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Federal Student Loan Types, Explained

Federal Student Loan Types, Explained
Rebecca Safier
Rebecca SafierUpdated January 25, 2023
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The Department of Education offers four types of federal student loans to qualifying students and parents: 
  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • Direct Consolidation Loans
These federal student loans have competitive fixed interest rates and qualify for various repayment plans and protections. Because of these benefits, it’s generally a good idea to max out your eligibility for federal student loans. Read on for more information about what federal student loans are, including the different federal student loan types and how they compare to their private student loan counterparts. 

What Are Federal Student Loans?

Federal student loans are government loans provided by the Department of Education and, more specifically, its agency, Federal Student Aid. These loans are available to undergraduate, graduate, and professional students, as well as parents of undergraduates. Some types of federal student loans are earmarked for students with financial need, while others are available to everyone, regardless of family income. Some federal student loan types also come with borrowing limits, so you can only borrow a certain amount each year. You can access federal student loans by submitting the Free Application for Federal Student Aid (FAFSA). Schools review the information on your FAFSA® to determine your eligibility for federal student loans and other types of aid. Once you’ve gained admission to college, career school, or a graduate program, the institution will send you a financial aid award letter that details how much you can borrow. You don’t need to borrow the full amount you’re offered, but you can decide how much you need to cover your cost of attendance. 

Federal vs Private Student Loans

Both federal and private student loans can be used to cover the costs of higher education. When comparing private vs. federal loans, though, there are some key differences. While federal loans are provided by the government, private loans are issued by private lenders, such as banks, credit unions, and online lenders. Federal loans have fixed interest rates that stay the same over the life of the loan, whereas private student loan rates can be fixed or variable. And while everyone gets the same rate on a federal loan, the rate you get on a private loan will vary based on the lender, your credit score, and other factors. In fact, you need a strong credit score to borrow privately, which is why many undergraduates apply with a cosigner. Most federal loans, on the other hand, have no such requirement. Federal loans are also eligible for a variety of repayment plans, including income-driven repayment as well as forgiveness programs. Private student loans don’t come with these protections, though some lenders might be willing to pause payments if you run into financial hardship. Because federal student loans have many benefits, they should usually be your first stop when borrowing for college. But if you still have a funding gap, it might be worth considering a private student loan. 

4 Federal Student Loan Types

Federal Student Aid offers four types of student loans through its Direct loan program. Past borrowers may also hold Federal Family Education Loans (FFELs) or Perkins loans, but these programs are no longer in operation. Here’s a closer look at the federal student loan types that are currently available. 

Direct Subsidized Loans

Direct subsidized loans are available to undergraduates with demonstrated financial need. They’re the most affordable federal loan you can get, because the government covers any interest that accrues while you’re enrolled at least half-time in school, during the six-month grace period after you leave school, and during periods of deferment. Subsidized loans currently have a fixed interest rate of 4.99% and an origination fee of 1.057%. According to the Department of Education, annual borrowing limits for dependent undergraduate students range from $3,500 to $5,500, with a total aggregate borrowing limit of $23,000. 

Direct Unsubsidized Loans

Direct unsubsidized loans have the same interest rate and origination fee as Direct subsidized loans for undergraduate borrowers. For graduate students, the interest rate is higher at 6.54%. Unlike subsidized loans, unsubsidized loans don’t come with an interest subsidy. You’ll be responsible for paying interest that accrues from the date of disbursement. That means if you don’t make any payments while you’re in school, your balance will grow over the years due to interest charges. On the plus side, though, unsubsidized loans are available to both undergraduate and graduate students, and they don’t have a financial need requirement. You can borrow between $5,500 and $7,500 per year as a dependent undergraduate student. For graduate students, the annual borrowing limit is $20,500, and the aggregate limit is $138,500.

