How student loans work and where to start
Taking out a student loan means borrowing money from the federal government or a private lender to pay for school, with the agreement that you will repay it after you graduate or leave school. Federal loans are the most common route because they offer fixed interest rates, income-based repayment options, and forgiveness programs that private loans do not. Most students start by filling out the Free Application for Federal Student Aid (FAFSA), which determines how much federal aid you can receive and opens the door to federal loans.
The process has a real timeline: the FAFSA opens October 1 each year, and your school's financial aid office uses it to build your aid package by spring. If you miss the FAFSA window for your academic year, you can still borrow, but you will have fewer options and may pay more. Starting early also gives you time to understand what you are borrowing and what it will cost you after graduation.
Key Takeaways
- Federal student loans require you to complete the FAFSA first, which opens October 1 and determines your aid may be able to access for the academic year.
- Your school's financial aid office will send you a loan offer showing the type, amount, and terms of each loan available to you.
- You must sign a Master Promissory Note (MPN) before any loan money is disbursed, which is a legal agreement to repay what you borrow.
- Federal loans disburse directly to your school to cover tuition and fees; any leftover money goes to you as a refund for other education costs.
- Private loans require a separate application with a lender and typically need a credit check or a cosigner, making them slower and more expensive than federal loans.
Complete the FAFSA to unlock federal loan options
The FAFSA is a federal form that collects information about your finances and your family's finances to determine how much aid you can receive. You fill it out online at fafsa.gov using your Social Security number and tax information. If you are a dependent student, you will need your parents' tax return or tax transcript; if you are independent, you use your own. The form asks about income, assets, household size, and other factors that affect how much you are expected to contribute toward school costs.
After you submit the FAFSA, you receive a Student Aid Report (SAR) that shows your Expected Family Contribution (EFC), now called the Student Aid Index (SAI). This number tells your school how much aid you may receive. You do not need to wait for the FAFSA to be processed to start school — most schools will give you a provisional aid package based on your FAFSA submission, and they adjust it once processing is complete.
If you are returning to school in a year you already completed the FAFSA, you will need to renew it each year you are enrolled. The FAFSA remains open until June 30, but schools often have their own earlier deadlines for awarding aid, so submitting by February or March gives you the best chance at the full amount available.
Review your loan offer and choose which loans to accept
Once your school receives your FAFSA information, the financial aid office will send you a financial aid package or award letter. This document lists every type of aid you can receive: grants (money you do not repay), work-study, and loans. For loans, it will show the loan type (such as Direct Subsidized Loan or Direct Unsubsidized Loan), the amount, the interest rate, and when repayment begins. You are not required to accept every loan offered — you can accept some and decline others.
Read the award letter carefully to understand the difference between the loans. A Direct Subsidized Loan does not accrue interest while you are in school; the government pays the interest for you. A Direct Unsubsidized Loan accrues interest from the moment it is disbursed, even while you are studying. Unsubsidized loans cost more over time because you pay interest on a larger balance. If you can cover your costs with subsidized loans alone, that is usually the better choice.
Your school will also tell you the annual and lifetime borrowing limits for federal loans. Undergraduate students can borrow a certain amount per year (the limit varies by year in school), and there is a total cap on how much you can borrow across all your undergraduate years. Graduate students have higher limits. These caps exist to prevent you from borrowing more than you can reasonably repay.
Sign the Master Promissory Note and complete entrance counseling
Before your school can disburse any federal loan money, you must sign a Master Promissory Note (MPN). This is a legal contract between you and the Department of Education in which you promise to repay the loan according to the terms. The MPN covers all federal loans you take out at that school, so you typically sign it only once per school (though you may need to sign a new one if you transfer or return after a gap). You sign the MPN electronically through your school's financial aid portal or through studentloans.gov.
At the same time, you must complete entrance counseling, which is an online tutorial about loan repayment, interest, and your responsibilities as a borrower. The counseling takes 20 to 30 minutes and covers what happens after you graduate, how interest works, and what to do if you have trouble repaying. This is not optional — your school will not disburse your loan until you finish it.
