A Beginner’s Guide to Federal Student Loans

Key Takeaways:

  • There are four main types of federal student loans: Direct Subsidized, Unsubsidized, PLUS, and Consolidation Loans.
  • To be eligible for federal aid, you need to submit the FAFSA annually.
  • Interest rates are set by federal law and don’t change based on your credit.
  • How much you can borrow is determined by your year in school, whether you’re a dependent or independent student, and what types of loans you qualify for, among other factors.
  • Repayment is generally flexible and can last 10 to 25 years; you can even select a plan that bases your payments on your income.
  • It’s possible to get federal loans forgiven, but it’s difficult to do and requires thorough documentation.

Federal student loans are often one of the best options out there to pay for college. They typically have lower interest rates, are easier to qualify for, and make repayment less stressful. However, that doesn’t mean they’re straightforward.

With multiple types of loans, repayment programs, and sometimes dizzying rules and loopholes, understanding all of your options and choosing the best strategy isn’t easy. Here’s everything you need to know about federal student loans before you start your college journey. 

What types of federal student loans are there? 

When it comes to federal student loans, there are four main types to choose from. Each works differently, so it’s important to understand them all before planning your financial strategy for school. 

Direct Subsidized and Unsubsidized Loans

Most students will be eligible for at least one of these loans. Unsubsidized loans have the fewest requirements to meet; many graduate and undergraduate students are eligible and your school will determine how much you can borrow. Interest will begin accruing as soon as the loan is disbursed, and you’re responsible for all interest fees once you start repayment.

Subsidized loans, on the other hand, help you pay for interest costs. You’ll have to prove you have a financial need to qualify, but if you’re eligible the Department of Education will pay your interest while you’re enrolled in school, during your grace period after graduation, and when you defer your loan payments later. 

Direct PLUS Loans

These loans can be borrowed by either graduate students or parents of undergrads. These loans do require a credit check, but you can add a cosigner if you need help qualifying. PLUS loans typically allow you to borrow a greater amount, but interest rates are also higher. 

Direct Consolidation Loan

If you already have multiple federal loans, you can combine them into one. This can simplify your finances since you’ll only have one loan servicer and one monthly payment to track after you consolidate. 

Who’s Eligible for Federal Student Loans? 

No matter which type of federal loan you get, there are a few basic requirements you must meet. 

To apply for federal aid, you must:

  • Be a U.S. citizen, permanent resident, or other eligible noncitizen 
  • Have a Social Security number (with some exceptions)
  • Enroll in an eligible degree or certification program (Direct Loans require at least half-time enrollment) 
  • Maintain satisfactory grades once you’re in college
  • Register with Selective Service, if you’re male

In addition to the general requirements, there are specific qualifications you must have to be eligible for certain loan types. 

Loan

Who’s eligible? 

Other requirements

Direct Unsubsidized Loans

Undergrad and grad students

N/A

Direct Subsidized Loans

Undergrad students

Must prove financial need

PLUS Loans

Grad students and parents of undergrads

Credit check

Consolidation Loan

Undergrad and grad students, parents of undergrads

N/A

 

To apply for a federal student loan, you’ll need to submit the FAFSA in your senior year of high school — and again every year you plan to attend school. After your application has been reviewed, you’ll receive a financial aid letter that details what loans, grants, or other federal aid you qualify for.

What Are the Interest Rates for Federal Student Loans? 

Often, the interest rates you get on federal loans will beat those you find on private loans. That’s because federal rates are determined by law and your credit doesn’t determine the amount of interest you’ll pay. Federal rates are also all fixed, which means your interest will never change over the life of the loan.

One-time fees are also applied to most federal loans. These fees are automatically deducted from the loan when it’s first disbursed, so the money you receive will be less than the amount you actually borrow. 

Here are the federal student loan interest rates and fees for the 2020-21 school year:

Loan

Interest

Fees

Direct Unsubsidized Loans

2.75% for undergrads

4.30% for grad students

1.059%

Direct Subsidized Loans

2.75%

1.059%

PLUS Loans

5.30%

4.236%



How Much Can I Borrow?

How much money you get depends on your exact situation. Based on your FAFSA, your school will determine how much you can borrow, up to annual and lifetime limits. 

The amount you receive each year is determined by your year in school, whether you’re a dependent or independent student, and what type of loan you qualify for, among other factors. The current limits that generally apply are listed below, but certain situations and exceptions may affect the amount you’re offered.

