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As college costs rise, more students are taking out loans to help pay for school. Of those who graduated from college in 2013, 69% had student loans, with an average debt amount of $28,400 per student, according to the Institute for College Access & Success. At one in five schools, that amount was at least 10% higher.

Grappling with significant debt as you enter the real world poses financial challenges, especially if you have trouble finding a well-paying job after graduation. This makes it crucial to borrow only what you need and to choose the best loans for your situation. The student loan process may seem overwhelming at first, so use this guide to better understand how it works and to become familiar with the types of loans available.

The student loan application process

Start by completing the Application for Federal Student Aid (FAFSA), available online at fafsa.ed.gov. You must complete it each year to be eligible for federal loans, grants and scholarships.

The government sends a copy of your FAFSA to the schools you’re applying to. The school’s financial aid office determines your aid package and will send you a financial aid award letter.

Jodi Okun, owner of College Financial Aid Advisors, says this letter has two sections: one for gift aid, containing grants and scholarships (which students shouldn’t turn down), and one for loans.

You may be offered one or more federal loans, but you don’t have to take on all of them if you don’t need to. “You will be allowed to accept or decline any of the aid on the award letter,” says Vicki Hendrickson, director of financial services at the University of Tulsa.

Consider accepting federal work study or tuition payment plans, if available. Next, go for any federal loans offered. If those options combined won’t cover all costs, then pursue credit-based loans. We’ll go into more detail on loan types below.

If you were offered federal loans and want to accept them, you’ll need to activate them online, Okun says. Then you’ll sign a master promissory note detailing the loans’ terms and complete a brief online loan counseling session. The government then sends the money to your college, which, in turn, sends it along to you. However, if you have a credit from a loan on your school bill, meaning you accepted more loans than were needed for tuition, you can get a refund and use it for living expenses

Taking out a loan means paying regular charges called interest. You can save money by choosing a loan with a low interest rate. A low interest rate means you’ll have to pay back less money in the long run. A subsidized loan is your best option. With these loans, the federal government pays the interest charges for you while you’re in college. Here are the types of student loans. (Keep in mind that not all students are eligible for every loan.)

Federal Perkins Loans

Colleges may award these loans to students with the highest financial need, using federal government money. The 5 percent fixed interest rate is low, and you don’t make any loan payments while in college. You can borrow a total of $27,500.

Federal Direct Subsidized Loans

These need-based loans have a low interest rate of 4.29 percent, and the government pays the interest charges while you’re in college. This interest rate is fixed, which means it will not change over time. You can borrow up to $3,500 your freshman year, and this limit increases to $4,500 for your sophomore year, and $5,500 each for your junior and your senior year.

Federal Direct Unsubsidized Loans

These non-need-based government loans also have a fixed interest rate of 4.29 percent. But they allow you to borrow more money than a Direct Subsidized Loan alone. You can pay the interest while you’re in college or add it to the amount of your loan. The second option means you’ll end up paying more money over time.

Federal Direct PLUS Loans

These non-need-based government loans allow parents (and graduate students) to borrow the total cost of attending college, minus any other aid received. They have a 6.84 percent fixed interest rate.

Private (Alternative) and State Loans

These loans from banks, colleges, private organizations and state government agencies usually are not need based or subsidized. They may require good credit, which often means an adult with good credit must cosign the loan. Interest rates on these loans are often higher than on federal loans, and the rates may rise over time. These loans may also have terms that are not as favorable as those of federal loans.

Selecting private loans

When federal aid and family contributions combined won’t cover everything, a small percentage of students take out private loans to fill in the gaps. Experts recommend using loan calculators (like the ones on studentloans.gov) to determine exactly how much you need and what your repayment plan will look like.

When comparing private loans, students should consider many factors, including fees, interest rates and terms, says Andrew Hopkins, vice president of Discover Student Loans. Some lenders charge origination fees, and interest rates for private loans are not fixed as they are for federal loans.