The Complete Guide to Federal Student Loans

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For students who need to fund their college education, federal student loans are more advantageous than private student loans. The reasons include lower interest rates, government protections, flexible repayment plans and opportunities for student loan forgiveness.

Here’s a complete guide to understanding the different types of federal student loans and how they can help fund your education.

Plus:

Latest news on mass student loan forgiveness

The federal government announced on Aug. 24, 2022 that up to $20,000 of federal student loan debt will be forgiven per eligible borrower later in the year.

Income requirements: You may qualify for student loan mass forgiveness if your annual income during the pandemic was below $125,000 (individuals) or $250,000 (married couples or head of households).
Cancellation amount: If you received a Pell Grant at any time during your college education (for any amount), you can potentially receive up to $20,000 in forgiveness. Otherwise, you’ll receive up to $10,000.
Qualifying time period: The nationwide debt cancellation reportedly applies only to loans issued before July 2022.
Loan types: Only federally held student loans are eligible as of reports on Aug. 29. Federal Family Education Loans (FFEL) and Perkins loans will be excluded.
Student loan refunds: You can receive a refund for payments made during the pandemic pause if your forgiven amount falls within the maximum debt relief amount you’re eligible to receive. (Note: If you paid your loan in full during the pandemic pause, you wouldn’t receive an automatic refund. Instead, contact your loan provider to request a refund.)
How to apply: According to the Department of Education, debt relief applications will be available online in early October 2022. You’ll have until Dec. 31, 2023 to apply. However, many borrowers may receive relief automatically if their data is in the system. Stay on top of notifications by updating your info at Studentaid.gov.

Read our full report for more details on these measures.

Types of federal student loans

The U.S. Department of Education grants several types of federal student loans backed by the government. These come with varying fees, interest rates and eligibility requirements.

Borrowers wishing to receive federal student loans must fill out the Free Application for Federal Student Aid (FAFSA) by the annual federal deadline of June 30 to see if they qualify. (Note that your college and state may have additional deadlines.)

Student federal aid is distributed on a first-come, first-served basis, so don’t delay submitting your FAFSA. See below for more details on applying for student loans.

Here are the five current types of federal student loans:

Direct subsidized loans

  • Who can apply: Undergraduate student with financial need
  • Interest rate for 2022-23: 4.99%
  • Origination fee: 1.057%

Direct subsidized loans are reserved for undergrad students who demonstrate financial need based on the information reported in their Expected Family Contribution (EFC). The Department of Education pays the interest on these loans while you’re enrolled in school at least half time, during the six-month grace period or for any deferment period.

Because of this, it’s worth maxing out your allocated subsidized amount before turning to unsubsidized or private loans.

Be aware that there are borrowing limits for Direct loans, and your school determines the amount you can borrow (which can’t exceed your total financial need).

Direct unsubsidized loans

  • Who can apply: Undergraduate, graduate or professional students
  • Interest rate for 2022-23: 4.99% (undergrad), 6.54% (grad and professional programs)
  • Origination fee: 1.057%

Undergraduate and graduate students do not need to demonstrate financial need to receive direct unsubsidized loans. These loans also adhere to the federal borrowing limits, and your school will determine how much you can borrow based on your financial aid package and your school’s cost of attendance.

Unfortunately, the government doesn’t help pay interest on unsubsidized loans. The accrued interest is added to your principal balance if you don’t make interest payments while in school or during the grace period.

Parent PLUS loans

  • Who can apply: Parents of dependent undergraduate students
  • Interest rate for 2022-23: 7.54%
  • Origination fee: 4.228%

Parents with an undergraduate student enrolled at least half-time in an eligible school can apply for a parent PLUS loan. Note that the borrower must be the student’s biological, adoptive or stepparent — unfortunately, grandparents and legal guardians aren’t eligible.

Unlike subsidized and unsubsidized loans, PfLUS loans require a credit check. If you have previous debt that has defaulted, gone into collections or a foreclosure within the last few years, your report will come back marked with “adverse credit history.” However, you can try to appeal this if you’ve experienced extenuating circumstances.

Most importantly, you must begin making payments upon the loan’s disbursement unless you defer until after your child graduates.

