Student loans are loans that you take out to help pay for educational expenses, such as tuition, fees, room, board, equipment and transportation to and from school. This guide covers the ins and outs of federal and private student loans, explains how to apply for student loans, discusses which option may be best for your circumstances and offers several alternatives to borrowing money.
PART I: Understanding student loans
As with other types of debt, you must agree to repay the money, plus interest.
However, student loans can differ from other types of loans. They may have less stringent credit or income requirements for students, and you may be able to delay making payments until after you leave school.
How do student loans work?
You can apply for a student loan from the federal government or from a private lender. The eligibility requirements and application process (discussed in detail later) are different for federal and private student loans, but the overall student loan process can be similar.
After applying and getting approved for a student loan, the lender will often send the money directly to your school. The school applies the money to your account to pay for tuition, fees and other expenses. If there’s money left over, the school will issue you a refund which you can use for additional educational expenses, such as off-campus housing and food. You can also return the excess funds.
With federal loans, you’ll need to reapply for financial aid once every year to remain eligible; the policies of private lenders vary. You may need to reapply each term, apply once for an academic year or apply once and fund multiple years. However, with both federal and private student loans, the loan will generally be split up and disbursed (i.e. sent) to the school at the beginning of each term.
Terms and repayment options
Your repayment term — the amount of time you have to repay the loan — and repayment plans can vary depending on the type of student loan. Many student loans, including federal student loans, let you defer payments while you’re enrolled at least half time in an eligible program, as well as during a six-month grace period after you graduate, leave school or drop below a half-time schedule. However, some private lenders require borrowers to make at least interest-only or $25 monthly payments once the loan is disbursed.
Federal student loans automatically enter a 10-year standard repayment plan. However, you can switch to a different loan repayment plan for free. Other repayment plans may give you more time to repay your loans, which can decrease your monthly payments but lead to paying more interest over the loan’s lifetime.
You may also be eligible for an income-driven plan that bases your monthly payments on your income, family size and where you live. An income-driven plan could even lead to $0 monthly payments, and the remainder of your loan balance might be forgiven after you make monthly payments for 20 to 25 years. There are also federal student loan forgiveness and cancellation programs.
Private loans aren’t eligible for federal repayment, forgiveness or cancellation programs, and often you’ll choose your loan’s term or be assigned a term when you apply. Some lenders have different repayment plans, but with others the only way to change your private loan’s term is to refinance the student loan.
The interest rate on your student loan can impact your overall cost of borrowing and your monthly payment amount. It’s important to understand how a lender determines your interest rate, how interest accrues on your loan and what your options are before agreeing to take out a student loan.
Congress sets the interest rate on federal student loans. All federal student loans have a fixed interest rate, meaning the rate won’t change once the loan is disbursed.
By contrast, private student loans’ interest rates can vary greatly. Lenders may offer different rate ranges, and the rate you receive will depend on your creditworthiness (or the credit of your cosigner). Private lenders also offer fixed- and variable-rate loans. Variable-rate loans are riskier because the interest rate can change in the future, but they can be enticing because they often offer a lower initial interest rate than fixed-rate loans.
Many federal and private student loans begin accruing interest as soon as the loan is disbursed. The interest will continue to accrue while your loans are in deferment or in a grace period, and then it will be added to your loan’s principal balance (i.e. capitalized) once you enter repayment. When this happens, more interest may accrue each month, as your interest rate will now apply to a higher principal loan balance.
PART II: Types of student loans
Student loans fall into one of two general categories: federal or private student loans.
Federal student loans
Federal student loans can offer borrowers simplicity and savings compared with private student loans. Although there are differences depending on the type of federal student loan or the degree the borrower is pursuing, federal student loans have uniform eligibility requirements, interest rates, loan terms, benefits and repayment options for every borrower.
Private student loans
On the other hand, private student loans — and their eligibility requirements, interest rates, loan terms, benefits and drawbacks — can vary depending on the lender. Carefully research different companies’ policies and the fine print on their loan agreements before agreeing to take out a loan.
Often, federal student loans are the best first choice for borrowers because of their standard terms and low barrier to entry. Even if you could get a lower rate with a private student loan, flexible repayment options, deferment and forbearance programs and eligibility for federal forgiveness can make federal loans a better option. Private lenders may not offer or guarantee similar options.
PART III: Federal student loan options
What is a federal student loan?
A federal student loan is a loan that’s funded by the federal government. There are currently three types of federal student loans available to new borrowers through the William D. Ford Federal Direct Loan Program: direct subsidized loans, direct unsubsidized loans and direct PLUS loans.
There are also direct consolidation loans, which allow borrowers to combine multiple federal student loans. Previous borrowers may also be repaying other federal student loans that are no longer available to new borrowers.
