The Definitive Guide to Federal Student Loans

Everything you need to know about the pros and cons of federal student loans.

If you’re a college student or a parent of a student, the federal government offers federal student loans that can help students cover the cost of their education.

Depending on your financial need, you could qualify for certain federal loan benefits. You may also get some help with repaying the loans once you or your child finishes school.

In this guide, you’ll learn everything you need to know about federal student loans and how to make sure they’re right for you.

92% of student loans were federal ($1,386 billions) while only 8% ($113.2 billion) were private student loans in 2017.

How federal student loans work

Administered by the U.S. Department of Education, federal student loans can help college students and their parents pay for school. There are three types of federal student loans you may qualify for, depending on your situation.

1. Direct Subsidized Loans

These loans are designed for undergraduate college students who demonstrate financial need through the Free Application for Federal Student Aid (FAFSA).

Like all other student loans, interest accrues while you’re in school. But with subsidized loans, the federal government picks up the tab on your interest payments.

These loans don’t require a credit check to get approved.

2. Direct Unsubsidized Loans

You can get this type of loan if you’re an undergraduate, graduate, or professional student.

You don’t need to demonstrate financial need to get approved. However, the government doesn’t cover your interest payments while you’re in college.

So, when you graduate, the accrued interest will capitalize and increase your total loan amount and monthly payments.

You don’t need to undergo a credit check to get approved for Direct Unsubsidized Loans.

3. Direct PLUS Loans

If you’re a graduate or professional student or a parent of a student, you may qualify for a Direct PLUS Loan.

As with Direct Unsubsidized Loans, interest will accrue without help from the government while you or your child are still in school. Also, there is a credit check required to get approved.

The benefits of federal student loans

Are you unsure whether to apply for federal student loans or private student loans? If so, it’s important to know what benefits you might give up if you choose private loans. Below are just a few factors to consider:

Relaxed credit requirements

If you’re applying for Direct Subsidized or Unsubsidized Loans, there’s no credit check required. Even if you’re applying for a Direct PLUS Loan, the credit requirements aren’t very strict.

The government just wants to ensure you don’t have any major delinquencies, defaults, bankruptcies, or other significantly negative items on your credit report.

If you’re new to credit or you have fair credit because of minor issues, you likely won’t run into problems. Private student loans, on the other hand, typically require a solid credit and financial profile.

Income-driven repayment plans

Once you graduate from college, you’ll have six months before you need to start repaying your student loans. If you can’t afford your payments, you can apply for an income-driven repayment plan.

“With income-driven repayment plans, your repayment term is extended to 20 to 25 years. And your monthly bill is based on a percentage of your discretionary income,” says Kat Tretina, a certified student loan counselor and freelance writer.

“Depending on your loan balance, income, and family size, your monthly payment could be as little as $0.”

Loan forgiveness programs

The government also offers student loan forgiveness programs. Depending on your situation, you can get all or part of your federal student loans forgiven.

Public Service Loan Forgiveness (PSLF), for example, is one of the more prominent programs offered.

“After 10 years of making qualifying payments while working for an eligible employer,” says Tretina of PSLF, “your loan balance is forgiven tax-free.”

Eligible employers typically include federal, state, or local governments or qualifying non-profit organizations.

Other loan forgiveness programs are also available, depending on your career choice.

The costs of federal student loans

Unlike private student loans—which are offered by individual private lenders—federal student loans are originated by the Department of Education.

What’s more, they all offer the same interest rates, regardless of your credit situation.

Here’s what you can expect if you take out a federal student loan for the 2018-2019 school year:

  • Direct Subsidized and Unsubsidized Loans (Undergraduate): Interest rate 5.05%, loan fee 1.066%.
  • Direct Unsubsidized Loans (Graduate or Professional): Interest rate 6.6%, loan fee 1.066%.
  • Direct PLUS Loans: Interest rate 7.6%, loan fee 4.248%.

In most cases, you can qualify for a lower interest rate with a federal student loan than with a private student loan. Even with the higher interest rate attached to Direct PLUS Loans, the benefits may still be worth it.

“Parents should absolutely look into Parent PLUS Loans before turning to private loans,” says Tretina.

“Parents are eligible for many of the same federal perks as students, which can provide significant benefits during repayment. That includes some forms of income-driven repayment plans.”

Related questions about federal student loans

We’ve covered the surface-level information about federal student loans. But it’s important to explore certain areas in more detail. Here are a few questions we’ve seen from readers:

How much can you get from federal student loans?

The amount you can borrow depends on the type of loan you receive, your year in school, and your financial dependence on your parents:

  • Undergraduate students: You can borrow up to $12,500 per year in both subsidized and unsubsidized loans, and only a portion of it can be subsidized. In total, you can borrow up to $31,000 if you’re a dependent student or up to $57,500 if you’re independent.
  • Graduate and professional students: You can borrow up to $20,500 per year and up to $138,500 total with unsubsidized loans. If you opt for PLUS loans, the maximum amount is the cost of attendance at your college minus other financial aid you’ve received.
  • Parents: Like graduate PLUS loans, you can borrow enough to cover your child’s cost of attendance minus other financial aid they’ve received.

How do I apply for a federal student loan?

To apply for federal loans, all you need to do is fill out the FAFSA on the Department of Education’s website.

This form will give the government a better idea of your specific financial need and whether you qualify for subsidized loans. You’ll then receive a financial aid award letter from your school’s financial aid office.

This letter will let you know what type of loans you qualify for and how much. If you accept, contact your school’s financial aid office and review and sign the paperwork.

The financial aid office will apply the loan funds to your tuition, fees, and room and board if you live on campus. Then, it will disburse the remaining amount to you.

How do I view my federal student loans?

While the Department of Education originates federal student loans, it doesn’t service them going forward.

You should get information from your school’s financial aid office about your student loan servicer, which may be one of the following:

  • Nelnet.
  • Great Lakes.
  • Navient.
  • FedLoan.
  • HESC/EdFinancial.
  • CornerStone.
  • Granite State.
  • OSLA.

Once you know who your servicer is, go to its website and create an online account. From there, you can view your loan balance, interest rate, and all other important details about your federal loans.

Are federal student loans right for you?

Before you apply for student loans of any kind, make sure you’ve exhausted all your other options. For starters, it’s essential that you apply for scholarships and grants.

Websites like list hundreds of scholarships from private organizations that can help you pay for school. You can also apply for scholarships from your university of choice.

Also, look into part- and full-time jobs both on and off campus. Having a job during college can feel like a drag on your social life.

But if you work just 10 hours a week at $9 an hour, you’ll earn $18,720 over four years. Even after taxes, that’s a good chunk of money that you’ll save on student loan payments.

If you’ve tried everything else and are still short, student loans may be necessary.

If you’re unsure whether to choose federal or private student loans, Tretina says, “Federal loans tend to have lower interest rates and more generous repayment terms than private loans. This makes it easier to manage your repayment,”

She adds, “Private loans should only play a role when you’ve exhausted federal aid and need additional funding to complete your degree.”

Either way, take your time before applying for federal student loans. And make sure not to borrow more than you need. You don’t want to be stuck with a massive student loan payment years after you’re done with your education.

Being smart and thoughtful throughout the process will enable you to save money and avoid unnecessary stress.