How student loans work and where to start
A student loan is money borrowed from the federal government, a state program, or a private lender to pay for education costs. You repay it after you graduate or leave school, usually with interest. The process starts with filling out the Free Application for Federal Student Aid (FAFSA), which determines what federal loans you may receive. Most borrowers begin here because federal loans have fixed interest rates, income-based repayment options, and forgiveness programs that private loans do not offer.
The FAFSA opens October 1 each year and remains open through June 30 of the following year, though schools set their own earlier deadlines. You submit it online at fafsa.gov. The form asks about your income, assets, family size, and other details. The Department of Education uses this information to calculate your Expected Family Contribution (EFC) — the amount your family is considered able to pay. Schools then use your EFC to determine how much aid they can offer you.
After you submit the FAFSA, you will receive a Student Aid Report (SAR) showing what the government calculated. Schools you listed on the form will also receive this information and send you a financial aid package showing loans, grants, and work-study they offer. You then decide which loans to accept.
Key Takeaways
- The FAFSA is the required first step for federal student loans and opens October 1 each year; you complete it at fafsa.gov.
- Federal loans come in three main types — Direct Subsidized, Direct Unsubsidized, and Direct PLUS — each with different interest rates and repayment rules.
- Your school's financial aid office processes your application and tells you which loans you are offered; you choose which ones to accept.
- Loan money is sent directly to your school to cover tuition and fees, with any remainder paid to you for other education expenses.
- Private loans require a separate application with a bank or lender and typically require a credit check or a cosigner.
Federal student loans: the three main types
Direct Subsidized Loans are available to undergraduate students with financial need. The government pays the interest while you are in school at least half-time, during your grace period after graduation, and during deferment. The current interest rate is set by Congress and changes each year; for loans issued in 2024, it is 5.50 percent. You do not have to make payments while in school.
Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. Interest accrues (builds up) from the moment the loan is disbursed, even while you are in school. You can pay the interest as it accrues or let it capitalize (be added to your loan balance), which means you will owe interest on interest later. The interest rate for 2024 is 5.50 percent for undergraduates and 7.05 percent for graduate students.
Direct PLUS Loans are for graduate students and parents of dependent undergraduates. They have a higher interest rate — 8.05 percent for 2024 — and require a credit check. Parents must apply separately from the FAFSA. PLUS loans have no annual borrowing limit, only a limit based on your school's cost of attendance minus other aid you received.
The application process step by step
Start by creating an FSA ID at studentaid.gov. This is your login for the FAFSA and other federal student aid websites. You will need your Social Security number and a valid email address. If you are a dependent student, at least one parent must also create an FSA ID.
Complete the FAFSA at fafsa.gov. The form takes 20 to 30 minutes. You will need your tax return (or your parents' if you are a dependent), W-2s, and records of untaxed income. If you do not have your taxes filed yet, you can use estimates and update them later. After you submit, you receive a confirmation number — save this.
Wait for your Student Aid Report (SAR). The Department of Education processes your FAFSA and sends the results to you and to every school you listed. This usually takes a few days to a few weeks. Check your email for a notification that your SAR is ready.
Review your school's financial aid package. Your school's financial aid office will contact you (usually by email or through a student portal) with an offer showing loans, grants, and work-study. This is not automatic — you must accept the loans you want. Declining a loan means you do not receive it.
Sign your Master Promissory Note (MPN). Before your school can disburse a federal loan, you must sign an MPN at studentaid.gov. This is a legal document promising to repay the loan. You sign it once per school, and it covers all loans from that school while you are enrolled.
Complete entrance counseling (for first-time borrowers). The Department of Education requires you to complete online counseling explaining your rights and responsibilities as a borrower. This takes about 30 minutes and is done at studentaid.gov.
How loan money reaches you and your school
Once you have accepted a loan and signed the MPN, your school's financial aid office arranges disbursement. The lender (the Department of Education for federal loans) sends the money directly to your school, not to you. Your school applies it first to tuition, fees, and room and board if you live on campus. Any remaining balance is paid to you, usually by check or direct deposit, for other education expenses like books, supplies, and living costs.