All three types of federal student loans have the same basic eligibility requirements, including being enrolled at least half time or accepted into an eligible degree or certificate program. In addition, the application process always starts with the Free Application for Federal Student Aid (FAFSA).
However, these loans are not identical. They may have different annual loan limits, aggregate loan limits and credit requirements. Loan details, such as eligibility for different repayment plans, can also vary depending on the borrower — whether they are an undergraduate, graduate or professional student, or the parent of a student.
The loans may have different interest rates and disbursement fees, a fee that’s subtracted from the amount that’s sent to your school. These fees depend on the loan type, the type of borrower and when the loan is disbursed.
The federal student loan interest rates in this guide are for federal loans disbursed from July 1, 2018 to June 30, 2019. The disbursement fees apply to federal student loans disbursed from Oct. 1, 2018 to Sept. 30, 2019.
Direct subsidized loan
Annual loan limit
Aggregate loan limit
Direct subsidized loans
$3,500 first year
How does it work?Direct subsidized loans are only available to undergraduate students, and only if their school determines they have a financial need based on the school’s cost of attendance and their expected family contribution. The direct subsidized loan limit increases during your second and third years. However, your offer could decrease if your financial need decreases.
The subsidy part comes into play after your loan is disbursed. Although the loan starts to accrue interest right away, the U.S. Department of Education will pay the interest while you’re in school at least half-time, during your grace period and if you later put the loan into deferment.
Pros and cons. If you plan to take out a federal student loan, the direct subsidized loan’s relatively low disbursement fee and interest rate, as well as the interest subsidization makes it the best option in most cases. Of course, it’s only an option if you qualify — the biggest drawback is that you may not be able to borrow enough to pay for all your educational expenses.
Direct unsubsidized loan
Annual loan limit
Aggregate loan limit
For dependent undergraduate students
$5,500 first year
$31,000, including up to $23,000 in Direct Subsidized Loans.
For independent undergrads and dependent undergrads after a parent gets denied for a PLUS Loan
$9,500 first year
$57,500, including up to $23,000 in Direct Subsidized Loans.
For graduate and professional students
$138,500, including up to $65,500 in Direct Subsidized Loans.
How does it work? Undergraduate and graduate students may be able to borrow money with direct unsubsidized loans, even if they don’t have a demonstrated financial need. The loans also have higher annual and aggregate loan limits than direct subsidized loans, and the limit varies depending on your degree type and dependency status.
However, the loan limits include debt from both Direct Subsidized Loans and direct unsubsidized loans loans. You also might not be offered the maximum amount, as your offer depends on several factors — these can include your school’s cost of attendance, your family’s expected contribution and how much money you’ve received from other sources of financial aid, such as scholarships.
Pros and cons. The higher loan limits and lack of a financial need requirement may make it easier to qualify for a direct unsubsidized loan; for undergraduate students, these loans have the same interest rate and disbursement fee as the subsidized version. However, the biggest drawback may be the lack of the subsidy. Without the subsidy, you could leave school with significantly more debt than you initially borrowed, unless you make interest payments while you’re in school and during the grace period.
For graduate and professional students who aren’t eligible for direct subsidized loans, the direct unsubsidized loans offer a lower interest rate and disbursement fee than grad PLUS loans. However, graduate and professional students may have already established their creditworthiness, and so they might be able to save money with a private student loan.
Parent PLUS loan
Annual loan limit
Aggregate loan limit
Parent PLUS loan
Your child's cost of attendance minus other financial aid
No adverse credit history
How does it work? Parent PLUS loans are direct PLUS loans that a parent borrows to help a dependent child pay for school. Parent borrowers must meet many of the same basic eligibility requirements as student borrowers; however, parent PLUS loans also require a credit check. The credit check looks for an adverse credit history in your credit reports, such as a recent bankruptcy or outstanding delinquent debts.
If you don’t pass the credit check, you may still be able to take out a parent PLUS loan if you have a creditworthy endorser (i.e. cosigner) or appeal the decision. Your child may also be able to take out additional direct unsubsidized loans if you’re unable to qualify for a parent PLUS loan.
Loan payments begin immediately after the parent PLUS loan is disbursed, unless parents request a deferment. If you request a deferment, you may not have to make payments as long as your child is enrolled at least half time and for the six months after they leave school or begin taking a less-than-half-time schedule. However, interest will accrue during the deferral period.
Pros and cons. As with other federal student loans, parent PLUS loans are eligible for different federal repayment plans, and forgiveness and cancellation programs. However, parent PLUS loans are only eligible for one of the four income-driven plans: the income-contingent plan — notably, this is only an option after the parent PLUS loan is consolidated with a direct consolidation loan.
