The basic mechanics of taking out a student loan
A student loan is money you borrow from a lender — either the federal government or a private bank — that you must repay with interest after you leave school. The lender gives the money directly to your school, which applies it to tuition, fees, room and board, and other costs. You do not receive cash in hand. The school keeps what it needs and may send you a refund for the remainder, which you can use for other education expenses.
Federal student loans and private student loans work differently. Federal loans have fixed interest rates set by Congress, income-based repayment options, and forgiveness programs. Private loans have variable or fixed rates depending on the lender and your credit, and repayment is typically standard — you pay a set amount each month until the loan is gone. Most students start with federal loans because the terms are more flexible and do not require a credit check or a cosigner.
You do not need to repay a student loan while you are enrolled at least half-time. This period is called in-school deferment. Interest on federal subsidized loans does not accrue during this time. Interest on unsubsidized loans and private loans continues to accrue, meaning it gets added to what you owe.
Key Takeaways
- Federal student loans require you to complete the FAFSA (Free Application for Federal Student Aid) each year, and the school determines how much you can borrow based on cost of attendance and other aid you receive.
- You must repay federal loans six months after you graduate, leave school, or drop below half-time enrollment — this six-month period is called the grace period.
- Private student loans require a credit check and often a cosigner if you have no credit history, and they begin accruing interest immediately even while you are in school.
- Borrowing more than you need increases the total amount you repay with interest, so only borrow what your school's cost of attendance minus other aid actually requires.
- Federal loans offer income-driven repayment plans that cap your monthly payment at a percentage of your income, while private loans typically require a fixed payment regardless of income.
How to get a federal student loan
To borrow federal student loans, you must complete the FAFSA (Free Application for Federal Student Aid) every year you are in school. The FAFSA is free and opens October 1 each year. You fill it out at fafsa.gov using your Social Security number, tax information, and information about your parents' income if you are a dependent. The form takes 15 to 30 minutes.
After you submit the FAFSA, the federal government calculates your Expected Family Contribution — the amount they believe you and your family can pay toward school costs. Your school then subtracts this from the total cost of attendance to determine how much federal aid you can receive. This includes grants (money you do not repay) and loans (money you do repay). The school sends you an award letter showing what you have been offered.
You then accept or decline the loan portion of your aid through your school's financial aid office or online portal. Once you accept, you must complete entrance counseling — a short online course that explains how loans work, what your repayment obligations are, and what happens if you default. This is required by federal law and takes about 30 minutes. After that, the school certifies the loan and the lender (usually the Department of Education) disburses the money to the school.
Private student loans and when to consider them
Private student loans come from banks, credit unions, and online lenders. You apply directly with the lender, not through your school. The lender checks your credit score and income. If you have no credit history or a low score, you will need a cosigner — usually a parent or guardian — who is legally responsible for repaying the loan if you do not.
Private loans have higher interest rates than federal loans on average, and the rates can be variable, meaning they change over time. You begin repaying private loans while you are still in school, though some lenders offer an in-school deferment option where you pay only interest during school and principal and interest after graduation. Private loans do not offer income-based repayment or forgiveness programs.
Most financial advisors recommend exhausting federal loan options before turning to private loans. Federal loans have lower rates, more flexible repayment, and protections like income-driven plans and public service forgiveness. Use private loans only if you have already borrowed the federal maximum and still have unmet costs.
Loan amounts and borrowing limits
The amount you can borrow in federal loans depends on your year in school and whether you are a dependent or independent student. Dependent undergraduates can borrow $5,500 to $7,500 per year in federal loans (the exact amount varies by year). Independent undergraduates and graduate students can borrow more. These are annual limits, not total limits — you can borrow each year you are enrolled.
Your school may also limit how much you can borrow based on your cost of attendance. If your school costs $30,000 per year and you receive $10,000 in grants, you can borrow up to $20,000 in loans that year. You cannot borrow more than the cost of attendance minus other aid, even if the federal limit is higher.
Private lenders set their own limits. Some will lend up to the full cost of attendance; others cap loans at a percentage of the school's cost. Check with individual lenders for their limits.
What happens after you graduate or leave school
Federal student loans enter a grace period six months after you graduate, leave school, or drop below half-time enrollment. During the grace period, you do not have to make payments. Interest on subsidized loans does not accrue; interest on unsubsidized loans continues to accrue and is added to your balance.
After the grace period ends, you must begin repayment. The standard repayment plan is ten years of fixed monthly payments. You can also choose an income-driven repayment plan, which caps your payment at 10 to 20 percent of your discretionary income depending on the plan. Income-driven plans extend repayment to 20 or 25 years, and any remaining balance is forgiven after that period, though forgiveness may be taxable as income.
Private loans typically do not have a grace period. You may be required to begin repayment while you are still in school, or the lender may allow deferment until after graduation. Check your loan documents or contact the lender to confirm when payments are due.
Documents you will need
For federal loans, you will need your Social Security number, driver's license or state ID, and tax information (yours and your parents' if you are a dependent). If you are applying for the first time, you will also need to create a Federal Student Aid ID at studentaid.gov. This ID is used to sign documents electronically and access your loan information later.
For private loans, you will need your Social Security number, proof of income (pay stubs or tax returns), and a cosigner's information if required. Some lenders also ask for proof of school enrollment or an acceptance letter.
Common mistakes to avoid when borrowing
The most common mistake is borrowing more than you need. Student loans accrue interest, and the more you borrow, the more you pay back over time. Borrow only what your school's cost of attendance minus grants and scholarships actually requires. If you borrow $30,000 at 5 percent interest over ten years, you will repay about $37,000. If you borrow $50,000, you will repay about $61,000.
Another mistake is not comparing federal and private loan terms before borrowing. Federal loans have lower average interest rates and more repayment flexibility. Private loans should be a last resort, not a first option. A third mistake is not understanding the difference between subsidized and unsubsidized loans. Subsidized loans do not accrue interest while you are in school; unsubsidized loans do. If you have a choice, take subsidized loans first.
Finally, do not skip entrance counseling or ignore your loan documents. Entrance counseling explains your repayment obligations and what happens if you default. Knowing these details upfront prevents surprises later.
Frequently Asked Questions
Do I have to repay a student loan if I drop out of school?
Yes. Your grace period begins when you leave school, regardless of whether you graduated or dropped out. You have six months before payments are due. If you plan to return to school later, you can request a deferment to pause payments while you are enrolled again.
What is the difference between subsidized and unsubsidized federal loans?
With subsidized loans, the government pays the interest while you are in school. With unsubsidized loans, interest accrues from the moment the loan is disbursed and is added to your balance. Unsubsidized loans cost more over time because you pay interest on interest. Borrow subsidized loans first if you have a choice.
Can I pay off my student loan early without a penalty?
Yes. Federal student loans have no prepayment penalty — you can pay extra toward your balance anytime without being charged a fee. Most private loans also have no prepayment penalty, but check your loan documents to confirm. Paying extra reduces the total interest you pay.
What happens if I cannot repay my student loan?
Contact your lender immediately. For federal loans, you can request a deferment or forbearance to pause payments temporarily, or switch to an income-driven repayment plan that lowers your monthly payment. Defaulting — not paying for 270 days — damages your credit and can result in wage garnishment. Private lenders have fewer options, so communication early is critical.
Can my parents take out a loan on my behalf?
Your parents can take out a federal PLUS loan, which is a federal loan in their name to help pay for your education. You do not borrow it; they do, and they are responsible for repayment. PLUS loans have higher interest rates than standard federal student loans. Alternatively, your parents can cosign a private student loan in your name.