How to Take Out A Student Loan: A Step-by-Step Guide for Students and Families

If you’re planning on going to college, you’ve probably been doing some thinking about how you’re going to pay for it. And, you’ve likely been wondering, “Should I take out a student loan?” For many, student loans are a necessary part of the college journey. But before you borrow, it’s important to understand how to take out a student loan, from choosing the right loan to borrowing smartly. Here’s a rundown.

What Is A Student Loan?

A student loan is a sum of money borrowed from the federal government, state government, or a private company. The funds can be used to help pay for tuition and other related expenses (room and board, textbooks, etc.). Student loans can also be used for qualifying trade and vocational schools. Taking out a student loan is a serious commitment, but when done responsibly, it can be a valuable tool for reaching your educational goals.

When Should You Apply for Student Loans?

The best time to apply for student loans is after you’ve completed your Free Application for Federal Student Aid (FAFSA), ideally as soon as it opens on October 1 for the following school year. This will help you access federal aid and determine how much you’ll need to borrow after factoring in grants and scholarships.

It’s also smart to begin thinking about college funding during your early high school years. Mapping out your career goals and estimating your post-graduation salary can help guide your borrowing decisions.

Below, we will map out how to take out a student loan step-by-step to help make this whole process less overwhelming.

Step 1: Understand the Types of Student Loans

Before taking out a student loan, you should know the difference between federal, state, and private loans.

Federal Student Loans

These loans come from the U.S. Department of Education and offer several advantages: There are four different types of federal student loans available, including:

• Direct Subsidized Loans: These are loans for undergraduate students who demonstrate a certain level of financial need. They can be used to help cover costs at a college or career school. The maximum amount you can borrow ranges from $5,500 to $12,500 annually, and depends on what year you are in school, as well as whether or not your parents claim you as a dependent (also known as your “dependency status”).
  • Interest: The government pays your interest while you’re in school.
• Direct Unsubsidized Loans: These loans are available to undergraduate, graduate, and professional students. Financial need is not a factor. Similar to Direct Subsidized Loans, for undergraduate students, the amount you can borrow ranges from $5,500 to $12,500 and depends on what year you are in school, as well as your dependency status. Graduate or professional students can borrow up to $20,500 annually.
  • Interest: Interest accrues immediately.
• Direct PLUS Loans: These loans are available to graduate or professional students, as well as to the parents of dependent undergraduate students. When taken out by a parent, they’re commonly known as “Parent PLUS Loans.” When a graduate or professional student borrows, they’re known as “Grad PLUS Loans.” The maximum amount you can receive via a PLUS loan is the cost of attendance at the school you are enrolled in, minus any other financial aid you’ve received. A credit check is required.
• Direct Consolidation Loans: It’s important to note that you can have more than one type of federal student loan. A Direct Consolidation Loan provides a way to bring all those eligible loans together into a single loan with a single loan servicer.

State Student Loans

State student loans are provided and guaranteed by government agencies in your respective state. Each state program has its own different criteria and features. For details on what’s available in various states, visit the U.S. Department of Education’s list of state contacts.

Private Student Loans

Last but not least, there are private student loans. Private student loans are offered by private lenders (banks, credit unions or online lenders). The maximum amount you can borrow is determined by your college’s tuition, less any financial aid you might be receiving. Additionally, most private lenders have aggregate loan limits ranging from $75,000 to $120,000 for undergraduate students, with a higher ceiling for graduate and professional students. Sound Credit Union offers Student Choice private loans. Contact us today to learn more.

Step 2: Consider: Should I Take Out a Student Loan?

Before taking out a student loan, exhaust other funding sources:

• Scholarships & Grants: Free money that doesn’t need to be repaid.
• Work-Study Programs: Part-time jobs that help pay for college expenses.
• Family Contributions: Support from parents or other relatives.

As you plan to pay for college, you’ll want to factor in scholarships and any assistance you may be getting from your parents (if any). If that total is short of what you need for tuition and related expenses, then it’s time to start shopping for student loans.

Step 3: Compare Loan Options

When comparing loan options, the best place to start is with Federal Direct Subsidized Loans, which are the “gold standard” among the borrowing options, thanks to several perks and benefits:

1. The Government Pays the Interest During School: With these loans, the government pays the loan interest while you’re in school, during the grace period, and when the loan is in authorized deferment.
   1. Deferment is a temporary pause in loan payments allowed under certain conditions, such as economic hardship, unemployment, or returning to school, during which interest does not accrue on subsidized loans.
2. Low Fixed Interest Rate: Subsidized federal loans have a low fixed interest rate for the entire life of the loan that doesn’t depend on you having a pristine credit record (or credit history at all).
3. Income-Based Repayment Plans: They also offer certain benefits, such as income-based repayment plans, that are unique to federal student loans.

If you’re ineligible for a Direct Subsidized Loan or want to increase the amount you borrow, federal Direct Unsubsidized Loans offer the same low, fixed interest rate and flexible repayment options.

Key Difference:

• Unlike Subsidized Loans, Direct Unsubsidized Loans begin to incur interest as soon as the funds are disbursed to your school. If needed, you can have a combination of direct subsidized loans and unsubsidized loans.