Direct PLUS loans, including parent PLUS loans, also have the highest interest rate and disbursement fee of the federal student loans. The interest rate and fees may still be lower than what you could receive with a private student loan, but you should compare your options.
Another potential con is that parents can’t transfer the loan to their children, although a child may be able to take over the debt if they can qualify to refinance student loans with a private lender. The debt from the parent PLUS loan could also increase your debt-to-income ratio, which may affect your eligibility for other loans or financial products.
Grad PLUS loan
Annual loan limit
Aggregate loan limit
Grad PLUS loan
Your cost of attendance minus other financial aid
No adverse credit history
How does it work? Graduate and professional students can use grad PLUS loans to pay for educational expenses. They have the same fees, limits and credit-check requirements as parent PLUS loans (both loans are direct PLUS loans), but there are a few differences.
Grad PLUS loans are eligible for all four income-driven repayment plans, and unlike parent PLUS loans, grad PLUS loans are automatically placed into deferment until six months after you drop below a half-time schedule, graduate or leave school. However, you can make early payments if you want.
Pros and cons. Grad PLUS loans don’t have preset annual or aggregate loan limits; you can also borrow up to your school’s cost of attendance, minus your other financial aid awards. This means you may be able to fund all your educational costs with grad PLUS loans — but that doesn’t mean a grad PLUS loan should necessarily be your first choice.
Direct unsubsidized loans will have a lower interest rate and disbursement fee than grad PLUS loans, and they offer the same access to federal repayment plans and programs. You may also want to compare private student loans offers to your grad PLUS loan rates to determine which will save you the most money.
If you want the best of both worlds — greater federal loan protections but lower private loan rates — keep in mind that you could always refinance your student loans down the road. You might borrow PLUS loan for its safeguards but decide later that they’re worth trading for a lower APR as you ramp up your repayment.
PART IV: Private student loans
What is a private student loan?
A private student loan is an educational loan issued by a non-government lender. As with federal student loans, borrowers must use the money for educational expenses.
Some federal laws apply to both federal and private student loans. For example, lenders aren’t allowed to charge you a fee for paying off your loans early — however, it can be difficult to discharge a federal or private student loan during a bankruptcy.
There are also important differences between federal and private student loans, and several pros and cons to consider before taking out a private student loan.
- High loan limits. The federal student loans with the lowest interest rates also have preset annual and aggregate loan limits. By contrast, private student lenders may let you borrow up to your school’s cost of attendance.
- Potentially lower interest rates. Creditworthy borrowers may qualify for a lower interest rate with a private lender than with a federal student loan.
- No funding fee. Federal student loans often have a disbursement fee; private student lenders generally don’t charge a disbursement or origination fee.
- Variable-rate options. Private lenders may offer variable-rate loans. Currently, many of these start with a lower interest rate than fixed-rate loans, but there’s a risk the rate will increase in the future.
- Interest rate discounts. Federal and private student loans often offer a 0.25% interest rate discount if you sign up for autopay. Private lenders may offer additional discount opportunities.
- Credit requirements. Your income, credit score and other factors could impact your eligibility, interest rate and maximum loan amount.
- No access to federal benefits or programs. Private student loans aren’t eligible for federal repayment plans or subsidies. They also aren’t eligible for the government’s forgiveness, cancellation, discharge, forbearance or deferment programs.
- Fewer hardship options. Private lenders might not offer borrowers forbearance or deferment options when borrowers have trouble making payments.
- Quicker defaults. Private student loans may default sooner than federal student loans if you stop making payments. When a loan defaults, you’ll immediately owe the entire loan balance. Federal student loans also offer ways to get your loan out of default and back onto a repayment plan, but private lenders may not give you similar options.
- Limitations with loan repayment assistance programs. Some government and private student loan repayment assistance programs won’t help you repay private student loans.
- Varied discharge policies. Private lenders may not discharge your loan balance if you become permanently and totally disabled or die. As a result, you may leave your estate or cosigner with a loan balance to pay. Federal student loans can be discharged when the borrower, or student in the case of parent PLUS loans, is permanently and totally disabled or dies.
Where can you find private student loans?
Banks, credit unions, online lenders, schools and states all offer private student loans to students, and sometimes to students’ parents. Your school’s financial aid office may be able to recommend several options, but you can also look online or speak to friends and family members to get recommendations.
There’s no single best private student lender, and you should compare different lenders’ loan types, loan terms, repayment options, fees, discounts and fine-print restrictions, like if they let you release a cosigner. You could also read reviews and recommendations to determine which private student lenders might be best for your situation.
Once you’ve narrowed down your list, you can then apply for a student loan with several lenders and compare your offers to determine which loan is best.
Who are private student loans best for?
