three students laughing together

During the 2020-21 school year, the National Center for Education Statistics estimated that 52% of the over 2.2 million students enrolled in a postsecondary program used student loans to finance their education. The average student borrowed around $7,219 for their student loan that year.

Because student loans are still the most viable way to pay for a college education, it’s essential to understand exactly what taking out a student loan means, both for your present and your future, and how to avoid the potential downsides of student loans. This article will guide you in best practices for borrowing and repaying your student loans.

What You Should Know Before You Take Out a Loan

What is a student loan?

A student loan is money lent to college students to cover the cost of tuition, books, fees, and other school-related expenses. Borrowers are expected to repay this money, with interest, to the loan provider once they complete or leave their program. Student loans differ from scholarships, grants, fellowships, and other forms of “free money” tuition assistance that do not have to be repaid, or are given in exchange for work.

Federal versus private loans

In the U.S., there are two types of student loans — federal and private.

Federal loans are funded by the federal government, with terms and interest rates set by Congress. There are multiple types of federal student loans available to both students and their parents.

The different types of federal student loans:

  • Direct Subsidized Loans. Available to undergraduate students only. The eligibility amount is determined by the school. The U.S. Department of Education pays interest while you are in school at least half-time, during your grace period, and if you defer your loans.
  • Direct Unsubsidized Loans. Available to undergraduate and graduate students. The eligibility amount is determined by the school. The borrower is responsible for paying interest throughout enrollment, grace period, and deferment.
  • Direct PLUS Loans. Available to parents and graduate or professional students. The maximum amount you can receive is the total cost of attendance minus other financial aid received. A credit check is required.
  • Private Loans. Awarded by banks, credit unions, schools, state-affiliated organizations, or other private agencies. The loan terms and interest rates are set by the individual lender. Interest rates for private loans tend to be higher than those for federal loans, and may be variable or fixed. Private loans are usually unsubsidized, and most require a co-signer.

How interest rates work

A key component of understanding how student loans work is understanding interest. Interest is the money that a lender charges a borrower for the privilege of using their money. It is usually calculated as a percentage of the original amount, or principal, that is borrowed.

All student loans have interest. Depending on the type of loan, interest may begin accruing once you complete or leave school (subsidized), or it will start accruing as soon as the loan is disbursed (unsubsidized). It is critical that you know what the interest rates on your loans are, and when your loans will begin accruing interest. Often borrowers find themselves in trouble not because they can’t pay the principal balance on their loan, but because they do not keep up with their interest, which significantly increases the overall amount owed.

Your lender should clearly state the loan’s interest rate and repayment terms when you sign the loan agreement. Do not sign any loan agreements until you have this information and fully understand it.

A 10-year History of Student Loan Rates

Year Undergraduate Graduate PLUS
2019-20 4.45 6.08 7.08
2018-19 5.05 6.60 7.60
2017-18 4.45 6.00 7.00
2016-17 3.76 5.31 6.31
2015-16 4.29 5.84 6.84
2014-15 4.66 6.21 7.21
2013-14 3.86 5.41 6.41
2012-13 6.80/*3.40 6.80 7.90
2011-12 6.80/*3.40 6.80 7.90
2010-11 6.80/*4.50 6.80 7.90

*Indicates subsidized loan

Note: Information is accurate as of October 25, 2023.


How to Apply for Student Loans

A student carrying a white and green texbooks

First, apply for FAFSA

The Federal Application for Federal Student Aid (FAFSA) is an online application that uses income and tax information to calculate your eligibility for federal student loans. Completing the FAFSA is the only way to apply for and receive federal student loans and financial aid. Typically, the application is available on October 1st, but will be available in late December for the 2024-2025 school year.

In general, undergraduate students are still considered dependents of their parent(s) or guardian(s), so they will complete the FAFSA using their parent or guardian’s income and tax information as well as their own. Graduate students, and those who are underage but legally independent, file the FAFSA on their own behalf, using their own income and tax information.

The FAFSA must be filed for each academic year that you want to be considered for federal student loans. The FAFSA application deadline varies by state, but it is typically early in the calendar year for which you wish to receive aid. The amount of federal aid offered to a student may change year over year if the family’s income is significantly different.

As the name implies, filing the FAFSA is free, so even if you are unsure if you will need student loans or your eligibility for other federal aid, it is advisable to submit a FAFSA, just in case. You are not obligated to accept any federal student loans you are awarded, but not filing a FAFSA, or doing so after the application deadline has passed, can negatively impact your eligibility for receiving federal student loans.

Talk to your school’s financial aid counselors

Most colleges have a dedicated financial aid department with financial aid counselors responsible for determining and distributing financial aid to students. These individuals are valuable resources who can help you understand the student loan application process, other funding resources, and other aspects of paying for your college education. You can connect with a school’s financial aid department during the application process, or once you have been accepted into a school.

Calculate how much you need to borrow

Understanding the amount of money you need to borrow to cover college costs can be tricky. Often, a school’s published tuition rate does not include things like room and board, fees, books, and other incidental costs. The school’s financial aid office should be able to provide a complete cost breakdown or estimate that will help you understand what you will owe each term.

Additionally, most schools have a Net Price Calculator tool on their website, which provides an estimate of how much need-based and merit-based aid the student would be eligible for, as well as an estimated total out-of-pocket cost to attend that school. While not completely accurate, most students and families find the tool helpful in determining what schools may be within budget and which ones may not.

There are also factors that can decrease your tuition before you begin using loans. Scholarships, grants, assistantships, fellowships, stipends, and work-study jobs all work together to decrease your overall tuition. Also, consider how much you or your family can pay out of pocket for school. Although this may require planning and sacrifice, paying upfront for school costs is the most efficient way to decrease the amount of money you need to borrow.

