How To Take Out a Student Loan

In the 2021-22 academic year, 49% of graduates with bachelor's degrees from public four-year colleges had an average debt of $20,700 in federal student loans, according to College Board. If you're headed to college, you may need to take out a student loan to cover costs. 

You can apply for federal student loans from the U.S. Department of Education, and private student loans from private lenders. In this guide, we cover how to take out a student loan and what to consider before borrowing.

Current private student loan rates

How to take out federal student loans

Federal student loans are widely accessible if you need to pay for college. If you meet the basic eligibility requirements, read on to learn how to take out federal student loans.

1. Submit the FAFSA

Students must submit the Free Application for Federal Student Aid, or FAFSA, every year they need federal financial aid. Your school uses your FAFSA to determine the amount of financial aid you qualify for, which can include:

• Scholarships: You may qualify for scholarships — which don't need to be repaid - based on academic achievements, talent, and more.
• Grants: If you demonstrate financial need, you might be eligible for grants, as most grants are need-based. Similar to scholarships, grants are gift aid that doesn't need to be repaid.
• Work-study: Through this program, you can qualify for part-time employment to earn money for your educational expenses.
• Federal student loans: You may qualify for different types of federal student loans. Undergraduates with a demonstrated financial need may be eligible for Direct Subsidized Loans, which have an interest subsidy while you're in school, for the first 6 months after you graduate, and during periods of deferment. Undergraduate and graduate students may qualify for Direct Unsubsidized Loans, which don't have a financial need component. Graduate and professional students may receive PLUS loans.

You'll need to create an FSA ID to submit the FAFSA, and must include your personal information and parent or spouse's information, if applicable. The process typically takes less than an hour to complete. Go to StudentAid.gov to fill out and submit the form.

After submitting your application, you'll receive a Student Aid Report (SAR), which is a summary of your information. It also includes your estimated eligibility for federal financial aid.

2. Review your financial award letter

Once your FAFSA is processed and your schools have received it, you'll receive a financial aid award letter from the school(s) that accept you. Your award letter will typically include:

• The types of financial aid you're eligible for
• The amount of financial aid you're offered
• Your expected costs

If you've applied and been accepted to different colleges, compare aid offers and total costs.

3. Accept or decline your award

When you're ready, accept or decline your award. It's a good idea to first accept any grants and scholarships, as this is often considered "free money." Then you can accept any work-study offer and federal student loans. Subsidized loans should be your first choice, before moving on to unsubsidized loans.

You may get an offer for more loans than you need. Calculate what you need and only borrow up to that amount. When you accept federal student loans, you must sign the Master Promissory Note (MPN), a legally binding document stating that you agree to repay your loans.

Additionally, you must complete entrance counseling, which outlines your responsibilities with repayment and how interest and your loans work.

How to take out private student loans

After maxing out your federal financial aid, like grants, scholarships, and federal student loans, you might realize you're still at a deficit. If savings, part-time work, or work-study opportunities can't fill the gap, private student loans are an option. Here's how to take out private student loans and get the funding you need.

Research private lenders

Private student loans are available through financial institutions, such as banks and credit unions, and online lenders. When looking for private lenders, cast a wide net. Research various private lenders and compare the following:

• Eligibility requirements: Every lender has a different set of eligibility requirements. Review the requirements to make sure you qualify. See if there is a minimum credit score requirement or a cosigner option available.
• Interest rates: While federal loans have fixed rates, you may choose either fixed or variable interest rates with private student loans, depending on the lender. Many lenders publish the typical ranges available to borrowers, so you can get an initial idea of what each lender offers.
• Repayment terms: The term on your private loan refers to the length of your repayment. The number of years you have to repay your private loans ultimately affects your monthly payment and interest over the life of the loan. Research the different repayment terms available from each lender.
• Hardship options: Private student loans generally have fewer benefits and much less flexibility than federal loans. Check to see if the lender offers hardship options, such as deferment or forbearance. This can help if you lose your job or face financial hardship and need to pause your student loan payments.
• Borrower benefits: Research any potential discounts or perks available to borrowers.
• Customer reviews: Since you get to choose your private student loan lender, check out their customer reviews on Trustpilot and the Better Business Bureau (BBB) website.

Compare rates/prequalify

Many lenders allow you to see your potential rate through the prequalification process. In most cases, you can find out if you prequalify with only a soft pull on your credit, which doesn't impact your credit score. Keep in mind that this isn't a final offer, and you may qualify for different rates and terms when you formally apply. Go through this process with multiple lenders and compare rates.

Submit an online application

After completing your research, choose a private loan lender with competitive rates and favorable terms. Go to the lender's website and submit an application. You'll need to provide personal and financial information and undergo a hard credit check, which can temporarily lower your score by a few points. Some information you may need to have available includes:

• Social Security number (SSN)
• Proof of income (pay stubs, tax returns, etc.)
• Name of school
• Cost of attendance
• Financial aid award
• Employer
• Monthly rent/mortgage payment
• Cosigner information (if applicable)

Which type of loan should I take out first?

If you're eligible for federal Direct Subsidized Loans for your undergraduate degree due to financial need, take out these loans first. Subsidized loans are the most affordable and generous federal loans, as the government offers interest subsidies in these situations:

• While you're attending school at least half-time
• During the 6-month grace period after you leave school
• During deferments

Taking out these loans can make student loan repayment more affordable and help you save on interest costs. If you don't qualify for Direct Subsidized Loans, take advantage of other federal student loans, such as Direct Unsubsidized Loans. These loans are more accessible since they're available to both undergraduate and graduate students. Plus, there isn't a financial need requirement.

Graduate and professional borrowers can take out grad PLUS loans. Max out federal loans first in all cases, since you'll get various repayment options and benefits, including access to student loan forgiveness. If federal loans don't cover all of your education costs, you can look into private student loans. Compare lenders, repayment terms, and interest rates before borrowing.