Student loans are borrowed money you repay after school ends, not money you keep

When you "pull out" a student loan, you are borrowing money from the federal government or a private lender to pay for education. The money goes to your school's financial aid office, which applies it to tuition, fees, and room and board. You then repay the full amount plus interest after you graduate or drop below half-time enrollment. This is different from grants or scholarships, which you do not repay.

The process starts with the Free Application for Federal Student Aid (FAFSA), which determines how much federal aid you can borrow. Private loans follow a separate path and require a credit check. Both routes involve signing promissory notes — legal documents stating you will repay the money under specific terms.

Key Takeaways

  • Federal student loans require you to complete the FAFSA first, which opens October 1 each year and determines your loan amount based on your family's income and assets.
  • You must be enrolled at least half-time at an accredited school to borrow federal loans, and the money is sent directly to your school, not to you.
  • Federal loans include unsubsidized and subsidized options; subsidized loans do not accrue interest while you are in school, but unsubsidized loans do.
  • Private student loans require a separate application with a lender, a credit check, and often a cosigner, and typically have higher interest rates than federal loans.
  • You do not begin repaying federal loans until six months after you graduate or leave school, a period called the grace period.

Complete the FAFSA to borrow federal student loans

The FAFSA is the starting point for all federal student loans. You fill it out online at fafsa.gov beginning October 1 each year. The form asks for your Social Security number, date of birth, income from the previous tax year, and asset information. If you are under 24 and not independent, you must include your parents' financial information as well.

After you submit the FAFSA, the Department of Education calculates your Expected Family Contribution (EFC) — the amount your family is expected to pay toward education. Schools use this number to determine how much federal aid you can borrow. You will receive a Student Aid Report (SAR) by email confirming what you submitted. Check it for errors and correct them if needed, because mistakes can reduce your loan amount.

The FAFSA remains open through June 30, but applying early matters because some schools have limited funds and award aid on a first-come, first-served basis. If you miss the October deadline, you can still apply, but you may receive less aid for that school year.

Understand the difference between subsidized and unsubsidized federal loans

Subsidized loans are awarded based on financial need. The federal government pays the interest while you are in school at least half-time, during your grace period, and during deferment. You owe only the principal when repayment begins. Subsidized loans are limited to undergraduate students and have a maximum of $3,500 to $5,500 per year depending on your year in school.

Unsubsidized loans are not based on need — anyone can borrow them. Interest accrues (builds up) from the day the loan is disbursed, even while you are in school. If you do not pay the interest while studying, it is added to your principal balance when repayment begins, meaning you owe more. Unsubsidized loans have higher annual limits: $5,500 to $20,500 per year depending on your year and whether you are dependent or independent.

Most students receive a combination of both types. Your school's financial aid office will tell you the breakdown in your aid package after you submit the FAFSA.

Review your aid package and sign the promissory note

After the FAFSA is processed, your school sends you an aid package letter listing all the loans and grants you have been offered. This letter shows the loan type, the amount, the interest rate, and the terms. Read it carefully — you are not required to borrow the full amount offered. You can accept part of it and decline the rest.

To actually borrow the money, you must sign a Master Promissory Note (MPN) — a legal contract stating you will repay the loan. For federal loans, you sign this once online at studentloans.gov, and it covers all federal loans you borrow while in school. You will need your FSA ID (a username and password created during the FAFSA process) to sign.

Before you sign, you are required to complete entrance counseling, a short online course explaining how loans work, your repayment obligations, and what happens if you default. This takes about 30 minutes and is free.

The school receives the money and applies it to your bill

Once you have signed the promissory note, the lender (the Department of Education for federal loans) sends the money to your school. Your school's financial aid office applies it to your tuition, fees, and other charges on your student account. If the loan amount exceeds what you owe, the school sends you the leftover as a refund, usually by check or direct deposit within two weeks.

You cannot request that the money be sent directly to you instead of the school — federal law requires it to go to the school first. However, you can control how much you borrow by declining part of the loan offer, which reduces the refund you receive.

The school disburses (releases) the money in two parts per academic year — once at the start of fall semester and once at the start of spring semester. If you drop out or change your enrollment status, your school may reduce or cancel the second disbursement.

Private student loans require a separate application and credit check

Private loans come from banks, credit unions, and online lenders, not the federal government. You apply directly with the lender using their website or application form. Private lenders require a credit check, and if your credit is limited or poor, you will likely need a cosigner — usually a parent or guardian with established credit who is legally responsible for repaying the loan if you do not.

Private loan interest rates vary by lender and your creditworthiness. They are typically higher than federal rates and may be fixed or variable (changing over time). Private loans do not have the same protections as federal loans — for example, they do not include a grace period or income-driven repayment options.

Private loans should be a last resort after you have borrowed the maximum federal amount, because federal loans offer better terms and more flexibility. However, if your school costs exceed federal loan limits, private loans can cover the gap.

Know when repayment begins and what happens during the grace period

You do not begin repaying federal student loans immediately after graduation. Instead, you enter a grace period — typically six months after you graduate, leave school, or drop below half-time enrollment. During this time, you do not make payments. However, interest on unsubsidized loans continues to accrue.

Before the grace period ends, your loan servicer (the company that manages your loan) will contact you with information about repayment plans and your first payment due date. Federal loans offer several repayment options: the Standard Plan (10 years), income-driven plans (20 to 25 years with payments based on your income), and others. You choose the plan that fits your budget.

Private loans may not include a grace period — check your promissory note to see when your first payment is due. Some private lenders allow you to make interest-only payments while in school, which reduces the amount of interest that accrues.

Frequently Asked Questions

Can I borrow student loans if I have not been accepted to a school yet?

No. You must be enrolled at an accredited school and at least half-time to borrow federal loans. You can complete the FAFSA before you are accepted, but the school will not disburse the money until you are officially enrolled and have signed the promissory note.

What if I do not use all the money the school sends me?

The money you do not spend on school charges is refunded to you, usually within two weeks. You can use this for living expenses, books, or other education-related costs. However, remember that you must repay every dollar you borrowed, including refunds.

Can I borrow more money if my costs increase during the year?

Yes, but only if your school's cost of attendance increases and you have not reached the annual borrowing limit. Contact your financial aid office to request an increase. They will update your aid package and send a new disbursement if approved.

What happens if I take out a loan and then decide not to go to school?

You must repay the loan in full, including interest. The grace period does not apply if you never enroll or if you withdraw before completing your program. Contact your loan servicer immediately to discuss repayment options, as you may face default if you do not pay.

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

No. You can accept part of the loan and decline the rest. Borrow only what you need, because every dollar you borrow must be repaid with interest. Declining part of the offer reduces your refund but also reduces your total debt.