There are also limits to the amount of federal and private loans you can borrow, on a yearly basis and in total. These limits vary based on the type of loan and student status:

Federal Subsidized and Unsubsidized Loans
Year Dependent Undergraduate Independent Undergraduate Graduate or Professional Student

(All unsubsidized)

First year $5,500 overall

$3,500 subsidized

$9,500 overall

$3,500 subsidized

Second year $6,500 overall

$4,500 subsidized

$10,500 overall

$4,500 subsidized

Third year and up $7,500 overall

$5,500 subsidized

$12,500 overall

$5,500 subsidized

Total overall limit $31,000 overall

$23,000 subsidized

$57,500 overall

$23,000 subsidized

$138,500 (including undergraduate loans)

Note: Information is accurate as of October 23, 2023.


Borrowing only as much as you need will guarantee you have the lowest possible balance to repay after you finish school. It will also benefit you if you decide to go back to school for an advanced degree, as there is a total aggregate limit of $138,500 for all federal student loans.

Beware of predatory lenders

Predatory lending imposes unfair or abusive loan terms on a borrower. It can also include deception or coercion in getting a borrower to agree to loans that they don’t need or can’t afford.

Predatory student loan lending practices have been a large contributor to the national student loan debt crisis. While steps are being taken to address this issue, there are still many lenders in the private sector who are willing to take advantage of students in need of money for college. Therefore, the onus is still largely on students to protect themselves from predatory lenders, and to only borrow from reputable lenders.

What You Should Know While You’re in School

Students in a classroom

Maintain good grades

Doing well in your classes can impact your eligibility for financial aid. Maintaining satisfactory academic progress is part of the eligibility criteria for receiving federal student loans. Failing classes or falling below a certain GPA can jeopardize your student loan. Also, if you need to repeat a class, you will have to pay for it again, which means taking out additional loans.

Return any loan payments you don’t need

Often students will take out more money in student loans than they need to cover tuition — the difference is typically referred to as a financial aid refund. They may use this extra money to pay for books, room and board, or other living expenses. However, if you still have loan money left over after you cover all of your expenses, the wise thing to do is give that money right back. That way, it is deducted from your principal balance and won’t accrue interest.

Pay down loans and interest while you’re enrolled in school

If your loan is unsubsidized, it begins accruing interest while you are in school. Whenever possible, pay off that interest as it accrues, so when you graduate, your overall balance has not significantly inflated.

Even if you have a subsidized loan that is not accruing interest while you are in school, you can start paying off the principal balance. This will give you a head start in paying off the loan after you complete your program.

Remember to submit a new FAFSA every year

In order to receive federal student loans, you must submit a new FAFSA every year. In the midst of classes, internships, jobs, and other obligations, it can be easy to forget to do this, so set a reminder for yourself. Failure to submit a FAFSA will make you ineligible for federal student loans and entirely reliant on private loans.

What You Should Know When You Finish School

You must repay your loans even if you don’t graduate

A common misconception among student loan borrowers is that if you don’t get a degree, you don’t have to repay your loans. This is not true. Borrowers typically have to start repaying their loans six months after they leave school, whether or not they have earned a degree. Keep this in mind if you are considering leaving school for any reason prior to obtaining your degree.

Understanding repayment options

Once you leave school, you must begin repaying your loans. Federal subsidized and unsubsidized loans have a grace period of six months before you must begin paying off your student loans. Private loans tend to have a shorter grace period, or none at all. Be sure to check the terms of your loan prior to signing the agreement to confirm the length of the grace period, if there is one.

You will receive a monthly bill with a minimum amount that you are obligated to pay by a certain date. In the case of private loans, the payment amount is usually non-negotiable, regardless of whether or not you are working, or what you are earning. However, for federal student loans, there are a number of repayment plans that allow you to adjust the monthly amount you owe, such as the income-driven repayment plan. Be sure to look carefully at the different terms for these repayment plans, as they can affect the overall amount and length of time you have to pay. Most lenders also allow borrowers to set automatic payments for their student loan bills, which ensures borrowers won’t miss any payments.

Pay above the minimum payment

Your monthly bill is for the minimum amount you are required to pay each month, but paying more than that amount will help you decrease your principal balance, and therefore the amount of interest you owe, faster. Even if it’s not possible for you to pay more than the minimum amount every month, putting extra money toward your student loan whenever possible can make a difference.

Consolidate your loans

Consolidating, or combining, your loans is an option for borrowers who only want to make one monthly payment on their student loans. Only federal student loans are eligible for consolidation, so it may not be the right choice for everyone. If you are making multiple payments to multiple loan servicers, it may be worth exploring additional repayment options and more favorable interest rates.

Loan Consolidation – Pros and Cons
Pros Cons
Simplify loan payments with one monthly bill A longer repayment period may mean more accrued interest and higher overall balance
Lower monthly payment and longer repayment period (up to 30 years) Outstanding interest becomes part of the principal balance, leading to a higher percentage of accrued interest
Switch from a variable-interest rate to a fixed-interest rate May lose certain borrower benefits, such as interest rate discounts, principal rebates, or some loan cancellation benefits, when you consolidate loans
Access additional income-driven repayment options and loan forgiveness programs Consolidating your current loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness or the Public Student Loan Forgiveness program

Refinance private loans

For some students, refinancing their private student loans may be beneficial as it can lower the interest rate and monthly payment. Keep in mind that this isn’t the case for all student loans and there are scenarios where you should avoid refinancing your student loans. Learn more about when you should refinance your student loans.

Additional Student Loan Resources

Interested in a degree instead?

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