Federal student loans are the best place to start for most borrowers, but there are some students who may want or need to take out private student loans. For example, if you’ve reached your annual or aggregate loan limit with federal student loans and you still need more money for school, you may want to consider a private student loan.
Parents and graduate or professional students who have established their creditworthiness may also want to consider private student loans as an alternative to federal student loans. Their federal loans have a higher interest rate and disbursement fee than those for undergraduates, and older applicants may be able to qualify for a lower interest rate with a private lender. However, consider the big picture as there may be other drawbacks, such as lack of access to federal forgiveness programs and repayment plans.
Finally, private loans could be a last resort for students who aren’t eligible for federal financial aid. This cohort includes part-time and international or immigrant students.
PART V: How to get a student loan
Applying for federal student loans
You must complete and submit a Free Application for Federal Student Aid (FAFSA) every year to apply for and remain eligible for federal financial aid.
Submitting your FAFSA early can help your financial aid situation, as some schools and states offer financial aid on a first-come, first-served basis based on information in your FAFSA. Even if you don’t plan on taking out loans, the FAFSA is a requirement for some grant and scholarship opportunities.
To begin the FAFSA process online, go to fsaid.ed.gov and create your FSA ID. The FSA ID will be your username and password for signing into your account and you’ll also use it to sign loan documents. Dependent students also need a parent to create an FSA ID, which the parent will use to sign the child’s FAFSA.
After you’ve created your FSA ID, you can start the online application at fafsa.gov. To complete the application, you’ll need:
- Your Social Security number or alien registration number
- Income-related forms, including recent W-2s and federal income tax returns
- Copies of your bank, brokerage and other financial account statements
- Documents related to other income
- If you’re a dependent student or you’re married, you may also need your parents’ or spouse’s Social Security number and income-related forms.
It generally takes under an hour to complete the FAFSA. Returning students will send the form to their school, while first-year students can send their FAFSA to the schools they’re considering.
After submitting your FAFSA, you will get a Student Aid Report (SAR) by mail or email; you should review this document to ensure all your information is correct. The SAR will list your expected family contribution amount, along with your FAFSA information. Schools and state agencies use this data to determine your financial aid eligibility and award amounts, and a mistake could lead to less aid being offered.
Your school, or the schools you’re considering, will then send you an aid offer that lists the financial aid types and amounts that you can accept. Your aid package may include a combination of grants, scholarships, work-study funds and/or several types of student loans.
You can choose which aid package offer to accept and how much money to borrow if you’re taking out a loan; the process can vary depending on your school. If you’re accepting a federal student loan offer, you will have to sign a promissory note, or loan contract. Keep in mind that you do not have to accept the full amount of federal loans you’re eligible to borrow — do the math to avoid unnecessary debt.
Applying for private student loans
Private student lenders may have different applications, and the application processes could vary. However, you can find some lenders that have a fairly simple and straightforward online application.
You won’t need to complete the FAFSA to apply for a private student loan, but you may want to gather similar personal and financial documents — you’ll likely need information from these documents during the application process, and you might have to submit copies for verification purposes.
You may also need personal and financial information from a cosigner if you’re adding one to your application; in some instances, the cosigner may be able to log in and submit their information directly.
If your application is approved, you might be able to pick from several loan terms with varying interest rates. Or, the lender may make you an offer and you can choose to accept or decline it.
At some point during the application process, the lender could contact your school to verify your eligibility and the school’s cost of attendance, which can determine your maximum loan limit. Alternatively, you could be asked to self-certify these numbers.
Alternatives to student loans
A loan shouldn’t necessarily be your first choice when it comes to financial aid. Scholarships and grants can offer money for school that you don’t need to pay back. Graduate or professional students may be able to get “free” money via fellowships. And you could look into different work opportunities.
If you submitted a FAFSA, you may receive a work-study award as part of your financial aid offer. The federal work-study program pays a portion of work-study recipient’s wages, which could make it easier for you to find a job while you’re at school. However, only certain employers are eligible, such as the school, nonprofits and some for-profits if the work you’ll do aligns with your major.
Graduate and professional students may have opportunities to get an assistantship at the school. Depending on the program, you could receive a stipend, tuition waivers or even benefits in exchange for working part time.
You can also look for work opportunities that aren’t part of a financial aid program. A part-time job while you’re at school, or a full-time job during the summer, might not earn you enough to cover all your educational costs — but every dollar you earn and put toward your education is one less dollar you need to borrow (and pay interest on).
If working an in-school job isn’t feasible, you could also avoid borrowing by using an Income-Share Agreement (ISA). Available at schools and through private companies, ISAs help you cover your tuition in exchange for a percentage of your income when you leave school and find employment. Of course, consider ISAs or student loans only after racking up as much gift aid and savings as you can.