Grad PLUS loans

  • Who can apply: Graduate and professional students
  • Interest rate for 2022-23: 7.54%
  • Origination fee: 4.228%

Graduate students enrolled at least half-time in an advanced degree program can apply for a Grad PLUS loan. As with the parent PLUS loan, a credit check is run to determine if the student has an adverse credit history. Additionally, you must meet the Department of Education’s requirements for federal financial aid.

You can borrow up to your school’s cost of attendance, minus other aid you’ve received.

You’re not required to make payments until six months after graduating, leaving school or dropping below half-time enrollment.

It’s generally best to utilize your subsidized and unsubsidized federal loans before considering a Grad PLUS loan since the latter comes with a higher interest rate.

Direct consolidation loans

Borrowers with existing U.S. Department of Education student loans are eligible to apply for a Direct consolidation loan. You can consolidate your loans for free, allowing you to simplify your repayment into one monthly payment.

The federal loans listed above are eligible for direct consolidation along with:

  • Supplemental loans for students
  • Federal Perkins loans
  • Nursing student loans
  • Nurse Faculty loans
  • Health Education Assistance loans
  • Health Professions Student loans
  • Loans for Disadvantaged Students
  • Federal Insured Student loans
  • Guaranteed Student loans
  • National Direct Student loans
  • National Defense Student loans
  • Parent Loans for Undergraduate Students
  • Auxiliary Loans to Assist Students

Students cannot consolidate loans taken out in their parent’s name into loans in the student’s name (and vice versa). You also can’t include any private loans in a direct consolidation, although your private student loan debt is used to determine your consolidated loan’s repayment period.

Discontinued federal loans

Here are two federal loan programs that are no longer active. However, if you have either of these types of loans, you can consider consolidating them with your other federal loans (as outlined above).

  • The Federal Family Education Loan (FFEL) program ceased loan origination after June 30, 2010. It allowed private lenders to make education loans backed by the federal government. These included FFEL PLUS loans and FFEL consolidation loans, as well as subsidized and unsubsidized federal Stafford loans (which later became part of the currently active Direct loan program mentioned above).
  • The Perkins loan program was another low-interest option for students with financial need, but in this case extended by schools and backed by the government. The government discontinued the Perkins loan program on Sept. 30, 2017.

Eligibility requirements

You must meet specific eligibility requirements to receive federal financial aid, which includes not just student loans but also work-study funds and grants.

To meet the basic criteria, you must:

  • Be a U.S. citizen or eligible noncitizen
  • Have a valid Social Security number
  • Be accepted for enrollment in an eligible degree or certificate program
  • Plan on attending an eligible school at least half-time
  • Maintain satisfactory academic progress while in college
  • Show that your existing federal student loans aren’t in default
  • Agree that you’ll use your federal aid only for educational expenses
  • Show financial need (for most programs, but not for Direct unsubsized loans)

Beyond these requirements, anyone currently attending or planning to attend college or university is encouraged to apply for federal financial aid. There is no maximum income limit to apply, so even if you think you or your parents make too much, it’s still worth submitting your FAFSA. (Plus, it’s free to apply).

However, the federal government does impose borrowing limits (see next section). Because of this, you may need to explore additional financing options beyond federal student loans.

Borrowing limits for federal student loans

As noted, FAFSA student loans offer many advantages over private student loans. However, you can’t borrow an unlimited amount in federal loans.

The Department of Education sets limits based on your year of attendance, whether you’re a dependent or independent student and how much other aid you expect to receive for the year.

Federal student loan annual limits
Year Dependent students Independent students
First-year undergrad $5,500 (Subsidized loans are capped at $3,500) $9,500 (Subsidized loans are capped at $3,500)
Second-year undergrad $6,500 (Subsidized loans are capped at $4,500) $10,500 (Subsidized loans are capped at $4,500)
Undergrad in third year or later $7,500 (subsidized loans are capped at $5,500) $12,500 (subsidized loans are capped at $5,500)
Grad and professional students Not applicable (Grad and professional students are considered independent) $20,5000 unsubsidized only

In addition to yearly limits, federal loans have an aggregate loan limit. This is the total amount of federal loans you can receive for your entire degree program.

