With the rising cost of college, it’s become increasingly common for students to rely on loans to complete their higher education. More than half of undergraduates who complete their programs use federal loans at some point — and the number is even higher when you include those who borrowed private loans.¹

If you’re heading back to college, or perhaps your child is, it’s important to understand the process of applying for loans. Keep reading to learn about the different types of loans available, how to apply, who is eligible, and more.

How to apply for federal student loans

Federal student loans, offered by the federal government, are the most popular type of student loan. The process for applying for federal student loans is the same as applying for any other type of financial aid, so it’s worth applying even if you aren’t sure what type of aid you’ll qualify for. Here’s a step-by-step guide for applying for federal student loans:

Step 1: Complete the Free Application for Federal Student Aid (FAFSA)

The FAFSA is the form that’s used to apply for all types of financial aid, including student loans, grants, and work-study. No matter what your family’s financial situation is, it’s worth completing the FAFSA to learn about what aid you might be eligible for.

The FAFSA is generally due by the end of June at the end of the school year for which you’re applying. For example, if you’re applying for aid for the 2024-2025 school year, you’ll need to complete the FAFSA by June 2025.²

That being said, most people should complete the FAFSA far earlier — you can do so as early as October 1 for the following school year. First, there is a finite amount of some types of financial aid. The earlier you complete your FAFSA, the better your chances of qualifying for financial aid. Additionally, if you need the money to pay for the school year, you’ll have to complete your application ahead of time, so your tuition is paid.

Step 2: Receive your aid offer

For each school you’re accepted to, you’ll receive an aid offer that outlines the financial aid you’re eligible for. This aid offer will outline both federal aid you’re offered, as well as any aid the school is offering you directly.

In your aid offer, you may find three different types of aid: student loans, grants, and work-study. The amount of free aid you’re offered will depend on your family’s financial situation. You’ll be offered student loans to cover the portion of your costs that aren’t covered by free aid.

Step 3: Accept your student loans

Once you’ve decided what school you’ll attend and you’ve run the numbers to determine how much you’ll need to borrow, you can accept your student loans and sign your loan agreement. You can borrow the full amount you’re offered, but you don’t have to. When the school year begins, your federal loans will be sent directly to the school to pay your tuition and other costs.

Types of federal student loans

The federal government offers several types of student loans. Each one is designed for a certain type of borrower or situation, and you may not be eligible for each one.

Direct Subsidized Loans

Direct Subsidized Loans don’t accrue interest while you’re in school, during any deferments, or during your grace period for the six months after you leave school. These loans are only available to undergraduate borrowers with financial need and have relatively low loan limits.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to all borrowers, both undergraduate and graduate, regardless of financial need. These loans accrue interest during all periods, and that interest will capitalize at the end of any period during which you aren’t making payments, such as while you’re in school or are in deferment or forbearance. In other words, the accrued interest will be added to your principal balance.

Direct Grad PLUS Loans

A Grad Plus Loan is a type of Direct Plus Loan that’s offered to graduate or professional students. These loans work a bit differently from Direct Subsidized and Direct Unsubsidized Loans in that they require a credit check. You won’t qualify if you have an adverse credit history.

Direct Parent PLUS Loans

A Parent PLUS Loan is another type of Direct PLUS Loan. This type of loan is offered to the parents of undergraduate students to help pay for their children’s education. Like Direct Grad PLUS Loans, Parent PLUS Loans require the borrower to go through a credit check.

Read more: Navigating the challenging new landscape of student loans

How much can I borrow in federal student loans?

The amount you can borrow in federal student loans depends on a variety of factors, including your year in school, your dependency status, and the type of loan you’re borrowing.

As a first-year dependent undergraduate student, you can borrow up to $5,500 in Direct Loans, $3,500 of which may be subsidized. That amount increases to $6,500 ($4,500 of which may be subsidized) for the second year, and $7,500 ($5,500 of which may be subsidized) for your third and subsequent years. The borrowing limits are higher for graduate students and for both independent students and undergraduate students whose parents don’t qualify for PLUS Loans.³

There are also aggregate loan limits. In total, a dependent student may borrow no more than $31,000, $23,000 of which may be subsidized. The aggregate limits are also higher for graduate students and for both independent students and undergraduate students whose parents don’t qualify for PLUS Loans.

