Guide to Federal Student Loans

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Caroline BasileMortgages and Student Loans Deputy Editor

Caroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She holds a degree in journalism from the University of North Texas. When she’s not working on finance-related content, Caroline enjoys baseball, traveling and going to concerts.

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Caroline Basile

Caroline BasileMortgages and Student Loans Deputy Editor

Mortgages and Student Loans Deputy Editor

Reviewed

Updated: May 4, 2022, 7:25am

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The average cost of undergraduate tuition and fees at a public, four-year college is $9,400 per year, according to the National Center for Education Statistics (NCES). That can be a lot of debt to handle as a student.

But luckily, on average, undergraduate students receive $6,617 in federal student loan assistance. Federal loans offer aid to students who need help covering the cost of college. So, understanding how these loans work is essential—before you decide to take on that debt.

Read More: Student Loan Debt Statistics

What Is a Federal Student Loan?

Federal student loans are intended to help you pay for your college education. The federal government provides student loans through the Department of Education’s William D. Ford Federal Direct Loan Program. This type of federal aid offers fixed interest rates and loans must be repaid once you leave school or drop below half-time enrollment.

There are four types of Direct loans available, including a loan option specifically for parents of dependent students. The federal loan program offers subsidized and unsubsidized loan options, as well, depending on your enrollment level.

How Federal Student Loans Work

If you’re eligible for federal student loans, your school will provide you with a financial aid award letter. It outlines which loans you qualify for, if any, and the amount you can receive for the academic year.

You’ll need to select which loans you want to accept and the amount. If this is your first time borrowing a federal loan, you’ll need to complete entrance counseling, which explains how loans work and how to pay them back. You’ll also sign a master promissory note agreeing to the terms of your loan.

The school will then apply the federal loan funds toward your outstanding account charges, like tuition and fees. Whatever amount is left will be returned to you.

Once your enrollment drops below half-time or you graduate, a six-month grace period begins where you don’t have to make payments. After the grace period is up, you’ll start making monthly payments based on the terms of your loan agreement.

Types of Federal Student Loans

There are four types of student loans offered under the Direct loan program.

Direct Subsidized Loans

Direct subsidized loans are one of two Direct loans that are available to undergraduate students. A key benefit of subsidized loans is that they don’t require a credit check and the federal government pays for some interest that accrues on the loan. You must show financial need to qualify for this type of loan.

Typically, interest charges for this loan are subsidized when you’re enrolled at least half-time, during the first six months after leaving school (grace period) and when the loan is deferred.

Direct Unsubsidized Loans

Unsubsidized loans are also within the Direct Loan program—so a credit check isn’t required with these loans either. Unsubsidized loans are available to undergraduate, graduate and professional students. Financial need isn’t required to be eligible.

The caveat, however, is that you’re responsible for repaying all interest that accrues on the loan as soon as the funds are disbursed. However, if you’re enrolled in school or your loan is in deferment or forbearance, you can choose to defer interest payments.

Deferring the interest will result in capitalized interest: The interest will be added to your loan balance, and you’ll ultimately be charged additional interest on the higher balance when you start making payments.

Learn More: Guide To Subsidized And Unsubsidized Federal Student Loans

Direct PLUS Loans

Graduate and professional students, as well as parents of dependent undergraduate students, are eligible for federal Direct PLUS loans.

Applying for a PLUS loan involves a separate application since it requires a credit check. There’s no minimum credit score to be eligible for a Direct PLUS loan, but the primary borrower must not have adverse credit—like poor repayment history. If you have adverse credit, you might still be able to be awarded a PLUS loan, but you’ll need to satisfy other requirements.

Direct Consolidation Loans

A Direct consolidation loan lets you simplify your loan repayment by combining two or more federal student loans into one. Direct consolidation offers a fixed interest rate based on the weighted average of the interest on your original loans.

A federal consolidation loan can also help borrowers access certain repayment options, like income-driven repayment (IDR) plans or Public Service Loan Forgiveness (PSLF).

