Federal student loans make up the vast majority of student loans in the U.S. They are made by the federal government with the U.S. Department of Education acting as the lender, and they typically have better benefits and terms than private student loans. However, these benefits and terms can vary greatly by loan type, so it’s important to become familiar with those that you may be eligible to borrow before you sign on the dotted line.
Keep in mind that all student loans, including federal loans, are money that you are borrowing to pay for school and must pay back with interest. Before borrowing student loans to cover the cost of college or postsecondary training, consider your options carefully and do your best to reduce the amount that you have to borrow. Always explore and apply for scholarships and accept any grant aid or work-study options that you are offered before looking at loans.
To apply for federal student loans and other types of federal student aid, you must complete the Free Application for Federal Student Aid, or FAFSA, each year. You can do this online at FAFSA.com or in the myStudentAid mobile app.
There are four types of federal student loans available:
- Direct subsidized loans
- Direct unsubsidized loans
- Direct PLUS loans
- Direct consolidation loans
Direct Subsidized Loans
Direct subsidized loans are available to eligible undergraduate students with demonstrated financial need. Your financial need is determined using a formula with the information provided on the FAFSA.
If you qualify, this loan has slightly better terms that other federal loans because the federal government will cover the interest during certain periods, including while you are enrolled in school at least half time, during the six-month grace period after you leave school and during periods of deferment.
The current interest rate on direct subsidized loans is 2.75%, which is fixed over the life of the loan. There is an origination fee, which is 1.057% for loans made after Oct. 1, 2020, and before Oct. 1, 2021.
A credit check is not required, but there are limits on the amount in unsubsidized loans that you are eligible to receive each academic year and in total. The limits depend on your year in school and whether you are a dependent or independent student, which is based on information you supplied on the FAFSA.
These loans are eligible for all the key benefits of the federal loan program that are designed to protect you as a borrower. You do not have to repay them while you are enrolled in school at least half time and during a six-month grace period after leaving school. Direct subsidized loans are eligible for several repayment plans that are designed to help you through periods of financial distress, as well as loan forgiveness programs like Public Service Loan Forgiveness, or PSLF, under certain conditions.
Direct Unsubsidized Loans
Direct unsubsidized loans are similar to subsidized loans with some key differences. Most significantly, the unsubsidized loan borrower is responsible for the interest that accrues during all periods, even when the loan is not in active repayment. Also, unsubsidized loans are available to both undergraduate and graduate students, and eligibility is not based on financial need.
The interest rate, origination fee and eligibility for repayment and forgiveness options for unsubsidized loans are the same as subsidized loans for undergraduates, but unsubsidized loans have a higher interest rate – 4.3% – for graduate and professional students.
You do not have to repay direct unsubsidized loans while you are enrolled in school at least half time and during a six-month grace period after leaving school, similar to the direct subsidized loan, but interest accrues nonstop and you will have to pay it when your loans enter repayment.
A credit check is not required, and these loans also have borrowing limits. The loan limits are based on whether you’re an undergrad or grad student and whether you’re a dependent or independent student.
The total maximum amount of direct subsidized and unsubsidized loans that undergraduate students can borrow is $31,000 for dependent students and $57,500 for independent students. A financial aid administrator at your school can help you understand your loan limits based on your situation, but note that the amount you are eligible for may be less than the annual loan limits depending on your cost of attendance and other financial aid you receive.
Direct PLUS Loans
Direct PLUS loans are made to either graduate or professional students, known as the Grad PLUS loan, or parents of dependent undergraduate students, known as the Parent PLUS loan. These loans are meant to fill a gap between the cost of attendance and available resources if you still need money to pay for your education after borrowing your maximum limit of unsubsidized and subsidized loans.
A credit check is required, but borrowers who have an adverse credit history may still be able to obtain a PLUS loan either with a co-signer, also called an endorser, or by meeting other criteria.
The terms of these loans are somewhat less favorable, which is why you should look at direct unsubsidized and subsidized loans first. The current interest rate on PLUS loans is a fixed 5.3%. They also have an origination fee, which is 4.228% for loans made after Oct. 1, 2020, and before Oct. 1, 2021.
For a PLUS loan, you can borrow only up to the cost of attendance – which is determined by your school – minus all other financial aid received.
There are some noteworthy differences between the Grad PLUS and Parent PLUS loans. Grad PLUS borrowers do not have to make payments on these loans while enrolled in school at least half time and during a six-month grace period after leaving school, but interest does accrue. Parent PLUS borrowers can apply for a deferment during these periods but are otherwise expected to begin making payments when the loan is disbursed.
In addition, Grad PLUS borrowers can apply for income-driven repayment plans and are eligible for loan forgiveness programs like PSLF. Parent PLUS borrowers are not eligible for these options, although they may qualify for an extended repayment plan that allows lower payments over a longer period of time, or an income-contingent repayment plan that results from consolidating Parent PLUS loans into a federal direct consolidation loan.
Direct Consolidation Loans
Consolidation loans are a bit different than other types of federal loans. They allow borrowers to combine all eligible federal student loans into a single loan – which is usually done after leaving school – without an application fee.
The interest rate on a new consolidation loan would be a weighted average of the current interest rates on the student loans that will be consolidated, rounded up to the nearest one-eighth of 1%. Consolidation loans are eligible for income-driven repayment plans and other options such as loan forgiveness programs.
There are some benefits to loan consolidation, but you should think carefully about whether this is the right step for you. Consolidating can make repayment easier to manage by giving you a single and possibly lower monthly payment, and one student loan servicer. You can also get access to additional loan repayment plans and forgiveness programs, if you were not already eligible.
However, if you’ve made qualifying payments toward PSLF or if you’re paying a current loan on an income-driven repayment plan, consolidating such loans will cause you to lose credit for any payments made toward PSLF or income-driven repayment plan forgiveness.
In addition, there are some benefits associated with older Federal Family Education Loans, known as FFEL, and Perkins loans – two programs that no longer exist – that you could lose if you consolidate them.