow for your undergraduate degree is $23,000.
Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. Interest accrues from the moment the loan is disbursed — you owe it whether you are in school or not. Borrowing limits are higher: undergraduates can borrow up to $2,000 more per year than subsidized loans, and graduate students can borrow up to $20,500 per year. Total borrowing limits for undergraduates are $31,000; for graduate students, $138,000.
Direct PLUS Loans are for parents of dependent undergraduates or for graduate students. You can borrow up to the full cost of attendance minus other aid received. PLUS loans require a credit check, and you must not have an adverse credit history. Interest rates are higher than other federal loans. Repayment begins within 60 days of disbursement unless you request a deferment.
Private student loans and how they differ from federal loans
Private student loans come from banks, credit unions, and online lenders. You apply directly to the lender, not through your school. The lender checks your credit score and income, and usually requires a cosigner — often a parent — if you have limited credit history. Interest rates vary by lender and your creditworthiness; they may be fixed or variable (changing over time).
Private loans have fewer protections than federal loans. There is no income-based repayment option, no loan forgiveness program, and no deferment or forbearance if you face hardship. If you miss payments, the lender can sue you or report the debt to credit agencies. You cannot discharge private student loans in bankruptcy except in rare circumstances.
Use private loans only after you have borrowed the maximum in federal loans. Your school's financial aid office can tell you which private lenders they work with and what terms they offer. Compare interest rates and fees across at least three lenders before you choose.
How loans are disbursed and when you receive the money
Once your school confirms you are enrolled at least half-time, the lender disburses the loan directly to your school. Your school applies the money first to tuition, fees, and room and board (if applicable). Any remaining balance is refunded to you, usually by check or direct deposit within two weeks of the start of the term.
Federal loans disburse at least twice per year — once per semester or term. If you are a first-time borrower, there is a mandatory waiting period: your loan cannot disburse until at least 30 days after you sign the promissory note (the legal agreement to repay). Your school will tell you the exact disbursement dates for your term.
Private loans disburse on the lender's schedule, which varies. Some disburse once per year; others disburse per semester. Ask your lender when to expect the money and whether it goes to your school or directly to you.
Repayment plans and when you must start paying back
Federal student loan repayment begins six months after you graduate or drop below half-time enrollment. This period is called the grace period. During the grace period, interest still accrues on unsubsidized loans, but you do not have to make payments.
The federal government offers several repayment plans. The Standard Repayment Plan requires fixed payments over 10 years. Income-Driven Repayment Plans set your payment based on your income and family size — payments may be as low as $0 per month if your income is very low. These plans extend repayment to 20 or 25 years, and any remaining balance is forgiven after that time (though you may owe taxes on the forgiven amount).
Private loans have no grace period. Repayment begins immediately or within 30 days of disbursement, though some lenders allow you to defer payments while in school. Once you graduate, you must make full payments on the schedule the lender sets.
Documents you need before you apply
| Document | Why you need it |
|---|---|
| Social Security card or ITIN | Required to complete the FAFSA and for the lender to verify your identity |
| Driver's license or state ID | Required to log into fafsa.gov |
| Prior-year tax return (yours or your parents') | FAFSA uses income information to calculate financial need |
| School's Federal School Code | Tells the FAFSA which school to send your information to |
| Proof of enrollment (for private loans) | Private lenders verify you are enrolled before disbursing |
Frequently Asked Questions
Do I have to take out a loan if I am offered one?
No. Your financial aid package lists all aid offered, but you choose which to accept. You can accept grants and work-study and decline loans. If you decline a loan, tell your school's financial aid office in writing so they do not disburse it.
What if I do not may have access to for federal loans?
You may not meet federal requirements if you are not a U.S. citizen or may be able to access noncitizen, or if you have a drug conviction on your record. Private student loans are available to noncitizens with a U.S. cosigner. Talk to your school's financial aid office about other options, such as payment plans or private scholarships.
Can I borrow more than the federal limit?
Federal loan limits are set by law and cannot be exceeded. If you need more money, you can take out a private student loan for the difference. Your school can tell you the maximum you need to borrow based on your cost of attendance.
What happens if I cannot pay back my loan?
Federal loans offer income-driven repayment plans that lower your payment if your income drops. You can also request forbearance or deferment, which pauses payments temporarily. Private loans have fewer options; contact your lender immediately if you cannot pay to discuss what they offer.
Can I refinance my student loans?
Yes, but refinancing federal loans into private loans means you lose federal protections like income-based repayment and loan forgiveness. Refinance only if you have a stable income and good credit. Federal loans cannot be refinanced with the federal government, only with private lenders.