Understanding federal student loan types: What you need to know

In a nutshell

Federal student loans provide help for families looking to cover the cost of higher education. On average, tuition is $29,150 per year for public four-year, out-of-state schools, according to data from educational nonprofit College Board. That figure jumps to $41,540 for private schools.

  • Like scholarships and grants, federal student loans are a way to reduce the cost of college for students and their families.
  • The U.S. government offers these loans to eligible families.
  • Federal student loans have several benefits, such as lower interest rates and better repayment flexibility, over private loans.

Related: Guide to student loans

Types of federal student loans

Federal student loans come with many advantages, but it’s important to understand how the various types of federal loans differ before applying.

Direct subsidized loans

Direct subsidized loans are available if you’re attending an undergraduate program and can demonstrate a financial need. The government pays the interest on these loans while you’re in school at least part time. It continues to cover the interest for a six-month grace period after you leave school and during any deferment (a period in which you postpone your payments).

Direct unsubsidized loans

Direct unsubsidized loans are available to both undergraduate and graduate borrowers. Unlike subsidized loans, you don’t need to demonstrate any financial need. The school determines how much you can borrow based on the overall cost of attendance and other aid you’re receiving. However, there are federal borrowing limits that we’ll cover later on.

The government doesn’t pay interest on these loans; that’s your responsibility. Interest is added to the loan during times when payments aren’t required (such as when you’re still in school), which can increase the total borrowing costs..

Direct PLUS loans

Direct PLUS loans — called Parent PLUS loans when made to parents of dependent students and Grad PLUS loan when made to graduate and professional students — are also types of unsubsidized loans. Direct PLUS loans cover the school’s predetermined cost of attendance, minus any other financial aid.

A credit check is required to get these loans, so if you don’t have a strong score or a history of late payments, you’ll have to meet additional requirements. Like with other direct unsubsidized loans, you’re entirely responsible for paying interest, which may be added to the principal loan amount during times when payments aren’t required. This increases your overall borrowing costs.

Direct consolidation loans

Federal student loan borrowers can combine multiple federal student loans into a single loan with one monthly payment — at no cost. These loans have a fixed interest rate based on the average rate of all the loans being consolidated.

Federal student loan benefits

When comparing federal versus private student loans, consider the following advantages of borrowing from the government.

Generally less expensive

Private student loans are funded by private organizations like schools, banks and credit unions and often have higher interest rates and fees than federal student loans.

Fixed interest rates

Federal student loans are fixed-rate loans, meaning that the rate won’t change for the life of the loan. Interest rates on private loans can be fixed or variable, meaning they can go up or down depending on market conditions.

The interest rate for direct subsidized and unsubsidized loans for undergraduate students disbursed between July 1, 2023 and July 1, 2024 is 5.50%. For direct unsubsidized loans for graduate students, the interest rate is 7.05% and for direct PLUS loans, it’s 8.05%.

No credit history or co-signer needed

If you borrow via private student loans, the lender will check your credit history and if you don’t have a strong credit profile you may need a co-signer. But if you go the federal student loan route, there is no credit check (except for PLUS loans), so there’s no need to worry about your credit history barring you from getting the loan or needing a co-signer.

More payment flexibility

Unless you get loan forgiveness, you’ll need to pay back your loan no matter what kind you get. However, federal student loans come with a bit more flexibility than private student loans if you struggle to make payments. You don’t have to start paying federal loans back until after you leave school, graduate or lower your enrollment status to less than part-time. While you can often defer payments on private student loans until you’re out of school, it’s not guaranteed.

Federal student loans also have deferment and forbearance options, allowing you to pause your payments (though some private plans may also have this, depending on the plan). These loans also allow you to use repayment plans to help pay off the loan, which include either fixed payments over a certain time period or can be tied to your income. With private loans, you’ll have to check with lenders about which options are available. Plus, the government will pay interest on subsidized loans when the borrower is in school and during certain other periods.

More time before default

If you don’t make a payment on a federal student loan for at least 270 days, you’ll go into default. With private loans, default timelines vary by lender and may be less than 270 days.

Consolidation without a credit check

There is no cost and no credit check to consolidate federal student loans. If you’re consolidating private student loans, though, you’ll likely undergo a hard credit inquiry, which could temporarily lower your credit score.