Step 4: Understand How to Apply for Student Loans

How to Apply for Federal Loans

1. Fill out the FAFSA: The FAFSA form determines how much financial aid you’re eligible to receive from colleges. This includes grants, scholarships, work-study funds, and loans.
2. Review Your Award Letter: This includes your federal loan offer.
3. Accept Your Loans: Do this through your college’s financial aid portal.
4. Complete Entrance Counseling & Sign the Master Promissory Note (MPN): Required for first-time borrowers.

Many students will find that even if they are approved to borrow the annual maximum amount in federal loans, it won’t be enough to cover all their costs. Once you’ve exhausted your federal loan options, grant possibilities, and scholarships, it’s time to consider private student loans. Smart comparison shopping will help you avoid getting in over your head.

How to Apply for Private Loans

1. Shop Around: Research different lenders to compare interest rates, repayment options, and any fees.
   1. Example Lender: Sound Credit Union Private Student Loans
2. Get a Cosigner (if needed): Most students will need a creditworthy cosigner (often a parent or guardian) to qualify for better interest rates.
3. Submit Your Application: Submit your application online through the lender’s website. You’ll need to provide financial details, personal information, and your school’s name.
4. Review Loan Offer: Once approved, carefully review the loan terms. Accept only the amount you truly need to cover your education expenses.
5. School Certification: Your school will confirm your enrollment and the cost of attendance directly with the lender before funds are disbursed.

Again, private lenders allow you to borrow up to your full cost of attendance. As you shop around, you’ll want to keep the following factors in mind:

• Interest Rates: The interest rate on your loan is essentially the fee, expressed as a percentage, that you pay to borrow the funds. When you make your payments each month, a portion will go toward repaying what you borrowed (also called the loan principal) and the rest will go to pay interest charges.
  • Note: Rates will vary by current interest rates as well as by lender and depend on your credit history or your cosigner’s credit history. You can increase your chances of qualifying for a low rate by making sure your credit, or your cosigner’s, is in tip-top shape before you start applying.
• Fixed vs. Variable Interest Rate: A fixed rate gives you security in knowing exactly how much you’ll pay over time. A variable rate will likely be lower at first. But it will move over time based on the broader interest rate environment.
• Loan Term: The loan term is the amount of time it will take to pay off your loan. Ten years is the standard repayment term for federal loans, but private lenders offer repayment options up to 20 years. Although your monthly payments may be lower with a longer-term loan, you’ll generally pay much more in interest by giving yourself a longer amount of time to pay it back.
• Loan fees: Some lenders charge one-time setup fees called “origination fees” based on the amount you borrow. It’s important to know how much those are and factor them into the total price you’re paying for the loan.

From the borrower’s perspective, the best student loan is the one with the lowest cost. That’s based on the initial loan amount, interest rate, the loan term (how long you have to pay it back), and loan fees. Making sure you shop around for the best rates and flexible repayment plans is incredibly important!

Step 5: Borrow Responsibly

The next topic to tackle is exactly how much you should be borrowing. For over 43 million Americans, student loans were essential for them in obtaining an education and earning a living. “Studies show most people who get college degrees see their earnings potential go up,” says Betsy Mayotte, President of The Institute of Student Loan Advisors. That’s worth it if it’s more than the debt you took on.

That said, there’s no denying many people borrow more than they probably should, and the ramifications of overborrowing can drag on for decades. Just because you’re approved for a certain amount doesn’t mean you should borrow all of it. A good rule of thumb: don’t borrow more than your expected first-year salary.

For example, if you expect to earn $50,000 after graduation, try to limit your total borrowing to that amount or less.

The Key to Keeping Borrowing Costs Down

It goes without saying that the less you borrow, the easier it will be to pay your student loans back. Luckily, there are a number of ways to keep your borrowing costs down.

• Negotiate: For many, it starts with a little negotiating. This is especially true if you’re choosing between schools and one is offering you more scholarship assistance.
• Start Early: Also, don’t delay when it comes to filling out your Free Application for Federal Student Aid, known as the FAFSA.
• Tax Credits: You should also look into your eligibility for the American Opportunity Tax Credit. For qualifying students, the tax credit is for certain education expenses incurred during the first four years of college. The maximum annual credit is $2,500 per eligible student. The student, someone claiming the student as a dependent or the spouse making college tuition payments for their partner, can claim the American Opportunity Tax Credit.
• Consider Community College: You’ll also want to consider community colleges to help lessen the burden. This includes taking community college courses while you’re in high school. Oftentimes, high schools will offer them for a fee. It’s a great way to get your basic course requirements completed before you even set foot on a college campus. Doing so can save you one to two semesters of coursework and the college tuition that goes along with them.

Taking Out Student Loans Can Pay Off, But Be Smart About Them

How to take out a student loan isn’t just about paperwork; it’s about making informed choices that support your future. Borrow only what you need, start with federal loans, and compare private lenders carefully. With the right planning, student loans can help you build the future you’re working toward, without holding you back for decades.

Feeling stuck? Contact Sound Credit Union or visit our Student Lending Center for support.