How student loans work and where to start
Taking out a student loan means borrowing money from a lender — either the federal government or a private bank — that you repay after you leave school. Federal loans are the most common route because they offer fixed interest rates, income-based repayment plans, and forgiveness programs that private loans do not. To start, you will need to complete the Free Application for Federal Student Aid (FAFSA), which determines what federal loans you can borrow and how much. If you are a dependent student, your parents' financial information goes on the form. If you are independent, only your own information is required.
The FAFSA opens on October 1 each year and remains open through June 30 of the following year, though some schools and states have earlier deadlines. You submit it at fafsa.gov, and your school's financial aid office receives your results within a few days. That office then sends you a financial aid package showing what loans, grants, and work-study you are offered. You do not have to accept every loan offered — you can borrow less, or none at all.
Key Takeaways
- Federal student loans require you to complete the FAFSA first, which opens October 1 each year and determines how much you can borrow.
- Your school's financial aid office sends you a financial aid package after processing your FAFSA, and you choose which loans to accept.
- Federal loans require you to sign a Master Promissory Note (MPN) before money is disbursed, which is a legal promise to repay.
- Money is sent directly to your school to cover tuition and fees first, then any leftover is sent to you or held in a student account.
- Private loans skip the FAFSA and go through banks or online lenders, but carry higher interest rates and fewer protections than federal loans.
Completing the FAFSA and understanding your aid package
The FAFSA asks for your Social Security number, date of birth, income, assets, and tax information. You will need a Federal Student Aid (FSA) ID to log in — create one at studentaid.gov before you start. If you are a dependent student, you will also need your parents' FSA IDs and their financial information. The form takes 30 to 45 minutes to complete.
After you submit the FAFSA, your school receives your Student Aid Report (SAR), which shows your Expected Family Contribution (EFC) — the amount the government expects you to pay toward school costs. Your school uses this to calculate your financial need and builds your aid package. The package lists each loan, grant, and work-study offer separately, with the interest rate, loan term, and monthly payment estimate for each loan. You will receive this by mail or through your school's online student portal.
Read the package carefully. Grants and work-study do not require repayment, but loans do. Federal loans typically have lower interest rates than private loans. If your package includes both, borrowing the federal loans first is usually the better choice.
Signing the Master Promissory Note and loan entrance counseling
Before your school can disburse federal loan money, you must sign a Master Promissory Note (MPN) — a legal document stating you will repay the loan according to its terms. You sign this once, and it covers all federal loans you take out at that school for up to 10 years. You can sign your MPN online at studentaid.gov or through your school's financial aid office.
You must also complete loan entrance counseling, which is a short online course explaining how federal loans work, your repayment options, and your rights and responsibilities as a borrower. The course takes 20 to 30 minutes and is required before your first federal loan is disbursed. Your school will direct you to the counseling through its financial aid website.
Once you have signed the MPN and completed entrance counseling, your school can release the loan funds. This usually happens within a few days to a week.
How loan money reaches you and what it covers
Your school receives the loan money directly from the lender, not you. The school first applies it to your tuition, fees, and room and board (if you live on campus). Any leftover amount is either sent to you as a check or direct deposit, or held in a student account that you draw from. Some schools require you to pick up a check in person; others mail it or deposit it automatically.
Loan money is typically disbursed twice per year — once at the start of each semester — though some schools disburse more frequently. Your school's financial aid office can tell you the exact dates. If you drop classes or withdraw from school, your school may be required to return some or all of the loan money to the lender, so notify your financial aid office immediately if your enrollment status changes.
Private student loans and when to consider them
If federal loans do not cover your costs, or if you have already borrowed the maximum federal amount, you can turn to private student loans from banks, credit unions, or online lenders. Private loans do not require the FAFSA. Instead, you apply directly with the lender, which runs a credit check and decides whether to lend to you and at what interest rate.
Private loans typically have higher interest rates than federal loans — rates vary by lender and your credit score — and they do not offer income-based repayment or forgiveness programs. Interest may start accruing while you are still in school, depending on the loan type. Before taking a private loan, exhaust your federal loan options, because federal loans offer far more flexibility if your financial situation changes after graduation.
Repayment plans and what happens after graduation
Federal student loans enter repayment six months after you graduate, leave school, or drop below half-time enrollment. This period is called the grace period. During the grace period, you do not have to make payments, though interest may still accrue depending on your loan type.
When repayment begins, you can choose from several repayment plans. The Standard Repayment Plan spreads payments over 10 years. Income-Driven Repayment Plans calculate your payment based on your current income and family size, which can lower your monthly payment if your income is low. These plans include Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). You can change plans at any time, and some plans offer loan forgiveness after 20 or 25 years of payments.
Private loans do not have grace periods or income-based repayment options. Repayment terms are set by the lender and are typically fixed.
Keeping track of your loans and avoiding common mistakes
Once you have borrowed, keep records of your loan documents, MPN, and entrance counseling certificate. Log into your federal student loan account at studentaid.gov regularly to check your loan balance, interest rate, and repayment status. If you take out loans at multiple schools, you will have separate accounts at each one.
Common mistakes include borrowing more than you need because the money is available, not reading your aid package carefully, and losing track of private loan terms. Borrow only what you actually need for school costs. If you take private loans, write down the lender's name, your loan amount, interest rate, and repayment start date — private loans are harder to track than federal loans, and you are responsible for remembering when payments are due.
If your financial situation changes — you lose income, face unexpected expenses, or want to change schools — contact your financial aid office or loan servicer immediately. Federal loans offer options like deferment or forbearance that can pause payments temporarily, but you must request these before you miss a payment.
Frequently Asked Questions
Do I have to borrow the full amount my school offers?
No. Your financial aid package shows what you are offered, but you choose how much to accept. You can borrow less, or decline loans entirely and use grants, work-study, or your own money instead. Borrow only what you need, because every dollar you borrow must be repaid with interest.
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, even while you are studying. Both have the same interest rate and repayment options, but unsubsidized loans cost more over time because interest compounds.
Can I borrow a federal student loan if I have bad credit?
Yes. Federal student loans do not require a credit check. Private loans do, and bad credit will either disqualify you or result in a higher interest rate. If you need a private loan and have poor credit, some lenders allow you to add a cosigner with better credit to improve your chances.
What happens if I do not repay my student loan?
Defaulting on a federal loan damages your credit score, allows the government to garnish your wages or tax refunds, and can result in collection fees. You may lose may be able to access for future federal aid. Contact your loan servicer immediately if you cannot make a payment — federal loans offer deferment, forbearance, and income-driven repayment to help you avoid default.
Can I take out a student loan if I am not a U.S. citizen?
Federal student loans require U.S. citizenship or permanent residency. Some private lenders offer loans to international students, but usually only if you have a U.S. cosigner. Check with your school's financial aid office about options specific to your immigration status.