In some ways, student loans are great: They make education more accessible for millions of students across America who otherwise might not be able to afford the ever-rising cost of college.
On the other hand, talk to the people in your life who are paying off their student debts, and it’s doubtful you’ll find many who are enthusiastic about it. According to one 2017 study, 64.5% of surveyed student loan borrowers were literally losing sleep over their debt. In a 2019 poll by Pew Charitable Trusts, 7 in 10 people said student loans are a reasonable choice because college is beneficial, but nearly 9 in 10 expressed concern about the burden of repayment.
That’s why it’s so important to choose your loan options wisely from the get-go. Depending on whether you opt for public or private loans, you could be facing very different interest rates, repayment options, and more.
We’ll walk you through what your options are — and how to set yourself up for future repayment success.
How Much Will Your Educational Experience Cost?
For a sense of the cost of education these days, visit the website for the colleges you’ve got your eye on. Most will list their current tuition costs publicly. For example, Harvard costs $79,450 for the 2023-2024 academic year (including tuition, health services, housing, meal plan, and other fees).
Your total college costs will include much more than just tuition. Room and board alone could easily cost over $10,000 — in the above example, housing at Harvard comes in over $12,000. And that doesn’t include transportation, books, and “fun money.”
College students can use student loans to pay for school-certified education expenses, which includes most living expenses. This includes tuition, fees, books, room and board, study abroad, and computers. Costs of food, transportation, health care, and child care are also eligible.
If you end up borrowing more than you need, you can return your unused student loans. Remember, every dollar you borrow will likely cost about two dollars once you pay it back.
Federal Student Loan Options
At the most basic level, the two broad categories are federal and private. Federal loans are issued directly by the U.S. government, whereas private loans come from private financial institutions.
Beyond that, there are many stripes and varieties of federal student loan programs to consider. Here’s a rundown of some of the most common ones:
Who Is the Borrower
Federal Direct Loan – subsidized
$3,500 – $5,500 per year for undergrads
Also known as the Federal Stafford Loan. Dependent on financial need.
Federal Direct Loan – unsubsidized
$5,500 – $7,500 per year for dependent undergraduate students
Also known as the Federal Stafford Loan. Not dependent on financial need.
Federal Direct PLUS
Graduate and professional students, or parents of undergrads
Annually: equal to cost of attendance, minus other aid. No aggregate loan limits. College determines how much you can borrow.
Federal unsubsidized loans have a much lower origination fee than Grad PLUS, but the maximum you can borrow (with federal unsubsidized loans) for graduate school is $20,500 per year, to a total lifetime limit of $138,500.
Federal Student Loans Versus Private Student Loans
Federal student loans are made by the U.S. government. A federal loan, such as federal direct loan, will have a lower interest rate than a private loan. Federal loans also typically offer more favorable terms, flexible repayment plans and loan forgiveness options.
When a borrower exhausts their college savings and they reach their federal student loan limits, they may turn to private student loans to help cover the remaining costs. Here are some key differences between a federal student loan and a private student loan:
Congress sets the interest rates for federal student loans, which are typically lower than interest rates for private student loans. Private student loan interest rates are set by the lender, and are based on the borrower’s credit worthiness. These loans may have a variable interest rate or a fixed interest rate. Variable rates may start out lower, but they will fluctuate over time based on economic conditions.
Just about anyone can get a federal direct student loan. The Department of Education requires a credit check for federal PLUS loans, but you may still be able to qualify even if you have an adverse credit history. Private student loans, on the other hand, always require a credit check and may also require a cosigner if you don’t have establish credit.
Some federal loans, such as a direct subsidized loan, are based on financial need. Other federal student loans, such as a federal direct unsubsidized loan, are not based on financial need, but there are limits as to how much you can borrow. Private student loans are not based on financial need.
The only way to get a federal student loan is to file the FAFSA and select an option from your financial aid award letter. Borrowers must submit the FAFSA by a certain deadline for each year that they need help paying for college. But, you can apply for a private student loan at any time throughout the year.
With a private loan, you are borrowing from a private lender. With a federal loan, you are borrowing money from the government. However, once the government disburses the funds they will assign the loan to a loan servicer to manage the account. The loan servicer is who you would contact if you wanted to change your repayment plan, apply for forbearance or deferment or update your contact information.
You can refinance a private student loan to another private student loan with a lower interest rate or a better repayment term. You can’t, however, refinance a federal student loan into another federal student loan, although you can refinance your federal student loan into a private one. That means once you refinance a federal student loan, you give up government protections like student loan forgiveness options. To keep your federal benefits, you might consider consolidating your loans into a direct consolidation loan.
Our Loan Comparison Calculator lets you compare two or more different loans, identifying which loan offers a lower monthly payment and which one offers a lower total cost.
How to Apply for Student Loans: Step-by-Step Guide
1. Determine How Much You’ll Rely on Loans vs Other Funding
Not only will you need to repay the amount you’ve borrowed, but you’ll have to pay interest on that amount. So, for obvious reasons, you’ll only want to borrow what you truly need. The first step, then, is to figure out how much you can really afford.
Experts recommend trying to pay for at least one-third of your costs out of pocket, meaning from savings. That would leave you with two-thirds that you could cover with a mix of student loans and income, like scholarships or work-study jobs.
