Taking out a student loan starts with filling out the Free Application for Federal Student Aid (FAFSA), which opens the door to federal loans with fixed interest rates and built-in borrower protections. Federal loans should be your first stop because they offer lower rates and more flexible repayment options than private loans. If federal aid doesn’t cover your full cost of attendance, private lenders can fill the gap. Here’s how the entire process works, from application to getting the money.
Start With the FAFSA
The FAFSA is a free online form that determines how much federal aid you qualify for, including grants, work-study, and loans. You fill it out at StudentAid.gov. The form asks about your family’s income, assets, and household size. If you’re a dependent student (generally under 24, unmarried, with no dependents of your own), you’ll also need your parents’ financial information.
The federal deadline to submit the FAFSA for the current aid year is June 30 of the following year, but your school and state will almost certainly have earlier deadlines. Many colleges set priority deadlines in the fall or early winter, and submitting late can mean missing out on limited grant funds. Check directly with your school’s financial aid office for its specific deadline, and file as early as possible.
After your FAFSA is processed, each school you listed will send you a financial aid offer. This letter breaks down how much you’re eligible to receive in grants, scholarships, work-study, and loans. You don’t have to accept the full loan amount offered. Borrow only what you need after accounting for scholarships, savings, and any income you expect to earn.
Understand Federal Loan Types
Federal student loans come in a few varieties, and the differences matter for how much you’ll pay over time.
Direct Subsidized Loans are available only to undergraduate students who demonstrate financial need. The government pays the interest on these loans while you’re enrolled at least half-time and during a six-month grace period after you leave school. This is the cheapest borrowing option available to students.
Direct Unsubsidized Loans are available to both undergraduate and graduate students regardless of financial need. Interest starts accruing the day the loan is disbursed, meaning it builds up while you’re still in school. You can choose to pay that interest as it accumulates or let it capitalize (get added to your principal balance), which increases the total amount you owe.
Direct PLUS Loans are available to graduate students and to parents of dependent undergraduates. They require a credit check and carry a higher interest rate. For loans disbursed between July 1, 2025, and June 30, 2026, the PLUS rate is 8.94%, compared to 6.39% for undergraduate subsidized and unsubsidized loans, and 7.94% for graduate unsubsidized loans. All federal loan rates are fixed for the life of the loan.
How Much You Can Borrow
Federal loans have annual caps that increase as you progress through school. For dependent undergraduates, the limits are:
- First year: $5,500 total ($3,500 max in subsidized loans)
- Second year: $6,500 total ($4,500 max in subsidized)
- Third year and beyond: $7,500 total ($5,500 max in subsidized)
Independent undergraduates, along with dependent students whose parents can’t get a PLUS Loan, qualify for higher limits:
- First year: $9,500 total
- Second year: $10,500 total
- Third year and beyond: $12,500 total
Graduate and professional students can borrow up to $20,500 per year in Direct Unsubsidized Loans. They can also take out PLUS Loans up to the full cost of attendance minus other financial aid received.
Complete Entrance Counseling and the Master Promissory Note
Before your school can release any federal loan funds, you need to complete two steps on StudentAid.gov: entrance counseling and a Master Promissory Note (MPN).
Entrance counseling is an online tutorial that walks you through how loans work, how interest accrues, and what your repayment responsibilities will be after school. It takes about 30 minutes and must be finished in a single sitting since you can’t save your progress and come back later. Have your school’s name, your financial aid offer, and a breakdown of tuition and fees handy before you start. Your session will time out after 15 minutes of inactivity, so plan to complete it without interruptions.
The Master Promissory Note is the legal contract in which you agree to repay your loans plus interest and fees. Once you sign an MPN, it typically covers loans for up to 10 years at the same school, so you won’t need to sign a new one each academic year.
How Loan Funds Are Disbursed
Your school receives the loan money, not you. The funds are applied directly to your tuition, fees, and room and board. If there’s money left over after those charges are covered, the school issues the remaining balance to you, usually by direct deposit or check. Most schools disburse funds at least twice per academic year, typically at the start of each semester.
One detail that catches many borrowers off guard: most federal loans carry an origination fee, which is a small percentage deducted from each disbursement before it reaches your school. This means the amount you receive is slightly less than the amount you technically owe. If you borrow $5,500, for example, a few dollars will be withheld as the fee, but you’ll still repay the full $5,500 plus interest.
When Federal Loans Aren’t Enough
If your cost of attendance exceeds what federal loans, grants, and scholarships cover, private student loans from banks, credit unions, or online lenders can bridge the gap. Private loans work differently from federal loans in several important ways.
Most private lenders evaluate your credit history, income, and debt-to-income ratio. Since many students have limited credit history, a cosigner (usually a parent or relative with good credit) is often required. The cosigner is legally responsible for the debt if you can’t pay. Lenders typically require U.S. citizenship or permanent residency, a valid Social Security number, income or employment verification, and documentation like tax returns or W-2s.
Private loan interest rates can be fixed or variable, and the rate you’re offered depends heavily on creditworthiness. Borrowers with strong credit profiles may get competitive rates, while those with thin or poor credit histories may face significantly higher costs. Unlike federal loans, private loans generally lack income-driven repayment plans and broad forgiveness programs, and many require you to begin making payments while still in school.
Shop around and compare offers from multiple lenders before committing. Look beyond the interest rate to the repayment terms, whether the rate is fixed or variable, any fees, and whether the lender offers cosigner release after a set number of on-time payments.
How Much to Borrow
The amount you borrow now determines your financial flexibility for years after graduation. A useful guideline: try to keep your total student loan debt below your expected first-year salary after graduation. If you anticipate earning $45,000 in your first job, aim to graduate with no more than $45,000 in total loans.
Before accepting any loan amount, build a simple budget. Add up tuition, fees, housing, food, books, and transportation. Subtract grants, scholarships, family contributions, and any money you can earn through part-time work. The remaining gap is the amount you actually need to borrow. Accepting less than the full loan amount offered to you is always an option, and borrowing less now means paying back less later, with less interest compounding along the way.