How student loans work and where to start

Student loans come from two sources: the federal government and private lenders. Federal loans are almost always cheaper and have better protections, so you should exhaust those first. To get federal loans, you fill out the Free Application for Federal Student Aid (FAFSA), which tells the school how much aid you can receive. Private loans come after — they require a credit check and often a co-signer, and their terms depend entirely on the lender you choose.

The process starts with the FAFSA, even if you think you won't get aid. Schools use it to determine your financial need, and some state and institutional aid requires it. You file the FAFSA once per year, and it covers the entire academic year. After you submit it, the school's financial aid office calculates how much federal aid you can borrow and sends you an award letter listing the loans, grants, and work-study they're offering.

Key Takeaways

  • Federal loans require filing the FAFSA each year; private loans require a credit check and often a co-signer, and their interest rates and terms vary by lender.
  • The school's financial aid office sends you an award letter showing how much you can borrow in federal loans, which you then accept or decline.
  • Federal loans include Direct Subsidized Loans (interest doesn't accrue while you're in school), Direct Unsubsidized Loans (interest accrues immediately), and Parent PLUS loans (for parents only).
  • You must complete entrance counseling and sign a Master Promissory Note before the school disburses federal loan money to your account.
  • Private loans have no annual or lifetime borrowing limits set by law, but lenders set their own caps based on your credit and income.

Filing the FAFSA and reading your award letter

The FAFSA opens October 1 each year and covers the academic year starting the following fall. You file it at fafsa.gov using your Social Security number and tax information. If you're a dependent student, you'll need a parent's information too. The form asks about income, assets, and family size — the answers determine your Expected Family Contribution (EFC), which is what the government thinks you can pay out of pocket.

After you submit the FAFSA, you'll receive a Student Aid Report (SAR) confirming what you entered. The school then uses that information to create an award letter. This letter shows the total cost of attendance, how much the school thinks you need to borrow, and what loans and grants they're offering. Read it carefully: it lists the loan type, the amount, and the interest rate. You don't automatically receive everything listed — you have to accept each loan separately, usually through the school's financial aid portal.

Understanding the types of federal loans available

Direct Subsidized Loans are for undergraduate students with financial need. The government pays the interest while you're in school at least half-time, during your grace period after graduation, and during deferment. You only owe the principal. The interest rate is set by Congress and is the same for all borrowers in the same year.

Direct Unsubsidized Loans are available to undergraduates and graduate students regardless of need. Interest accrues from the moment the loan is disbursed — even while you're in school. If you don't pay the interest as it accrues, it gets added to the principal (capitalization), and you'll owe interest on interest. The interest rate is also set by Congress and is the same for all borrowers.

Direct PLUS Loans are for parents borrowing on behalf of dependent undergraduate students, or for graduate students borrowing for themselves. They have a higher interest rate than Subsidized or Unsubsidized loans and require a credit check. Parents must pass a basic credit review; graduate students must not have an adverse credit history. There's no annual borrowing limit — you can borrow up to the full cost of attendance minus other aid.

Accepting loans and completing required paperwork

Once you've read your award letter, you accept or decline each loan through your school's financial aid system. Accepting a loan doesn't mean you're borrowing that full amount — it means you're authorizing the school to offer it. You can borrow less if you choose. The school then disburses the money, usually in two installments per semester, directly to your student account to cover tuition and fees. Any leftover goes to you as a refund for living expenses.

Before the school disburses federal loan money, you must complete entrance counseling and sign a Master Promissory Note (MPN). Entrance counseling is an online tutorial explaining how loans work, what your obligations are, and what happens if you don't repay. The MPN is the legal document promising to repay the loan. You typically sign it once, and it covers all federal loans from that school. Both are completed through your school's financial aid office or through studentloans.gov.

Private loans and how they differ from federal loans

Private loans come from banks, credit unions, and online lenders. They have no annual or lifetime borrowing limits set by law — you can borrow as much as the lender will give you. However, lenders set their own caps based on your credit score, income, and debt-to-income ratio. Interest rates vary widely by lender and by your creditworthiness, ranging from around 4% to over 13% depending on market conditions and your profile.

Private loans require a credit check. If you have limited or poor credit, you'll likely need a co-signer — usually a parent or relative with established credit. The co-signer is equally responsible for repaying the loan. Interest may be fixed or variable, and some lenders offer in-school deferment (you don't have to pay while enrolled), but many don't. You apply directly with the lender, not through your school, though your school can provide a list of preferred lenders.

Private loans should be your last resort because they lack the protections of federal loans. Federal loans offer income-driven repayment plans, forgiveness programs, and deferment options. Private loans typically don't. If you lose your job or face hardship, federal loans have safety nets; private loans usually don't.

What happens after you borrow

Once you graduate, leave school, or drop below half-time enrollment, your federal loans enter a grace period — usually six months during which you don't have to make payments. Unsubsidized loans and PLUS loans accrue interest during this time. After the grace period ends, repayment begins. You'll receive a bill from your loan servicer (the company that collects your payments) with your monthly payment amount and due date.

Federal loans offer several repayment plans. The Standard Plan is ten years of fixed payments. Income-Driven Plans tie your payment to your income and can extend repayment to 20 or 25 years. If you're struggling, you can request deferment or forbearance, which temporarily pause payments. Private loans have fewer options — most require fixed monthly payments starting shortly after graduation, with little flexibility if you face hardship.

Frequently Asked Questions

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

No. Your award letter shows what you're offered, but you accept or decline each loan individually and can borrow less than the full amount. Borrow only what you need to cover tuition, fees, and reasonable living expenses. Every dollar you borrow costs more in interest over time.

What's the difference between a subsidized and unsubsidized loan?

With a subsidized loan, the government pays the interest while you're in school. With an unsubsidized loan, interest accrues immediately and gets added to what you owe. If you have a choice, take subsidized loans first — they cost less overall.

Can I borrow more if I need it after I've already accepted loans?

Yes. Contact your school's financial aid office and ask if you can increase your loan amount. They can adjust your award if funds are available and you haven't exceeded annual or lifetime limits. You can also explore private loans, though federal loans are usually better.

What if I don't pass the credit check for a private loan?

Ask a co-signer with good credit to apply with you. A co-signer's credit is used instead of yours. If you can't find a co-signer, stick with federal loans — they don't require a credit check and have better terms anyway.

When do I start paying back my loans?

Federal loans have a grace period after you graduate or leave school, usually six months, before payments begin. Private loans vary — some have grace periods, others don't. Check your loan documents to know your exact start date.