If you don’t have enough in savings, you might be tempted to fill the entire gap with student loans. But this could put you at risk for borrowing more than you’re able to repay down the line. Another rule of thumb: Treat your expected post-graduation starting salary as your borrowing cap. So, if you think you’ll make $50,000 in your first year after graduation, then aim not to borrow more than that in total. If you’re planning to go into finance or medicine and expecting a much larger starting salary, then you might feel more comfortable borrowing a higher amount. That’s because you’ll have a solid income to help you repay your debts within a standard 10-year repayment plan once you’re working.
Staring down the barrel of not enough savings? Apply for as many scholarships as you can — the more income you can bring into the picture now, the less you’ll need to take out as a loan later. Search for scholarships with this free tool.
Our loan calculator can help you estimate your monthly payment based on the loan amount, interest rate, loan fees and loan repayment term you input.
2. Fill Out the FAFSA to Apply for a Federal Student Loan
First, you need to learn how to apply for federal student loans. Start by filing the Free Application for Federal Student Aid (FAFSA), which the federal government uses to determine your eligibility for need-based federal aid.
You can file the FAFSA as early as October 1 of the year before you enter college. Note that the 2024-2025 FAFSA is delayed and won’t be available until December. Some financial aid is awarded on a first-come, first-served basis, so it’s important to file as soon as possible. You can access the FAFSA online at studentaid.gov. Remember to fill out and submit the FAFSA as soon as possible to maximize your chances of getting the most aid.
Even if you don’t think you’ll qualify for need-based aid, it’s probably worth filling out the FAFSA because federal aid doesn’t have an income cut-off; it factors in things like family size and what year you’re in at school. FAFSA is also the key to federal work-study funds and some scholarships or grants offered directly from your school.
Note that you’ll need to file a FAFSA for every year you attend college. That said, once a year is enough — you don’t have to apply every semester.
3. Understand Your Student Loan Repayment Terms
Before you apply for a student loan, you should completely understand the requirements, how the student loan process works and what it really means to be in debt.
Most students borrow money for college from the government or from a private lender. In either case, the borrower typically has to sign some form of loan agreement that acknowledges the loan repayment terms.
With federal student loans, this agreement is called a Master Promissory Note. This confirms that you legally agree to pay back the loan, along with any interest and fees, no matter what.
Borrowers who don’t repay their student loans may face harsh consequences, such as wage garnishment, suspension of professional licenses and a lower credit score. However, federal borrowers may be eligible for flexible payment plans or forbearance during times of unemployment.
Private student loans are a different story. If you can’t make your private student loan payments, you may not have the option to postpone or lower payments through deferment or forbearance. You won’t have the option for forgiveness, either, through programs like Public Service Loan Forgiveness.
- How Student Loan Interest Works
- What is Capitalized Interest?
- Fixed vs. Variable Interest Rate Student Loans
4. Compare Federal Student Loan Offers
Once you complete and submit the FAFSA, you’ll wait for financial aid award letters from the colleges you applied to. The letters will include a list of the federal financial aid you are eligible for. For example, your award may include the following types of need-based aid:
- Federal Direct Stafford Loan
- Federal PLUS Loan (education loans for graduate students and parents)
- Perkins Loan
- Parent PLUS Loan
- Grad PLUS Loan
- Work-Study Programs
- What Credit Score Do I Need for Federal Student Loans?
- Reasons You Could Get Denied for a Federal Student Loan
5. Apply for Private Student Loans
If federal student loans aren’t sufficient to cover your costs for your education, private student loans are your next step. You can apply for private student loans and private parent loans through private lenders like banks, credit unions, or online lenders, which are outside of the government.
It’s important to research your options to make sure you’re getting the lowest interest rate. You’ll also want to compare things like eligibility requirements, fees and other features.
Private lenders are looking for creditworthy borrowers. This means the lender will review your income, credit history, debt-to-income ratio, and length of employment. Most students—including 90% of undergraduates and two-thirds of graduate students—will need a cosigner to qualify.
Before applying for private student loans, you should consider the risks. These loans don’t offer the same protections as federal loans. The government won’t pay for your interest while you’re still in school, unlike federal Direct Subsidized Loans. And once you graduate from school, you won’t have access to federal income-driven repayment plans.
If you can’t make your student loan payments, you may not have the option to postpone or lower your required payments through deferment or forbearance. Your private student loans won’t have an option for student loan forgiveness, either. This includes Public Service Loan Forgiveness, a program only available for federal loans. Federal loans also offer more generous deferment options in times of unemployment or economic hardship.
Private loans may require a cosigner if you have a limited credit history (which most students do). Your cosigner should be an adult you know and trust, such as a close friend or family member. By agreeing to cosign your private loan, this person will become equally responsible for paying back the debt. That means if you miss payments or go into default, it will affect their credit, too.
Items to Have on Hand When You Apply for Student Loans
Some documentation that you might need — depending on the type of loan you apply for — could include:
- Valid driver’s license or other ID
- Social Security number
- Income and credit history for you or your cosigner
- Recent tax documents for you or your cosigner
- Bank account and asset information for you or your cosigner
- Payment obligations like other loans (mortgage, credit card, car loan, etc.) for you or your cosigner
It’s important to understand how student loans work before you apply, so that you don’t end up with too much debt. Student loans are a big responsibility, but if you borrow smart, they can help set you up for future success. Before starting the process, jot down the key deadlines.
If you begin early enough, you can avoid scrambling to finish everything on time. The most important deadlines are for filing the FAFSA. If you miss them, you won’t be eligible for federal student aid, including federal student loans, for a year.
At the end of the day, you’ll own these choices and face the consequences when you repay your loans down the road — and you’ll also own the joys and the benefits of higher education.