Federal student loans aggregate limit
Year Dependent students Independent students
Undergrad $31,000 (Subsidized loans are capped at $23,000) $57,500 (Subsidized loans are capped at $23,000)
Grad and professional students Not applicable $138,500 (includes all loans received for undergrad study)

It’s important to exhaust all federal loan options before considering private lenders. However, if you hit the federal student loan limit and still need more funds, you can research private student loans to find a rate and term that fits your budget. (See more below)

Student loan debt statistics

According to our recent student loan debt analysis, a little more than half of all bachelor’s degree students in 2020 graduated with student loans, taking out an average of $28,400 in federal and private debt.

And did you know that 54% of undergrads don’t utilize their total allocated amount of federal student loans? Unfortunately, they turn to private loans before exhausting available federal funding.

Here’s a closer look at key data points:

Total U.S. student loan debt: Nearly $1.75 trillion
Americans with student loan debt: About 48 million
Total private student loan debt: More than $136 billion
Total parent PLUS debt: $104.8 billion
Total grad PLUS debt: $90.6 billion
Loans in repayment: $16 billion
Average student loan monthly payment: $300 (before the pandemic pause)

Student loan interest rates

The interest rate is one of the most important factors to consider when comparing student loans. Federal student loans are often preferable because they typically come with a better rate than banks or private lenders.

Rather than using your credit history to assign you an interest rate, Congress sets one rate for each type of loan for all federal borrowers each school year.

Here are the federal student loan interest rates for July 2022 to July 2023:

  • Direct subsidized and unsubsidized loans for undergraduates: 4.99%
  • Direct unsubsidized loans for graduates: 6.54%
  • Direct PLUS loans: 7.54%

Remember, the interest on student loans compounds daily, meaning you’ll pay more than you initially borrowed.

Even though you don’t have to pay the interest while you’re in school on subsidized loans, your loans will start accruing interest as soon as you enter repayment. Try using our student loan interest calculator to estimate how much each student loan will cost you.

Even though all federal student loans charge interest, you’ll generally pay less than you would with private student loans. The only exception is PLUS loans, which tend to have a relatively high rate.

Pro tip: Consider interest-only payments while in school
Not everyone can afford to make interest-only payments on a college student’s budget. But if you have extra cash, making in-school payments can significantly help reduce your overall student loan debt.

How to apply for federal student loans

Fortunately, the Department of Education makes applying for federal financial aid pretty straightforward. Here’s how the whole process works:

  1. Check if your school participates in the federal student aid program. Most colleges and universities do, but certain private or specialty schools might not. Use the federal school code list to ensure your desired institution accepts federal aid.
  2. Gather necessary paperwork. Federal aid amounts — including federal student loans — are allocated based primarily on your or your family’s income and assets. Make sure to have important documents on hand before applying, such as recent tax returns, pay stubs, savings account info and other sources of income.
  3. Submit the FAFSA. This is your main document for every type of federal aid, including loans, work-study programs and grants. Each year’s FAFSA opens on Oct. 1, and you have to reapply every year. Check your school and state-specific FAFSA deadlines to ensure you file on time.
  4. Review your financial aid report. After submitting your FAFSA, you’ll receive a student aid report (SAR) outlining all your info. Double-check this for any errors, as it will be sent to your prospective schools.
  5. Review your award letter. You can then wait to (hopefully) receive a college acceptance letter along with an award letter outlining your financial aid package. You’ll receive multiple award letters if several schools accept you, so you’ll want to compare them.
  6. Make your choice. Confirm your school choice and pay special attention to any deadlines outlined in the letter. Missing a deadline could impact the amount of financial assistance you’ll receive.

Also be aware that, besides the FAFSA, there’s an aid application called the CSS Profile that can unlock institutional aid from your school. It’s worth filling out and opens to new applications on Oct. 1, just like with the FAFSA.

Check out our full guide on how to apply for student loans for more information.

Student loan forgiveness

Another benefit of federal student loans is the chance of receiving federal student loan forgiveness. If you meet the requirements, these programs can eliminate part or all of your student loan debt.

The federal government offers various student loan forgiveness programs — you can check out our full guide to student loan forgiveness. Here are arguably the two most popular:

Public Service Loan Forgiveness

Borrowers employed full time by a government or nonprofit organization may be eligible for public service loan forgiveness (PSLF) after a certain period.

