Maximize your use of federal student loans before turning to private loans, and only borrow what you need and can realistically repay. Ideally, you should explore student loans only after considering more cost-effective options, such as scholarships, fellowships, and grants, since these do not need to be repaid.

Despite the availability of free financial aid, millions of Americans still turn to student loans to cover educational expenses, according to the Department of Education. If you find that you need to borrow to fill the funding gap, here are six essential things to know about securing your first student loan.

1. Choose Federal Loans Over Private Ones

There are two primary types loans for students: federal and private. Federal loans, obtained by submitting the Free Application for Federal Student Aid (FAFSA), are generally the preferred option. They don’t require a credit history for qualification and come with benefits such as income-driven repayment plans and loan forgiveness programs that are not available with private loans.

Federal loans are available in two types: subsidized and unsubsidized. Subsidized loans do not accrue interest while you are in school, while unsubsidized loans begin accruing interest immediately. You may be eligible for subsidized loans if you can demonstrate financial need. Given the additional repayment options and relief programs available with federal loans, it’s advisable to exhaust these options before considering private loans.

2. Borrow Only What You Need and Can Afford to Repay

Undergraduate students can borrow up to $57,500 in federal student loans, whereas dependent undergraduates are capped at $31,000. For private loans, you can borrow up to the total cost of attendance—covering tuition, fees, room and board, books, transportation, and personal expenses—minus any non-repayable financial aid you receive.

However, you don’t need to borrow the maximum amount available. A common guideline is to borrow only enough so that your student loan payments remain around 10% of your estimated after-tax monthly income. To estimate your potential earnings, use the U.S. Department of Labor’s Occupational Outlook Handbook. Then, input these earnings into a student loan affordability calculator to gauge your monthly payments.

For instance, if you anticipate earning $50,000 annually, try to keep your student loan payments below $279 per month. This would roughly correspond to a $26,000 loan with a 5.50% interest rate and a 10-year repayment term. Your financial aid award letter will provide guidance on how to accept or decline financial aid. If you need assistance, reach out to your financial aid office for help.

3. Be Aware of Interest and Potential Fees

Regardless of whether you borrow federal or private loans, you’ll end up owing more than the amount borrowed due to interest. Interest accrues daily on your loan and is added to the total amount owed once repayment starts. Federal undergraduate loans have a fixed interest rate of 5.50%, though this rate can change annually. Private lenders, on the other hand, determine your interest rate based on your credit history or that of your co-signer.

Besides interest, federal loans also come with a loan fee, which is a percentage of the total loan amount. Currently, the loan fee for federal direct student loans for undergraduates is 1.057%.

4. After Accepting the Loan, Your School Will Manage the Details

After you sign a master promissory note agreeing to repay the loan, the funds will be disbursed directly to your school. Typically, the school will use the loan money to cover tuition, fees, and room and board (if you’re living on campus), and will then provide any remaining funds as a reimbursement. You can expect to receive this disbursement each term or at least twice within an academic year.

5. Use Loan Funds Only for Approved Expenses

Even if the loan money is disbursed directly to you, it must be used for education-related expenses. It cannot be spent on entertainment, takeout, or vacations. However, you can use it for transportation, groceries, study abroad costs, personal supplies, or off-campus housing.

6. Identify Your Loan Servicer and Understand Payment Timelines

If you take apply for federal loans, your debt will be managed by a student loan servicer contracted by the federal government. For private loans, your lender might be your servicer or may transfer you to another company for loan management. After graduation or if you drop below half-time enrollment, you typically have a six-month grace period before your first student loan payment is due.