Where to Take Out Student Loans: Federal, State, and Private

If you’re trying to figure out where to take out student loans, the order is what matters most: file the FAFSA and borrow federal loans first, look at state and school-run programs next, and use a private lender (a bank, credit union, or online lender) only to cover what’s left. Federal loans carry fixed rates set by law, income-driven repayment, and forgiveness options that no private lender matches.¹ Skipping federal borrowing because a private application looks faster is one of the most expensive mistakes a student can make.

Start With the U.S. Department of Education

The Department of Education’s own guidance is direct: borrow federal before borrowing private.¹ Federal rates are fixed for the life of each loan, so a shift in the broader economy won’t change what you owe each month. You get access to income-driven repayment and loan forgiveness programs that private lenders don’t offer.² And most federal loans don’t require a credit score or a cosigner, which matters when you’re eighteen with no credit history.

Federal borrowing has limits, though, and once you hit them you have to look elsewhere. That’s where state programs, your school, and private lenders come in.

The Three Federal Loan Types

The Direct Loan Program has three loan types, and which one you can use depends on who you are and what you’re studying.

Direct Subsidized Loans are for undergraduates with demonstrated financial need. The government pays the interest while you’re enrolled at least half-time, during the six-month grace period after you leave school, and during certain deferments. This is the cheapest federal borrowing available.
Direct Unsubsidized Loans are open to undergraduates and graduate students regardless of need. Interest accrues from the day funds are disbursed, so the balance grows while you’re in school if you don’t make payments.
Direct PLUS Loans are for parents of dependent undergraduates and for graduate or professional students. The borrower cannot have an adverse credit history. PLUS loans carry higher interest rates and higher origination fees than the other two.³

First-time borrowers have to complete entrance counseling at StudentAid.gov before a school can release federal loan funds. It’s a federal requirement, not optional orientation.⁴

Dependent or Independent Changes What You Can Borrow

Independent students can borrow more because the formula assumes they have fewer family resources. You qualify as independent on the 2026–27 FAFSA if you were born before January 1, 2003, are married, are enrolled in a graduate program, are a military veteran, have your own dependents, or were in foster care or a ward of the court any time after turning thirteen.⁵

Living on your own or not being claimed on a parent’s tax return does not make you independent for federal aid.⁵ You have to answer “yes” to at least one of the qualifying FAFSA questions.

How Much the Government Will Lend You

Federal borrowing has hard annual caps that combine subsidized and unsubsidized amounts.⁶ For undergraduates through June 30, 2026:

First-year dependent students: $5,500 (no more than $3,500 subsidized).
Second-year dependent students: $6,500 (no more than $4,500 subsidized).
Third-year and beyond dependent students: $7,500 per year (no more than $5,500 subsidized).
First-year independent students: $9,500 (no more than $3,500 subsidized).
Second-year independent students: $10,500 (no more than $4,500 subsidized).
Third-year and beyond independent students: $12,500 per year (no more than $5,500 subsidized).

Legislation enacted in 2025 (H.R. 1) changes the picture for loans first disbursed on or after July 1, 2026. It introduces a lifetime cap of $257,500 across all federal Direct Loans (not counting Parent PLUS borrowed on a student’s behalf), caps Parent PLUS at $20,000 per year and $65,000 per student over a lifetime, and eliminates Graduate PLUS entirely for new borrowers after June 30, 2026. Graduate students will instead have higher Direct Unsubsidized limits of $20,500 annually and $100,000 aggregate, with professional students at $50,000 annually and $200,000 aggregate.

Rates on federal loans are fixed for the life of each loan but reset each year for new disbursements. For loans first disbursed between July 1, 2025, and June 30, 2026:⁷

Direct Subsidized and Unsubsidized (undergraduate): 6.39%.
Direct Unsubsidized (graduate/professional): 7.94%.
Direct PLUS (parents and graduate students): 8.94%.³

Projected rates for loans disbursed on or after July 1, 2026, are slightly lower: roughly 6.23% for undergraduate Direct Loans and 8.78% for Parent PLUS. Final rates are typically set each spring based on the 10-year Treasury note auction.

Every federal loan also carries an origination fee that comes off the top of each disbursement. For loans disbursed between October 1, 2020, and September 30, 2026, that fee is 1.057% on Direct Subsidized and Unsubsidized Loans and 4.228% on PLUS Loans.⁷ On a $10,000 Direct Unsubsidized Loan, about $106 never reaches your account.

Check State and School Programs Next

Before you jump to a private lender, two sources often sit in between federal borrowing and the private market.

Many state higher education authorities run their own loan programs, funded by legislative appropriations and aimed at residents or students entering high-demand fields like nursing, teaching, or technology. Some carry below-market interest rates or partial loan forgiveness for graduates who stay and work in the state. Eligibility almost always requires state residency, usually demonstrated by living in the state for at least twelve months before enrollment.

Colleges and universities themselves sometimes lend directly from endowment funds or institutional reserves. These loans typically close small gaps that remain after federal aid, scholarships, and private loans are applied. Your campus financial aid office administers them and terms vary widely from school to school. If you’re a few thousand dollars short, ask the financial aid office whether institutional lending is available before you turn to a private lender charging higher rates.