The program requires borrowers to make 120 qualifying payments on their federal loans before being considered for forgiveness. Additionally, those payments must be made through certain repayment plans while you’re employed by a qualifying organization.

Standard repayment plan payments qualify, but you won’t save money through forgiveness if you make 120 monthly payments on this plan since you’ll end up paying off the total balance. To seek loan forgiveness, you should instead switch to an income-driven repayment plan.

The PSLF program greatly benefits those passionate about working in nonprofit or government industries, including those that don’t pay high salaries.

Teacher Loan Forgiveness

Teachers can earn student loan forgiveness a bit faster through the Teacher Loan Forgiveness program. Borrowers who teach full time for five consecutive years at a low-income school may be eligible for up to $17,500 in federal loan forgiveness.

Like PSLF, the Teacher Loan Forgiveness program also has rigorous requirements. Teachers must meet specific eligibility requirements and may be subject to proficiency testing. Additionally, grad PLUS and parent PLUS loans are not eligible for forgiveness.

You may be able to receive student loan relief from both programs, but you have to meet the requirements separately. For example, if you teach for five years and receive Teacher Loan Forgiveness, you’ll need to make an additional 120 monthly payments to qualify for PSLF.

Repayment options

Federal student loan borrowers have the flexibility to choose between several repayment options. Although your loans will automatically go into the Standard Repayment Plan when entering repayment, you can switch payment plans anytime.

Explore the following options to decide which is best for you.

Repayment plan Eligible loans Monthly payment and length of repayment Eligibility and benefits
Standard Repayment Plan ● All direct subsidized and unsubsidized loans
● All consolidation loans
● All PLUS loans
● A fixed monthly payment that ensures the loan is paid off in 10 years (or 10 to 30 years for consolidation loans) ● All borrowers are eligible
● You’ll likely save the most on interest payments with this plan
Graduated Repayment Plan ● All direct subsidized and unsubsidized loans
● All consolidation loans
● All PLUS loans
● Payments start low and typically increase every 2 years
● You’ll pay off the loan within 10 years (or 10 to 30 years for consolidation loans)
● All borrowers are eligible
● Low monthly payments to begin, however you’ll generally pay more over time
Extended Repayment Plan ● All direct subsidized and unsubsidized loans
● All consolidation loans
● All PLUS loans
● Payments are either fixed or graduated
● The loan is paid off within 25 years
● Borrowers with more than $30,000 in direct loans are eligible
● Lower monthly payments than standard repayment, but you’ll pay more interest
Revised Pay as You Earn Plan (REPAYE) ● All direct subsidized and unsubsidized loans
● Consolidation loans (can’t include parent PLUS loans)
● Grad PLUS loans made to the student
● Monthly payments are 10% of your discretionary income
● Payments are recalculated each year based on your income and family size
● Borrowers with an eligible loan qualify for this plan
● Any outstanding balance on your loan will be forgiven after 20 years (undergrad) or 25 years (graduate or professional studies)
● You may have to pay tax on the amount forgiven
Pay as You Earn Plan (PAYE) ● Direct subsidized and unsubsidized loans
● Consolidation loans (can’t include parent PLUS loans)
● Grad PLUS loans made to the student
● Monthly payments are 10% of your discretionary income but never greater than the standard repayment amount
● Payments are recalculated each year based on your income and family size
● You’re eligible if you were a new borrower on or after Oct. 1, 2007 and received a disbursement of a direct loan on or after Oct. 1, 2011
● You must have a high debt-to-income ratio
● Your monthly payment will never be more than the 10-year Standard Plan amount
● Any outstanding balance will be forgiven after 20 years
Income-Based Repayment Plan (IBR) ● Direct subsidized and unsubsidized loans
● Consolidation loans (can’t include parent PLUS loans)
● Grad PLUS loans made to the student
● Monthly payments are 10% or 15% of your discretionary income (depending on the date you first received the loans)
● Payments are recalculated each year based on your income and family size
● Borrowers must have a high debt-to-income ratio
● Monthly payments never greater than what you would have paid through standard repayment
● Any outstanding balance will be forgiven after 20 or 25 years
Income-Contingent Repayment Plan (ICR) ● Direct subsidized and unsubsidized loans
● Consolidation loans (can’t include parent PLUS loans)
● Grad PLUS loans made to the student
● Monthly payments will be 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment 12 years, adjusted according to your income
● Payments are recalculated each year based on your income and family size
● Borrowers with eligible loans can select this plan
● Any balance remaining after 25 years may be forgiven
● A great option for borrowers seeking PSLF
Income-Sensitive Repayment Plan ● Subsidized and unsubsidized Federal Stafford loans
● FFEL Loans
● FFEL Consolidation loans
● Monthly payments are calculated using your annual income
● Loans are paid in full within 15 years
● Only available for FFEL Program loans

