What to Know if You Need to Borrow Loans to Cover the Cost of College

Borrowing for college is an important decision with long-term impact. Here's how the student loans work.

Unlike grants and scholarships, the loans you borrow for college need to be repaid. You’ll be responsible for repaying the amount you borrow — called the principal amount — as well as interest, which is the cost of borrowing a loan. Because interest accumulates over time, the total amount you repay will be higher than the amount you borrowed. Loans can have different interest rates, which means some are more or less expensive.

Borrowing for college is an important decision with long-term consequences. As you weigh options for covering costs remaining after grants and scholarships, keep in mind that smart borrowing can help you focus on succeeding in school rather than working more hours than is advisable. Research shows that working too many hours while in college can make it harder to graduate.

Did You Know? Most students borrow at least some money to pay for college. In fact, more than six in ten college seniors graduating from public and private nonprofit colleges in 2019 had student loan debt.

Who Provides Student Loans?

Federal student loans, provided by the U.S. Department of Education, are the most common — and safest — option for those who need to borrow, and allow millions of students to attend college each year. 

Federal student loans offer important benefits for borrowers. If you need to borrow, make federal student loans your first choice, and exhaust your federal student loan eligibility before considering any other types of loans. Federal student loans provide low, fixed interest rates and repayment options typically not matched by nonfederal loan programs. The standard option is to repay your loan in 10 years in equal monthly payments. But you also have the ability to repay your loans in payments that vary based on your income rather than the amount you borrowed if you are willing to take more than 10 years to pay off your loan. This can provide lower monthly payments, as well as forgiveness of any debt remaining after 20 or 25 years of payments. However, the total amount of debt you repay may be larger than the standard 10-year loan and debt forgiven may be subject to federal income tax. Forgiveness after 10 years is also available to federal student loan borrowers who work in qualified public service jobs.

Not All Student Loans Are the Same. While the federal government runs the largest student loan program, loans are also available from other, nonfederal sources. These include private lenders like banks and credit unions. Some states and colleges also offer their own loans. Most nonfederal loans have additional eligibility requirements beyond those of federal loans, less generous terms, and fewer repayment options than federal student loans.

Who Can Receive a Federal Student Loan?

To receive a federal student loan, you must be a U.S. citizen or permanent resident, and enrolled in a qualifying program and school (most programs and schools qualify). If you’ve previously borrowed federal loans that are now in default, you cannot borrow new federal loans until the default is resolved.

Unlike most forms of consumer credit (such as credit cards, mortgages, or car loans), there is no credit check or income requirement to borrow a federal student loan. Also, unlike federal Pell Grants, federal student loans are available to students regardless of their income or financial need. 

What Kinds of Federal Student Loans Are Available?

Federal student loans are commonly referred to as Direct Loans or Stafford Loans, and they can be either subsidized or unsubsidized. The only difference between subsidized and unsubsidized loans is whether or not interest accrues on the loan while you’re in school. 

  • Subsidized Loans do not accrue interest while you’re in school and are available to students with financial need
  • Unsubsidized Loans do accrue interest while you’re in school and are available to students regardless of financial need

The interest rate for all federal student loans is set by law and changes every year. Federal loans borrowed in different years may have different interest rates, but the interest rate for each loan you borrow is fixed, meaning it won’t change over time. 

All federal student loans also have an up-front origination fee (sometimes called a ‘loan fee’). It’s a small percentage of the amount borrowed, paid as a processing fee to the federal government when they disburse the loan.

The federal government also offers loans for parents of undergraduate students, called Parent PLUS Loans. Compared to federal student loans, federal parent loans have higher interest rates and fees, and fewer repayment options. If you still have a funding gap after grants, scholarships, and federal student loans, your family should carefully consider differences between federal parent loans, private loans, and other forms of credit (such as a home equity loan) before making a borrowing decision. 

How Much Can I Borrow in Student Loans?

There are both annual limits (how much you can borrow in a given year) and aggregate limits (how much you can borrow over the course of your college career). Read more about loan limits

The amount of money you’re eligible to borrow is based on what year you are in school and whether you’re a dependent or independent student, and will be outlined in your financial aid offer(s). The specific loan amount that your school includes in your aid offer may be less than the maximum amount you’re eligible to receive. 

Borrow What You Need. Whether and how much to borrow, up to the maximum amount allowed, is your choice. You don’t have to borrow the full amount offered by your school. If you decide to borrow less, you can also request additional loans later on, so long as your total aid (including student loans) doesn’t exceed the school’s total cost of attendance.

Our Affordability Calculator can help guide you on the maximum amount to borrow. The U.S. Department of Education’s Loan Simulator can help you explore the expected costs of borrowing federal student loans, including how much interest adds to the cost of a loan.

What’s the Process for Getting a Federal Student Loan?

  1. Complete the FAFSA. You must complete the Free Application for Federal Student Aid (FAFSA) to receive a federal student loan. Your financial aid offer will likely include the federal loans you’re eligible to borrow, and then you will tell your school whether you want to accept the loan(s), and how much you want to borrow. Contact your financial aid office if your aid offer doesn’t include federal loans and you want to know about your borrowing options.
  2. Sign a Master Promissory Note. If you decide to borrow, you’ll sign a Master Promissory Note, which is a contract that outlines the terms and conditions of your loan(s). 
  3. Complete entrance counseling. The first time you borrow a federal student loan, you’ll also be required to complete “entrance counseling,” which is designed to give you the information you need to understand the loan process, including your interest rate and repayment options. Your school?s financial aid office will provide you the information you need to complete entrance counseling.  

Once you?ve completed this process, your college will process the loan, either applying it to your bill or sending you a check.

A resource from the Peter G. Peterson Foundation, created with support from The Institute for College Access and Success (TICAS)