How student loans work: the basic path
Getting a student loan starts with filling out the Free Application for Federal Student Aid (FAFSA) if you are a U.S. citizen or may be able to access noncitizen attending an accredited school. The FAFSA opens October 1 each year and determines what federal loans you may receive. You submit it to the U.S. Department of Education, not to your school — your school sees the results afterward and uses them to build your financial aid package.
Federal loans come directly from the government. Private loans come from banks, credit unions, or online lenders and require a separate application with each lender. Most students start with federal loans because they have fixed interest rates set by Congress, income-based repayment options, and no credit check for undergraduate loans. Private loans typically require a credit check and offer fewer protections.
Once you are offered a loan, you sign a promissory note (a binding contract) and the money goes to your school's financial aid office. The school deducts tuition and fees, then sends any remainder to you as a check or direct deposit. You do not receive the full amount at once — it disburses in chunks, usually once per semester.
Key Takeaways
- Complete the FAFSA starting October 1 each year; it determines federal loan amounts and opens before many school deadlines.
- Federal loans require no credit check for undergraduates and offer fixed rates and income-based repayment; private loans require credit approval and have fewer protections.
- Money goes to your school first to cover tuition and fees, then to you; it disburses per semester, not all at once.
- You must sign a promissory note before any loan money is released, and you are responsible for repaying it even if you do not finish school.
Completing the FAFSA and understanding your aid offer
The FAFSA asks for your Social Security number, tax information, and details about your family's income and assets. You can file it yourself at fafsa.gov or with help from your school's financial aid office. Many schools offer free FAFSA completion events in the fall and winter. If you are a dependent student, you will need a parent to sign; if you are independent, you sign alone.
After you submit the FAFSA, the Department of Education sends you a Student Aid Report (SAR) that shows what you reported. Your school then uses this information to create a financial aid package — a letter listing all the aid you are offered, including grants (money you do not repay), work-study, and loans. Read this letter carefully. It shows the loan type, amount, and interest rate. You are not required to accept every loan offered.
If your circumstances change after you submit the FAFSA — your family's income drops, your parents divorce, or you become independent — contact your school's financial aid office. They can adjust your FAFSA information and recalculate your aid package.
Types of federal student loans and how much you can borrow
Direct Subsidized Loans are for undergraduate students with financial need. The government pays the interest while you are in school at least half-time. Direct Unsubsidized Loans are available to undergraduates and graduate students regardless of need, but interest accrues (builds up) from the day the loan is disbursed. Direct PLUS Loans are for graduate students and parents of undergraduates; they require a credit check and have a higher interest rate.
Borrowing limits depend on your year in school and whether you are a dependent or independent student. For the 2024–2025 school year, a dependent undergraduate can borrow up to $5,500 in their first year (with a maximum of $3,500 in subsidized loans), increasing to $7,500 by the third year. Independent undergraduates can borrow more. Graduate students can borrow up to $20,500 per year in unsubsidized loans. These limits change yearly, so check studentaid.gov for current amounts.
You can also take out a Direct Consolidation Loan after you graduate to combine multiple federal loans into one, which simplifies repayment but may extend the time you pay and increase total interest.
Private student loans: credit, cosigners, and terms
Private loans require you to apply directly with a lender — Common lenders include Sallie Mae, Earnest, SoFi, and Discover. You will need to provide proof of income or employment, your credit score, and information about your school and program. Most private lenders require a credit check; if your credit is limited or poor, you may need a cosigner (usually a parent or relative with established credit).
Private loan terms vary widely by lender. Interest rates may be fixed or variable (meaning they change over time). Repayment typically begins six months after graduation, though some lenders allow in-school deferment. Private loans do not offer income-based repayment or public service loan forgiveness, and they are harder to discharge in bankruptcy. Compare offers from at least three lenders before choosing one.
Private loans are most useful when you have exhausted federal loan limits or when you have good credit and can secure a lower rate than the federal rate. They should not be your first choice because federal loans offer more flexibility and consumer protections.
What happens after you accept a loan offer
Once you accept a loan in your school's financial aid portal, you must complete entrance counseling — an online tutorial about loan terms, repayment options, and your rights and responsibilities. This is required by federal law and usually takes 20 to 30 minutes. You then sign a Master Promissory Note (MPN), a legal document stating you will repay the loan with interest. For federal loans, you sign this once and it covers all loans from that school; for private loans, you sign a separate note with each lender.
After you sign, the lender (federal or private) sends the money to your school's financial aid office. Your school deducts what you owe for tuition, fees, room, and board, then sends any leftover funds to you. This happens once per semester or term. If you borrow $10,000 for the year and your costs are $8,000, you receive $2,000; you do not get the full amount upfront.
Keep records of everything: your promissory notes, loan documents, disbursement dates, and the total amount borrowed. You will need these when you start repayment and if you ever need to dispute a charge or apply for forgiveness.
Repayment begins after you graduate or drop below half-time enrollment
For federal loans, repayment typically begins six months after you graduate or leave school (this period is called the grace period). During the grace period, you do not have to make payments, but interest on unsubsidized loans continues to accrue. You can pay interest during the grace period to reduce what you owe later, but you are not required to.
When repayment starts, you choose a repayment plan. The Standard Repayment Plan has fixed payments over 10 years. Income-Driven Repayment Plans (PAYE, REPAYE, IBR, ICR) base your payment on your income and family size; payments may be as low as $0 per month if your income is very low. Income-driven plans last 20 to 25 years, and any remaining balance is forgiven (though you may owe taxes on the forgiven amount). You can change plans at any time.
Private loans have no grace period; repayment begins according to the terms in your promissory note, often while you are still in school. Contact your private lender to ask about deferment or forbearance options if you cannot pay after graduation.
Common mistakes to avoid when borrowing
Do not skip the FAFSA because you think you will not may have access to. Many students underestimate their need or do not know they can receive loans regardless of income. Submitting the FAFSA is the only way to find out what you are offered.
Do not borrow more than you need. Just because a lender offers $20,000 does not mean you should take it. Borrow only what your school costs minus grants and scholarships. Every dollar you borrow costs more when you add interest over 10 or 20 years.
Do not ignore loan documents or skip entrance counseling. These are not formalities — they explain your legal obligations and the terms you are agreeing to. If you do not understand something, ask your school's financial aid office before you sign.
Do not assume all loans are the same. Federal and private loans have very different terms, protections, and repayment options. Exhaust federal loans before turning to private ones.
Frequently Asked Questions
Do I have to take out loans if I am offered them?
No. Your financial aid package is an offer, not a requirement. You can decline any or all loans and instead use grants, scholarships, work-study, or pay out of pocket. Declining a loan does not affect other aid you receive.
What if I do not finish school — do I still have to repay?
Yes. You are responsible for repaying any loan you borrow, whether you graduate, transfer, or leave school. The grace period still applies (six months for federal loans after you leave), but you will eventually owe the full amount plus interest.
Can I borrow money for living expenses, not just tuition?
Yes. The FAFSA and loan programs account for your total cost of attendance, which includes tuition, fees, room, board, books, transportation, and personal expenses. You can borrow up to that total amount minus other aid you receive.
What is the difference between a cosigner and a parent PLUS loan?
A cosigner on a private loan is legally responsible if you do not pay; a parent PLUS loan is taken out in the parent's name alone, and the parent is the borrower. PLUS loans have higher interest rates but offer federal protections; private loans with cosigners offer none.
Can I change my loan type or amount after I accept it?
Yes, before your school disburses the money. Contact your financial aid office and ask to adjust your loan package. After disbursement, you cannot change what was already sent, but you can decline future disbursements in the same year.