Loan Type	Interest Rate* (fixed)	Borrowing Limits	Who’s Eligible
Direct subsidized loan	4.99%	Year 1: Up to $3,500 Year 2: Up to $4,500 Year 3+: Up to $5,500	Undergrad students enrolled at least half-time who demonstrate financial need
Direct unsubsidized loan	Undergrad students: 4.99% Grad or professional students: 6.54%	Dependent undergrad students (includes subsidized amounts): Year 1: Up to $5,500 Year 2: Up to $6,500 Year 3+: Up to $7,500 Independent undergrad students: Year 1: Up to $9,500 Year 2: Up to $10,500 Year 3+: Up to $12,500 Grad students: Up to $20,500	Undergrad and grad students enrolled at least half-time
Direct PLUS loan	7.54%	Up to the school-certified cost of attendance minus financial aid awards	Grad or professional students, or parents of dependent students, who don’t have adverse credit
Direct consolidation loan	Varies (based on the weighted average of your original federal loan rates)	N/A	Most borrowers who have multiple federal loans

*All rates for the 2022-23 school year.

How to Apply For Federal Student Loans

To apply for federal student loans, you’ll need to submit a Free Application for Federal Student Aid (FAFSA) each academic year. The FAFSA is used by your school to determine if you qualify for federal loans and how much you can borrow. Here’s what you need to do:

1. Create a Federal Student Aid ID

If you’re a first-time college student or have not submitted a FAFSA in the past, you’ll need to create a Federal Student Aid (FSA) ID. This ID helps you sign your FAFSA and loan contracts, and manage your federal loan account on StudentAid.gov. Parents of dependent students will also need to create their own FSA ID.

2. Fill Out Your FAFSA

The FAFSA can be completed online at fafsa.gov or using the form on the myStudentAid app. If you prefer a paper application, you can download and print a FAFSA and mail it in.

To prepare, gather your financial documents: tax return, bank statements, investment statements and other income and asset records. If you’re a dependent student, you’ll need to use the information from your parent(s).

3. Submit Your FAFSA by the Deadline

The Department of Education begins accepting FAFSA applications for the upcoming academic year starting on October 1 and the FAFSA deadline is June 30 each year. But keep in mind, aid is awarded on a first-come, first-served basis—so the earlier you get your application in, the better.

Tip: States and schools often have their own FAFSA deadlines, so it’s best to submit as early as possible.

Federal vs. Private Student Loans

Federal student loans come with many benefits, including:

Fixed interest rates that aren’t based on your credit score
Extended deferment and forbearance
Access to student loan forgiveness programs
The opportunity to utilize IDR plans to make repayment manageable

IDR plans can be requested by eligible borrowers who need a lower monthly payment, and IDR payments are generally restricted to 10% to 20% of your discretionary income. Those with very low income might be eligible for $0 monthly payments.

Private student loans, on the other hand, don’t adhere to the same rules as federal loans. Here are some ways private loans differ:

Interest rates: Rates can be fixed or variable. But interest on private loans isn’t subsidized so you’re responsible for paying it in school (though some private lenders offer deferment).
Underwriting criteria: Lenders set their own eligibility requirements for borrowing which are generally more restrictive than federal loans.
Credit check: Private student loans also require a credit check. If you don’t have established credit, or have adverse credit, you’ll likely need a creditworthy co-signer to qualify.
No IDR option: Private loans aren’t eligible for federal IDR plans and not all lenders offer flexible repayment terms. But some private lenders might offer other options.
No student loan forgiveness: Private loans aren’t eligible for the Department of Education’s loan forgiveness programs. This means that even if you meet all other loan forgiveness requirements, but have a private loan, that private loan debt can’t be forgiven.

Although private student loans are sometimes necessary, you should explore other options for aid first. Take advantage of any scholarships and grants—since these don’t need to be repaid. Then, if you need student loans, prioritize federal government student loans before exploring private loan options.