How to take out federal and private student loans

If you’re a current or prospective student pursuing higher education, you may be wondering how to pay for it.

There are some options such as grants and scholarships that may be available to students that, in most instances, don’t need to be repaid to help pay for college. For students who may need additional financial support once they’ve exhausted the scholarships and grants available to them and the other financial resources at their disposal, a different option they may consider is taking out student loans.

Student loans are funds that students or their parents may borrow from either the U.S. Department of Education or a private lender to help pay for school tuition and related expenses.

A Federal Reserve report found that 30% of adults said they have taken out student loans. The report also found that the adults who completed higher levels of education — like graduate school — were more likely to have taken out student loans.

In essence, it’s common for students to take out student loans when pursuing higher education.

Keep reading as we cover how student loans work broadly and how to apply for both federal and private student loans.

How do student loans work?  

Before taking out student loans, it’s important to understand how student loans work. When you apply for a student loan, you’re applying to borrow money you’ll need to pay back in most circumstances.

This money is available to borrow if you’re eligible for loans from one of the many private student loan lenders or the U.S. Department of Education. If you apply for and are approved for a student loan, after agreeing to the loan terms, your lender expects you to pay back the amount you borrowed (the principal) and any interest you accrue on the loan.

When interest starts accruing on a student loan and when you’ll be expected to start making payments on a student loan will vary depending on the student loan you take out. For instance, for certain federal loans, such as Direct Subsidized Loans, you likely won’t accrue interest on your loan until six months after you graduate. Many federal student loans, although not all, have a six-month grace period after you graduate, when you won’t have to make payments on the loan.

In the case of private loans, the start of your payment period and when interest starts accruing on the loan will vary depending on the type of loan and the lender.

No matter what kind of student loans you have and whether they’re federal or private, it’s important to check when you’ll be expected to start making payments on the loans and when interest will begin to accrue on the loans.  

How to take out federal student loans

Federal student loans often offer benefits like fixed interest rates, the ability to access loans without undergoing a credit check, and flexible repayment options. They may be available to students pursuing undergraduate, graduate, and professional degrees and to parents of undergraduate students.

Here’s a list of steps you can take to pursue federal student loans:

1. Fill out the Free Application for Federal Student Aid (FAFSA®) on the  Federal Student Aid website to apply for financial aid for the upcoming school year. Filing the FAFSA® is a requirement to access all forms of federal financial aid, including federal student loans.
2. After completing the FAFSA®, check your FAFSA® Submission Summary on the Federal Student Aid website. It will show your estimated eligibility for federal student loans and the Pell Grant.
3. Schools you have been accepted to will ultimately provide you with a financial aid award letter detailing the aid you’re being offered, if any, including federal student loans.  
4. If you’re offered student loans, decide if you want to accept any or all of the loans you’ve been offered. Just because you’re offered federal student loans doesn’t mean you have to accept them.

How to take out private student loans

Private student loans are funds provided by banks, credit unions, and other financial institutions. Lenders determine the terms and conditions of these loans and may factor in a borrower’s credit score and other financial indicators when making lending decisions. Unlike federal student loans, there isn’t one universal application to fill out to apply for a private loan. Applications and the steps involved will vary by lender.

A few steps you may want to take if you want to apply for a private student loan include:

• Research different reputable private student loan lenders to see the terms of the loans they’re offering.
• Ask lenders about the steps involved in applying for the student loans they’re offering.
• Fill out any prequalification forms to see if you’ll likely be eligible for the loans you’re more seriously considering, and then formally apply for any student loans you’re interested in.  
• Evaluate all the offers you receive, if any, to see which terms you feel comfortable with.
• Pick the loans you want to accept, if any, and formally accept offers.

Should I take out a federal or private student loan first?

There’s no hard and fast rule on which type of loan you should take out first. That said, it’s often recommended to max out on any federal student loans you’re offered before seeking private student loans. This is because of the benefits federal student loans offer, including:

• Some federal student loans don’t accrue interest while you’re in school.
• Federal student loans offer the possibility of eligibility for federal student loan forgiveness and discharge programs.
• Federal student loans often offer flexible payment repayment options.
• Federal student loans offer fixed interest rates determined by Congress.
• Most federal student loans don’t require a co-signer, even for borrowers who are under 18.
• Federal student loans don’t have minimum credit score requirements, and most don’t require a credit check.

Final thoughts

Like any other type of debt, you’ll have to repay student loans in most cases. Before taking out student loans, think carefully about their terms and understand how much you’ll ultimately have to pay over the life of the loans and how much your monthly payments will be. You’ll also want to take time to understand if the loans involve any hidden fees or penalties for late payments, too.

If you’re unsure about any aspect of the student loan you’re considering accepting, consider seeking advice from a trusted financial professional or contacting your school’s financial aid office who may be able to answer questions.