Private Lenders for Whatever’s Left

Private loans come from banks, credit unions, and online lenders using their own capital. Approval depends heavily on credit score and income, and most undergraduates will need a cosigner. Private loans don’t come with income-driven repayment, don’t qualify for federal forgiveness programs, and offer limited deferment or forbearance if you run into trouble.¹ They do serve a real purpose when federal limits don’t cover your costs: students at high-tuition schools or in expensive graduate programs routinely need private funding to bridge the gap.

Banks and Credit Unions

National and regional banks offer student loans alongside their other consumer lending. Some discount the rate if you already hold a checking or savings account with them. Credit unions typically require formal membership before you can apply. Both evaluate credit history, income, and debt-to-income ratio. Federal regulation requires private education lenders to clearly disclose interest rates, repayment terms, and total costs before you sign.⁸

Online Lenders

Fintech companies operate entirely online and handle both new student loans and refinancing of existing debt. Without branch overhead, they often compete on rate and approval speed, and the application-to-funding timeline can be noticeably shorter than at a traditional bank. They follow the same federal disclosure rules.

Fixed Versus Variable Rates

Private lenders let you pick between a fixed rate that stays the same for the life of the loan and a variable rate that moves with market benchmarks like the Secured Overnight Financing Rate (SOFR). Variable rates usually start lower. The risk is that your payment can climb a lot if rates rise, and you won’t know the loan’s total cost until it’s paid off. Most variable-rate loans include a cap, but the ceiling can be well above the starting rate. For a loan you’ll carry for ten or fifteen years, the predictability of a fixed rate is worth the slightly higher starting cost for most borrowers.

Cosigners

Most private borrowers under 25 need a cosigner with established credit. The cosigner is equally responsible for the debt, and late payments show up on both credit reports. Some lenders offer cosigner release after the primary borrower makes a stretch of on-time payments (often 24 consecutive months) and passes a solo credit review. Not every lender offers release, and requirements vary, so ask about it before you sign.

How to Apply at Each Source

Federal: The FAFSA

Every federal loan starts with the Free Application for Federal Student Aid. The 2026–27 FAFSA opened on September 24, 2025, the earliest launch in the program’s history. Filing early matters because some state aid goes out first-come, first-served, with priority deadlines for state grants falling as early as February or March.

You’ll need your Social Security number, your federal tax return, records of untaxed income or benefits, and a list of schools you’re considering. The FAFSA now pulls tax data directly from the IRS, so you (and your parents, if you’re a dependent student) must consent to that transfer on the form.⁹ Keep your tax return handy for follow-up questions.¹⁰

After the FAFSA is processed, each school you listed sends a financial aid offer showing the federal loans and grants you qualify for. To accept the loans, you sign a Master Promissory Note (MPN) electronically at StudentAid.gov. The MPN is a binding legal agreement to repay and covers all Direct Loans you receive at that school for up to ten years.⁹

Federal law takes false statements on loan applications seriously. Knowingly providing false information on a federal form can lead to fines and up to five years in prison.¹¹ Use your legal name exactly as it appears on your Social Security card, and round dollar figures to the nearest whole number.

Private Lenders

Private lenders run a hard credit inquiry during the application. If you’re shopping multiple lenders for the best rate, submit all your applications within a two-week window. Credit scoring models treat student loan inquiries made in a short period as a single inquiry rather than hitting your score multiple times. Each lender will also require a completed self-certification form listing your school’s cost of attendance and any other financial aid you’ve received.¹² Your financial aid office provides the cost-of-attendance figure.

How the Money Gets to You

Approved loan funds, federal or private, go directly to your school’s financial aid office, usually about ten days before classes start. The school applies the money to tuition, fees, and on-campus housing first. Any remaining balance is released to you for books, transportation, and living expenses, typically through the bursar’s office via direct deposit or check.

One Boundary Worth Knowing Before You Sign

Private student loans are not eligible for Public Service Loan Forgiveness or any federal forgiveness program, and they aren’t eligible for federal income-driven repayment either.² If forgiveness or income-based payments figure into your plan, every dollar you borrow privately is a dollar outside those programs. That’s the strongest practical reason the order of sources matters: exhaust federal first, use state and institutional programs next, and let private lending cover only the remaining gap.

1
Federal Student Aid. Federal Versus Private Loans
2
Federal Student Aid. Income-Driven Repayment Plans
3
Federal Student Aid. Direct PLUS Loans for Graduate or Professional Students
4
Federal Student Aid Knowledge Center. Direct Loan Counseling
5
Federal Student Aid. Dependency Status
6
Federal Student Aid. Subsidized and Unsubsidized Loans
7
Federal Student Aid. Interest Rates and Fees for Federal Student Loans
8
eCFR. 12 CFR Part 1026 Subpart F – Special Rules for Private Education Loans
9
Federal Student Aid. FAFSA Checklist: What Students Need
10
Internal Revenue Service. Tax Information for Federal Student Aid Applications
11
Office of the Law Revision Counsel. 18 USC 1001 – Statements or Entries Generally
12
U.S. Department of Education. Private Education Loan Applicant Self-Certification Form