Loan

Annual maximum

Aggregate maximum

Direct Unsubsidized Loans

$2,000 (dependent students)
$6,000-$7,000 (independent students)
$20,500 (grad students)

$8,000 (dependent students)

$34,500 (independent students)

$73,000 (grad students)

Direct Subsidized Loans

$3,500-$5,500

$23,000

PLUS Loans

Up to the cost of college

Up to the cost of college

 

For more specific information about limits, you can check out the Department of Education’s site on Subsidized and Unsubsidized Loans

Note that federal loans aren’t all or nothing — if you don’t need the maximum amount you’ve been approved for, you can choose to only borrow a portion of that.  

Repayment Plans for Federal Student Loans

One of the best parts of federal student loans is the flexible repayment plans on offer. You can take anywhere from 10 to 25 years to repay your federal debt, and if you have trouble affording your monthly payments you can opt for an income-driven plan. If you don’t earn much money, you might even qualify for a $0 monthly payment. Some plans also forgive any remaining debt after you’ve made all the required payments.

While not every borrower or loan is eligible for every repayment plan, here’s a quick overview:

Repayment plan

Length of repayment

Details

Standard

10 years

Fixed monthly payments spread evenly over a decade

Graduated 

10 years

Payments start small and slowly increase every 2 years

Extended

25 years

Payments can be fixed or graduated, but you must have more than $30,000 in federal loans

Revised Pay as You Earn

20 years (undergrad loans)

25 years (grad loans)

Payments are set at 10% of your discretionary income; any remaining debt will be forgiven after you’ve made the required payments

Pay as You Earn

20 years

Payments are set at 10% of your discretionary income; any remaining debt will be forgiven after you’ve made the required payments

Income-Based

20 or 25 years, based on when you took out debt

Payments are set at 10% or 15% of your discretionary income; any remaining debt will be forgiven after you’ve made the required payments

Income-Contingent

25 years

Payments are set at either 20% of your income or the amount you would pay with a fixed payment over 12 years, whichever is less; any remaining debt will be forgiven after you’ve made the required payments

 

For more details about eligibility requirements and how these plans work, check out our guide to federal loan repayment programs.

While it may sound nice to qualify for low monthly payments or stretch out your payments over two decades, beware of the added costs that come with these perks. Interest will continue to accrue as long as you hold the loan — and the longer it takes you to pay your debt off, the more you’ll pay over the life of the loan. 

Deferment and Forbearance

If you just need a short break from repaying your student debt, you can temporarily pause payments in certain situations. This can be useful if you lose your job, have emergency expenses, or return to school for a second degree or certification. Your loan will remain current and not in default, and you can sort out your cash flow before resuming payments.

Note that interest will continue accruing in most cases, so your loan will likely grow larger when you’re in deferment or forbearance. But if you’re seriously struggling to make payments, speak with your loan servicer about your options and see if you might be eligible to push pause on your student debt.

Forgiveness Options for Federal Student Loans

It sounds like a dream — you wake up one day and all your student loans have magically been forgiven. While the reality is more complicated, there are a few ways federal student loans can be discharged. There are a lot of hoops to jump through and you’ll usually end up repaying at least some of your debt, but federal loan forgiveness is possible. 

But be aware: For most types of forgiveness or cancellation, you’re still responsible for paying income tax on the forgiven amount, which can add up to thousands of dollars. So if you are lucky enough to qualify, plan for a major tax bill.

Here’s an overview of the types of forgiveness on offer, but more details about eligibility can be found on the Department of Education forgiveness page

Forgiveness program

Details

Income-Driven Repayment

Complete the terms of an income-driven repayment plan (listed above) and your remaining debt will be forgiven

Public Service Loan Forgiveness

Work full-time for a government or nonprofit organization and make 10 years of payments under an eligible repayment plan; your remaining debt will be forgiven 

Teacher Loan Forgiveness

Teach full-time in a low-income school for five consecutive years for up to $17,500 in loan forgiveness

Closed School Discharge

If your school closes while you’re enrolled, you might be eligible for loan cancellation

Total and Permanent Disability Discharge

Prove you have a permanent disability that prevents you from working and you could have your loans canceled

Discharge Due to Death

If the borrower has died, their remaining debt could be canceled 

Borrower Defense to Repayment

If your school misled you, broke the law, or participated in other forms of misconduct, you may not have to repay your loans

 

More uncommon types of loan cancellation include false certification (your school approved you for federal loans when you were ineligible), an unpaid refund (your school failed to return your loan to the servicer after you withdrew), and, very rarely, bankruptcy. Parents who borrowed PLUS Loans may also be eligible in some situations.

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