Direct PLUS Loans

Direct PLUS loans are available to graduate students and parents of undergraduate students. PLUS loans have virtually no borrowing limits — you can borrow up to the school’s cost of attendance minus any other financial aid you’ve already received. However, PLUS loans have higher rates and fees than Direct subsidized and unsubsidized loans. The interest rate is 7.54%, and the origination fee is 4.228%, according to the Department of Education.  What’s more, borrowers can’t qualify on their own if they have adverse credit. Adverse credit may mean delinquent debt, a recent bankruptcy, or other negative marks. If you do have adverse credit, you might still be able to get a PLUS loan by applying with a creditworthy endorser or providing an explanation of extenuating circumstances. Either way, you’ll have to complete credit counseling to obtain the loan. 

Direct Consolidation Loans

Direct consolidation loans can replace one or more federal student loans you already hold. Consolidation loans can be useful in a few scenarios. First, you might want to simplify repayment if you owe multiple loans. By consolidating, you combine those loans into one new loan with a single monthly payment. Second, consolidating can make some loan types eligible for certain repayment plans. Parent PLUS loans, for instance, aren’t eligible for any income-driven repayment plans unless you consolidate them first. Finally, consolidating is one way to get federal loans out of default. It’s worth noting that consolidation won’t reduce your interest rate. Instead, your new rate will be a weighted average of your previous rates rounded up to the nearest one-eighth of a percentage point. After consolidating, you can choose loan terms up to 30 years, depending on how much you owe. 

Benefits of Federal Student Loans

The different types of federal student loans have a number of benefits. First, they’re eligible for a variety of repayment plans, including income-driven repayment. Second, the government lets you pause payments through deferment or forbearance if you run into financial hardship, go back to school, or have another qualifying reason. Third, federal student loans may be eligible for forgiveness programs, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. Plus, federal loan payments and interest have been paused since March 2020 in response to the Covid-19 pandemic. And in August 2022, Pres. Biden announced up to $20,000 in loan forgiveness to borrowers making less than $125,000 per year or $250,000 per household (this initiative is currently blocked by legal challenges). Along with these benefits, however, there’s one downside of federal loans worth considering. Unlike private student loans, federal loans have no statute of limitations. The government can demand repayment throughout your life and has wide-reaching powers of collection if you default. Borrowers who stop paying their federal loans could see their wages, tax refunds, and even Social Security benefits garnished. 

Federal Student Loan Repayment Plans

Most federal student loans automatically go on the standard repayment plan, which involves fixed payments over the course of 10 years. If you need to adjust payments, however, you have alternative options: 
  • Graduated repayment: This plan spans 10 years and involves smaller monthly payments at the beginning, which increase over time. 
  • Extended repayment: This plan gives you up to 25 years to pay off your student loans. You can choose between fixed and graduate payments.  
  • Income-driven repayment: There are four income-driven plans, all of which adjust your monthly payments based on your income and extend your loan terms to 20 or 25 years. If you still have a balance at the end of your term, it could be forgiven. 

Can You Refinance Federal Student Loans?

You can refinance federal student loans with a private lender but proceed carefully. Refinancing federal loans makes them private, meaning they’ll no longer be eligible for federal repayment plans, forgiveness programs, or other protections. If you don’t need these federal benefits, student loan refinancing could lead to a better interest rate. But if you may need those programs or protections, it might be better not to refinance your federal loans with a private lender. 

The Takeaway

Federal student loans are one of your best borrowing options as a student since they come with competitive interest rates and a variety of flexible repayment plans. Before borrowing any type of loan, however, think carefully about how much you can afford to borrow. If possible, make payments while you’re still in school to ease the financial burden after graduation. 

3 Student Loan Tips

  1. Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
  2. One pain-free way to pay down your student loan sooner: send in your tax refund to put against the principal balance. Since it’s money that has already been taken out of your pay, you won’t miss it.
  3. If you teach full-time for five complete and consecutive academic years in a low-income school, you may be eligible for federal student loan forgiveness.

Frequently Asked Questions

What is the difference between subsidized and unsubsidized federal student loans?
What kind of federal loans are available to students?
How many types of student loans are there?
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Photo credit: iStock/Prostock-Studio

About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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