Disbursement typically happens at the start of each semester or term. If you are a full-time student, your school may disburse half your annual loan amount each semester. Part-time students may receive smaller amounts. Your school's financial aid office can tell you the exact schedule.
If you drop below half-time enrollment, your school must notify the lender. This can affect when your grace period begins and when you must start repaying. Always tell your school if your enrollment status changes.
Private student loans: when and how to use them
Private loans come from banks, credit unions, and online lenders, not from the government. You should exhaust federal loans first because private loans lack income-based repayment, forgiveness programs, and borrower protections. Private loans are useful only if federal loans do not cover your full cost of attendance.
To obtain a private loan, you apply directly with the lender. You will need to provide proof of enrollment (your school can supply this), your income or your parents' income, and consent to a credit check. Most private lenders require a cosigner — usually a parent — if you have limited credit history. Interest rates vary by lender and your creditworthiness; they may be fixed or variable and are typically higher than federal rates.
Private loans begin accruing interest immediately and often require payments while you are in school, though some lenders offer in-school deferment. Read the loan agreement carefully before signing, as terms vary widely. Compare offers from at least three lenders before choosing.
What happens after you receive the loan
Federal loans enter a grace period after you graduate or drop below half-time enrollment. For Direct Subsidized and Unsubsidized Loans, this grace period is six months. For PLUS Loans, there is no grace period — repayment begins 60 days after disbursement. During the grace period, you do not have to make payments, but interest on Unsubsidized Loans continues to accrue.
Before your grace period ends, you must choose a repayment plan. The standard plan is 10 years of fixed payments. Income-driven plans base your payment on your income and family size and may extend repayment to 20 or 25 years. You can change your plan later if your circumstances change. Visit studentaid.gov to compare plans and set up automatic payments, which lower your interest rate by 0.25 percent.
Private loans have their own grace periods and repayment terms set by the lender. Check your loan documents for details. Most private lenders require you to contact them to set up repayment; they do not do it automatically.
Documents you will need at each stage
| Stage | Documents Needed |
|---|---|
| FAFSA completion | Social Security number, tax return (yours or parents'), W-2s, records of untaxed income |
| School financial aid package review | Student Aid Report (SAR), acceptance letter from school |
| Loan acceptance | Financial aid package from school, FSA ID login |
| MPN and counseling | FSA ID login, proof of enrollment (school provides) |
| Private loan application | Proof of enrollment, income documentation, Social Security number, cosigner information (if required) |
Frequently Asked Questions
Can I borrow more than the federal loan limit?
Federal loan limits vary by year in school and whether you are a dependent or independent student. Undergraduates can borrow $5,500 to $7,500 per year in Direct Loans, depending on year and dependency status. Graduate students can borrow up to $20,500 per year. If you need more, you can take out a PLUS Loan (which has no annual limit) or a private loan.
What if I do not have a cosigner for a private loan?
Some private lenders will approve loans without a cosigner if you have established credit or sufficient income. Others require one. If you cannot find a cosigner, exhaust federal loans first — they do not require one. You can also ask your school's financial aid office whether they have emergency funds or alternative funding sources.
Do I have to accept all the loans my school offers?
No. You can accept some loans and decline others. You can also accept part of a loan amount. Your school's financial aid office will show you how to do this when you review your package. Declining a loan means you do not receive that money.
What if I need to borrow more after I have already taken out loans?
Contact your school's financial aid office. If you have not reached the federal loan limit for your year in school, you can request an additional disbursement. If you have, you can take out a PLUS Loan or a private loan. Your school can tell you what options remain available to you.
When do I start repaying my loans?
Federal loans enter a six-month grace period after you graduate or drop below half-time enrollment (except PLUS Loans, which have no grace period). Repayment begins after the grace period ends. Private loans have their own grace periods set by the lender — check your loan documents. You should receive a repayment notice from your lender at least 15 days before your first payment is due.