More options for loan forgiveness than private loans

The government offers several options for loan forgiveness for federal student loans. The most common is Public Service Loan Forgiveness (PSLF). Private lenders don’t typically offer forgiveness options; though, in some cases, loans from state agencies may be forgiven, according to the Department of Education.

What are the eligibility requirements for federal student loans?

To be eligible for a federal student loan, you must:

  • Be a U.S. citizen or eligible noncitizen.
  • Have a Social Security number.
  • Be accepted to or enrolled in an eligible school.
  • Maintain “satisfactory academic progress,” which is determined by your school.
  • Demonstrate financial need if you’re applying for a need-based loan.

When you apply for a federal student loan, you’ll also fill out the Free Application for Federal Student Aid (FAFSA) form to determine how much aid you qualify for.

Borrowing limits for federal student loans

The government sets limits on how much money you can receive per year in federal student loans. Limits depend on which year of school you’re in and your dependency status.

The following table shows the annual loan limits for dependent undergraduate students, with the exception of dependent students whose parents cannot get Direct PLUS loans.

Dependent undergraduates Total (subsidized and unsubsidized) Maximum subsidized
First year
Second year
Third year and beyond

The following table shows the annual loan limit for independent undergraduates and dependent undergraduates whose parents cannot get direct PLUS Loans.

Independent undergraduates Total (subsidized and unsubsidized) Maximum subsidized
First year
Second year
Third year and beyond

How to apply for federal student loans

Applying for federal student loans is fairly simple (and free). Get started with these steps.

Get organized

While the application process can be completed online, you’ll need information about your family’s finances. Collect documents like federal tax returns and bank statements before applying.

Fill out the FAFSA

Submitting the FAFSA form is one of the most important steps in the process of getting student loans. You’ll need to fill out this form every year you’re enrolled in school. The federal FAFSA deadline is June 30, but each school and state has its own deadlines, so be sure to check early so you don’t miss it. Before filling out your application, review our FAFSA guide.

Double check your work

Once you submit the FAFSA, you’ll get a FAFSA submission summary — previously called the Student Aid Report (SAR) — which summarizes all the information you entered on the FAFSA. Make sure all the information is accurate and, if there are any errors, correct them. The federal deadline to make corrections is Sept. 14.

Choose an aid package

After you’re accepted to a school, you’ll be offered an aid package based on the information you provided on your FAFSA. Carefully weigh your options, and choose the amount of aid that makes sense for you.

Alternatives to federal student loans

While federal student loans can be a solid way to help you pay for college, there are other options, including:

  • Grants: These are typically based on financial need and don’t need to be repaid.
  • Scholarships: Like grants, scholarships don’t need to be repaid. They can be based on need or academic merit.
  • Work-study programs: In addition to loans, the federal government offers part-time jobs for students who need financial aid.
  • Help from an employer: While more common for graduate and professional students, your employer might pay for some of your educational expenses if you go to school while you continue to work.
  • Income-share agreements: These agreements allow you to attend school for free or with financial help in exchange for paying the provider a percentage of your income for a set period of time. You’ll want to carefully review this type of agreement before signing.

The AP Buyline roundup

Federal student loans help make college accessible for many families. They come with advantages like fixed interest rates, flexible repayment options and a lower cost than private loans. Your dependency status and the program of study you enroll in will factor into your eligibility for various federal student loans.

Frequently asked questions (FAQs)

How do you qualify for federal student loans?

You need to meet certain citizenship, academic and enrollment requirements to be eligible for federal student loans. You’ll also need to provide financial documentation if you’re applying for need-based aid as well as fill out the FAFSA form.

What is the limit on how much I can borrow in federal student loans?

Federal student loan borrowing limits depend on your dependency status and school year. For a first-year undergraduate dependent, for example, the limit is $5,500; no more than $3,500 of that amount can be subsidized. You can find all the loan limits on the Department of Education’s website.

How do I apply for more financial aid?

Your FAFSA is used to determine other forms of financial aid you might qualify for, such as scholarships and work-study programs. You can also apply for scholarships and tuition payment plans through your school. If you’ve exhausted other options, speak with your school about whether you’re eligible to apply for more student loans.

What’s the difference between subsidized and unsubsidized loans?

With subsidized loans, you won’t be charged interest while you’re in school or for six months after you leave. However, unsubsidized loans accrue interest as soon as you start receiving loan disbursements.

Leave a Comment