Most students need to borrow money in order to go to college unless they have parents who saved all that was needed for tuition. Few students can earn enough to pay tuition at the same time as they are in school. If they wait until they have enough saved to fund a college degree, they may need to wait until they are 30 or older to start school. Instead, students generally seek loans to pay for tuition and other living costs while in school before they start working.

Students may wonder how much is reasonable debt to take on as a student. Generally counselors will recommend that the maximum amount of debt a student should consider is equal to no more than their expected first year starting salary. Ideally they should try to keep total debt to no more than half of their first year’s starting salary.

That means if a student thinks their starting salary will be $40,000, they should try not to exceed $10,000 per year in loans for a 4-year degree. In today’s world that may be impossible if they are thinking about a private school or planning to go to an out-of-state public school. Tuition and fees for a four-year public school average about $9,000 per year, plus another $1,200 for books and supplies. Add in room and board at an in-state school (if the plan is to live at school rather than at home) the cost jumps by nearly $10,000. Tuition and fees for an out-of-state public college average $22,958 per year plus a bit over $11,000 for room, board, and books and supplies. Private schools average $31,000 for tuition and fees plus around $12,500 for room, board, and books and supplies.

Students can minimize some of these costs by getting a scholarship or grant or by working on campus. For many students, however, loans are their only option to cover a majority of their school costs. The loan process is long and complicated, but breaking it into steps makes it more comprehensible and doable.

Step 1: FAFSA

The first thing all students must do every year before even applying for student loans is to fill out the Free Application for Federal Student Aid (FAFSA).This application can be completed online at and is a requirement for any federal student or parent loans. This application is also used by schools to make decisions on grants and other forms of financial aid, such as work study.

Step 2: Direct Subsidized vs. Direct Unsubsidized Student Loans

Direct loans are from the federal government and can be subsidized or unsubsidized. A student’s first hope is that they can get as much subsidized student loan money as possible. The advantage of direct subsidized student loans is that the U.S. Department of Education will pay all interest while the borrower is still a student and for a certain number of months after graduation.

If the student gets direct unsubsidized loans and don’t make interest payments while in school, the interest builds up as loan principal and increases the amount they will have to pay back. The financial aid officer at the school will tell you whether you qualify for subsidized or unsubsidized loans based on the financial evaluation of the FAFSA application.

Step 3: Federal Student Loans

If a student qualifies, federal student loans are the best option. They come with fixed interest rates and more lenient repayment terms, including a graduated repayment plan that allows the borrow to pay less in the early years when they first start to work and extended repayment plans that let them make payments for up to 25 years. In addition there are income-based repayment plans with the possibility of forgiveness after 25 years and pay-as-you-earn repayment plans with the possibility of forgiveness after 20 years.

Federal Student Loans are based on the FAFSA, which evaluates both family and student income levels. After reviewing the FAFSA, the school will let you know which types of loans you qualify for and whether they will be subsidized or unsubsidized.

– Direct Stafford Loan: Available for undergraduate and graduate students, these offer the lowest-cost borrowing options. Whether or not the loan will be subsidized will be based on the student’s financial situation. It is possible to get a Stafford loan that is partially subsidized and partially not subsidized. (For more see Stafford Loans: Subsidized vs. Unsubsidized.)

Federal Perkins Loan: These are need-based loans. After the student completes the FAFSA, the school financial aid officer will let them know if they qualify. (Note that in mid-September 2015, Congress was debating whether to shut down this program, which is on a one-year extension and is scheduled to expire after September 30, 2015.)

– Federal PLUS Loan: This is a college student loan taken by the student’s parents and made in the parent’s name. Graduate students can take out these loans in their own name.

Step 4: Private Student Loan

If a student can’t get enough money through federal student loan programs, their most likely other option will be to apply for a private student loan. Generally these loans are at a higher interest rate and the rate is variable rather than fixed. These loans also are not included in the federal repayment programs if the borrower has trouble paying them back after they graduate.

Some private schools offer loans through a school-based trust fund. If the student is planning to attend a private school, the loan terms from the school-based trust fund will generally be more favorable then from a private lender.

Most students apply for private loans with a parent or other co-signer who has a good credit rating. This allows them to qualify for lower interest rates. (For more, see How to Score a Private Student Loan and Seniors: Before You Co-Sign That Student Loan.)

Step 5: Review Your Offers & Pick Your School

The financial aid package a student is offered may be different from every school to which they apply. Some schools don’t award Perkins Loans, for example. Some schools can offer more grant or scholarship money than others, which can lower the amount of money the student will need to borrow.

As a student gets acceptance letters from colleges with information about the financial aid package being offered, prepare a spreadsheet with a column for each school that includes:

1. Scholarships

2. Federal Student Loans

3. Family Planned Contribution, which includes both the cash the student plans to contribute and the amount their family plans to contribute

4. Work study or other planned earnings

5. Gap – how much money is still needed after adding up all the available money for that school

Compare the offers and determine which school the student wants to attend. Students can apply for private student loans to fill any gap at the school they choose, but think carefully before going down that slippery slope. Students could find that they need to borrow more than they can afford to pay back, putting themselves on the road to financial disaster.

The Bottom Line

Students should think carefully about how much they want to borrow for school. They might really want to go to a particular private school, but will it be worth it to put their financial future at risk? Generally, financial advisors find that people who borrow more than their first year salary have a hard time living their dreams of having a family and buying a home because their student loan payments are beyond what they can afford. (For more information, see Top Student Loan Providers, a Quick Guide to How FAFSA Loans Work and 5 Ways to Get Maximum Student Financial Aid.)