Unlike Direct Subsidized and Direct Unsubsidized Loans, Direct PLUS Loans don’t have set loan limits. Instead, you can borrow your school’s cost of attendance minus any other financial aid you receive.

Understanding federal student loan interest rates

Unlike other types of loans, federal student loans have fixed interest rates. Rates are based on the current market rates rather than your credit score. The rates on federal student loans vary depending on the loan type, but they’re generally lower than the interest rates on other types of loans, including private student loans.

For loans disbursed on or after July 1, 2023, but before July 1, 2024, the interest rate is 5.50% for undergraduate Direct Subsidized and Direct Unsubsidized Loans, 7.05% for graduate Direct Unsubsidized Loans, and 8.05% for Direct PLUS Loans.⁴

The table below outlines the changes in federal student loan interest rates over the past decade, helping you understand how they fluctuate.⁵

The time at which you borrow your student loans can have a significant impact on your future finances because they are fixed. In other words, the rate at which you borrow your loans is the rate you’ll pay forever.

As you can see from the table above, students who borrowed loans in the 2020-2021 school year will have considerably lower long-term loan costs than students who borrowed loans just a couple of years earlier. However, because interest rates change each year, most borrowers have loans at several different interest rates.

How to apply for private student loans

Another option to help you pay for school is private student loans, which are offered by private lenders rather than by the federal government.

Unlike federal loans, private loans involve a comprehensive underwriting process. In other words, you apply for your loan, and the lender looks at your credit history, debt-to-income ratio (DTI), and other financial factors to determine if you’re eligible.

If you have poor credit or low (or no) income and don’t qualify for a private loan on your own, you may apply with a cosigner — often a parent. The cosigner is responsible for repaying your loans if you can’t do so.

Generally speaking, the most you can borrow from a private loan is the cost of attendance at the school you’re attending, but your loan limit could be lower based on your income. Additionally, the interest rate on your loans is based on both the current rate environment and your creditworthiness.

Read more: What to know about student loan debt (and tips for making payments)

Here’s a quick step-by-step guide for applying for private student loans:

1. Identify lenders: There are plenty of private student loan lenders on the market, including banks, credit unions, and online lenders. You can find plenty of information online about the top lenders and their loan requirements.
2. Compare loan offers: Because each lender offers its own loan requirements, terms, and interest rates, it’s important to shop around. Consider getting prequalified with a handful of lenders to see which can offer you the best rate.
3. Consider a cosigner: If your credit isn’t sufficient for you to get a private loan on your own, consider asking a cosigner to apply with you.
4. Complete your loan application: Once you’ve identified the best lender for your situation, complete the full application. You’ll have to provide important personal and financial information so the lender can verify your eligibility.
5. Receive your funds: After you go through the underwriting process, you’ll receive your loan funds. You’ll either receive a check directly or your lender will send the money directly to the school.

When to use private student loans

Private loans are a good option in some cases, but they’re usually best used as a second resort when federal student loans aren’t available.

For example, you might apply for private student loans if you’ve exhausted your federal student loan limits but still require financial assistance for your college expenses. They’re particularly helpful for students and their parents with good credit who can qualify for the best interest rates.

Before applying for private loans when federal ones are available, consider the benefits you’ll be giving up. First, private loans often have higher interest rates, and those rates may be variable instead of fixed. Additionally, there’s no option for subsidized loans — no matter your financial situation, interest will accrue while you’re in school.

There are also downsides to having private loans after graduation. For example, private loans often offer fewer repayment options, including no income-driven repayment plans. You may also have a more difficult time qualifying for deferment or forbearance if you go back to school, suffer financial hardship, or can’t make your loan payments for some other reason.

Though many students eventually have to turn to private student loans, it’s usually better to exhaust your federal student loan options first.

Read more: Student loan repayment: Tips and strategies

The bottom line

Student loans are an important tool when it comes to paying for higher education. Though no one wants to be saddled with student debt when they graduate, loans are often the only option for borrowers who want a college degree.

If you’re heading off to school and need to apply for student loans, be sure to research the various loan types available, as well as which are best for your situation. It’s also helpful to get an idea of how much you can afford to pay out of pocket so you know ahead of time roughly how much you’ll need to borrow. Having as much information as possible upfront will help you make informed decisions based on your individual circumstances.