Keep a copy of your signed MPN for your records. You will need it if you ever need to contact your loan servicer or if you have questions about your loan terms later.
Understand how and when your loan money reaches you
Federal student loans disburse directly to your school, not to you. Your school applies the money to your tuition, fees, and room and board (if you live on campus). If there is money left over after those costs are covered, the school sends you a refund, usually by check or direct deposit. This refund is yours to use for other education expenses like books, supplies, and living costs, but it is still borrowed money that you will repay.
Loans typically disburse in two installments per academic year — one at the start of each semester. Your school's financial aid office will tell you the exact disbursement dates. If you drop classes or withdraw from school, your school may be required to return some of your loan money to the lender, which can affect your aid package for future semesters.
Interest on federal loans does not start accruing until after you graduate, leave school, or drop below half-time enrollment — but only for subsidized loans. Unsubsidized loans accrue interest immediately, even while you are in school. If you do not pay the interest while you are studying, it gets added to your loan balance (called capitalization), which means you will pay interest on interest after graduation.
Apply for private student loans if federal loans are not enough
If federal loans do not cover your full cost of attendance, you can borrow from a private lender. Private loans come from banks, credit unions, and online lenders, not from the federal government. They have different terms, interest rates, and repayment options than federal loans, and they are typically more expensive.
To apply for a private loan, you will need to contact a lender directly and submit an application. Most private lenders require a credit check, and if your credit is limited or poor, you will need a cosigner — usually a parent or guardian who agrees to repay the loan if you cannot. The lender will tell you the interest rate, fees, and repayment terms before you accept the loan. Private loans do not have income-based repayment options or forgiveness programs, so you are locked into the terms you agree to.
Private loans disburse more slowly than federal loans — often taking several weeks — so apply early if you need them. Also compare rates across multiple lenders, because rates and terms vary significantly. A lower interest rate saves you thousands of dollars over the life of the loan.
Know what happens after you graduate or leave school
Once you graduate, leave school, or drop below half-time enrollment, your federal loans enter a grace period — usually six months — during which you do not have to make payments. Interest still accrues on unsubsidized loans during this time. After the grace period ends, you must begin repayment. Your loan servicer will contact you with information about your repayment plan options and your first payment due date.
Federal loans offer several repayment plans: the Standard Plan (fixed payments over 10 years), income-driven plans (payments based on your income), and extended plans (longer repayment periods with lower monthly payments). You can change your repayment plan at any time if your circumstances change. Private loans do not have these options — you repay according to the terms you agreed to when you borrowed.
If you have trouble making payments after graduation, contact your loan servicer immediately. Federal loans offer deferment and forbearance options that pause or reduce your payments temporarily. Private loans may offer similar options, but it depends on the lender and your loan agreement.
Frequently Asked Questions
Do I have to borrow the full amount my school offers?
No. You can accept part of your loan offer and decline the rest. If your school offers you $10,000 in loans but you only need $5,000, you can accept just the $5,000. Borrow only what you need to cover your actual costs, because every dollar you borrow is a dollar you will repay with interest.
What is the difference between subsidized and unsubsidized federal loans?
With a subsidized loan, the government pays your interest while you are in school. With an unsubsidized loan, interest accrues from day one, and if you do not pay it while studying, it gets added to your loan balance. Subsidized loans are cheaper over time, so prioritize them if you have a choice.
Can I borrow more money if my costs go up during the year?
Yes, but you will need to contact your school's financial aid office and request an increase to your loan amount. They will review your updated costs and may increase your offer if your circumstances have changed. This process can take a few weeks, so plan ahead if you know you will need more money.
What if I do not use all the loan money my school disburses?
If you receive a refund and do not spend it on education costs, you can return it to your loan servicer to reduce the amount you owe. This saves you money on interest. If you keep the refund and do not use it for school, you still have to repay the full loan amount.
Do I need a cosigner for federal student loans?
No. Federal loans do not require a cosigner or a credit check. Private loans usually do require a cosigner if you have no credit history or poor credit. A cosigner is legally responsible for repaying the loan if you do not, so choose someone you trust and who understands the commitment.