How to Apply for Student Loans

Unless their parents have somehow saved enough money—or earn massive salaries—most students need to borrow to pay for college today. Working your way through college is also largely a thing of the past. Few students can make enough to pay for college while they're also taking classes. For that reason, student loans (and debt) have become increasingly common. Here's what you need to know about applying.

Step 1: Fill Out the FAFSA

The first step in applying for student loans is to fill out the government's Free Application for Federal Student Aid (FAFSA). The FAFSA asks a series of questions about the student's and parents' income and investments, in addition to other relevant matters. Based on the information you supply, the FAFSA will calculate your Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC). That's the amount of money the government believes you should be able to pay for college for the coming school year out of your own financial resources.

You can complete the FAFSA online at the office of the Federal Student Aid website. To save time, round up all of your account information before you sit down to start work on it. You must not only complete the FAFSA when you first apply for aid but every year after that if you hope to continue receiving aid.

Step 2: Compare Your Financial Aid Offers

The financial aid offices at the colleges you apply to will use the information from your FAFSA to determine how much aid to make available to you. They compute your need by subtracting your EFC from their cost of attendance (COA). Cost of attendance includes tuition, mandatory fees, room and board, and some other expenses. It can be found on most colleges' websites.

In order to bridge the gap between your EFC and their COA, colleges will put together an aid package that may include federal Pell Grants and paid work-study, in addition to loans. Grants, unlike loans, do not need to be paid back, except in rare instances. They are intended for students with what the government considers "exceptional financial need."

Award letters can differ from college to college, so it's important to compare them side by side. In terms of loans, you'll want to look at how much money each school offers and whether the loans are subsidized or unsubsidized.

Direct subsidized loans, like grants, are meant for students with exceptional financial need. The advantage of subsidized student loans is that the U.S. Department of Education will cover the interest while you're still at least a half-time student and for the first six months after you graduate.

Direct unsubsidized loans are available to families regardless of need, and the interest will start accruing immediately.

Payments and interest on these loans were suspended in 2020 during the economic crisis. Payments resume Oct. 2023, and interest will begin accruing on Sept. 1, 2023.

If you qualify, a college might offer you both subsidized and unsubsidized loans.

Federal loans have a number of advantages over student loans from banks and other private lenders. They have relatively low, fixed interest rates (private loans often have variable rates) and offer a variety of flexible repayment plans.

However, the amount you can borrow is limited. For example, most first-year undergraduates can only borrow up to $5,500, of which no more than $3,500 can be in subsidized loans. There are also limits on how much you can borrow in total over the course of your college career.

If you need to borrow more than that, one option is a federal direct PLUS Loan. PLUS loans are intended for the parents of undergraduates (as well as for professional and graduate students). PLUS loans have higher limits—up to the full cost of attendance minus any other aid the student is receiving—and are available regardless of need. However, the parent borrower must generally pass a credit check to prove their creditworthiness.

Step 3: Consider Private Student Loans

Another option if you need to borrow more money than federal student loans can provide is to apply for a private loan from a bank, credit union, or other financial institution.

Private loans are available regardless of need, and you apply for them using the financial institution's own forms rather than the FAFSA. To obtain a private loan, you will need to have a good credit rating or get someone who does have one, such as a parent or other relative, to co-sign on the loan.

Having less-than-stellar credit can make it difficult to qualify for student loans. Private lenders will consider your income and credit history, and as a college student, you likely have poor credit or no credit at all. However, some lenders offer student loan options for borrowers with bad credit.

Generally, private loans carry higher interest rates than federal loans, and these rates are variable rather than fixed, which adds some uncertainty to the question of how much you'll eventually owe. Private loans also lack the flexible repayment plans available with federal loans and are not eligible for loan consolidation under the Federal Direct Consolidation Loan program. However, you can refinance your private loans after you graduate, possibly at a lower interest rate.

Each college will notify you of how much aid it is offering around the same time that you receive your official acceptance. This is often referred to as an award letter. In addition to federal aid, colleges may make money available out of their own funds, such as merit or athletic scholarships.

Step 4: Choose Your School

How much you'll have to borrow to attend one school versus another may not be the most important factor in choosing a college. But it should definitely be high on the list. Graduating from college with an unmanageable amount of debt—or, worse still, taking on debt and not graduating—is not only a burden that might keep you up at night; it can limit—or even derail—your career and life choices for years to come. Also factor in the future careers you are considering when you choose to pay more for college. A career with a high entry-level salary will put you in a better position to repay your loans and justify taking on more debt.

The Bottom Line

Student loans are among the resources available to help families pay college bills. Private and federal loans have advantages and disadvantages depending on your situation. Private loans, administered by banks and credit unions, are much like any other kind of loan, meaning a credit check will be required. Federal loans are often needs-based with lower interest rates and flexibility in repayment. Those who do the required legwork will find options that best meet their needs.