The repayment plan you choose will depend on your goals and budget. If you’re looking for low monthly payments, you’ll likely pay more over time. However, you can expect high monthly payments if your ultimate goal is to pay the loans off as quickly as possible.

Also, there are a range of loan repayment programs depending on where you live, what field you studied and other factors. Check out our guide to student loan repayment assistance programs to see if you can get help on repayment.

Trouble repaying student loans

If you’re facing financial hardship, you can work with your loan servicer to temporarily suspend your payments through deferment or forbearance.

Deferment

Federal student loan deferment allows eligible borrowers to pause payments on their student loans in certain situations. Acceptable reasons may include cancer treatments, extreme economic hardship (such as receiving welfare or serving in the Peace Corps), military service or educational fellowship.

Direct subsidized loans will not accrue interest while loans are in deferment but all other loans will, meaning you will end up paying more on the loan when you resume payments. Any period your loans spend in deferment will not qualify toward PSLF requirements.

The Department of Education recommends borrowers explore income-driven repayment plans before requesting a deferment.

Forbearance

Similarly, student loan forbearance allows borrowers to pause monthly payments without negatively impacting their credit score. The eligibility requirements for forbearance are a bit less strict than deferment, but all Direct loans accrue interest while in forbearance except in special circumstances.

Furthermore, you can only keep your loan in forbearance for up to 12 months at a time. You may request another forbearance period, but the total limit is three years.

Any federal borrower can request a forbearance, but loan servicers must grant them to borrowers in certain situations, like serving with AmeriCorps or the National Guard.

An income-based repayment plan is still preferable to a forbearance, so make sure to review all your repayment options. But if forbearance is your only choice, try to continue making interest-only payments.

Above all, if you’re struggling to make your monthly student loan payment for any reason, contact your servicer immediately. Skipping payments can end up costing you late fees or hurting your credit score. Lenders are generally willing to work with borrowers who are transparent about their situations.

Federal student loan servicers

The Department of Education provides funding for federal student loans. However, the loans are handed over to a select number of private companies upon disbursement. In turn, these companies manage payments, issue 1098-T forms and offer assistance along the way — at no extra cost to you.

It’s important to know your servicer and your student loan balance in order to receive notifications and stay on top of payments. If you have trouble locating such info, log into your Studentaid.gov account and scroll to “My Loan Servicers” — all federal loan details will be listed there.

Here are the current federal student loan servicers and their contact number:

Alternatives to federal student loans

Federal loans offered by the Department of Education are a popular option for funding your college education. However, the funds may not be enough depending on your school’s cost of attendance and other personal expenses.

Here are some alternatives to consider, starting with some non-loan options that should be sought before taking out any federal or private loans.

Scholarships and grants

Ideally, you want to receive substantial funding from scholarships and grants because it’s money you don’t need to pay back. Furthermore, you can use the money for tuition, room and board and other associated costs for your college career.

If eligible, your financial aid package will include info regarding a Pell Grant, which is free federal money. Pell Grant recipients can receive up to $6,895 for the 2022-23 school year.

Additionally, you can apply for need- and merit-based scholarships and grants. Researching options takes time and effort, but anything that can help reduce the amount you need to borrow is worth it.

Explore our scholarship search tools and list of grants to help you research how to get free money for school.

Work-study programs and other college jobs

Your FAFSA award letter might include eligibility for work-study programs, which provide work opportunities for undergrad and grad students with financial need. The jobs are usually geared toward your major and are on campus or in the surrounding community. You can apply the earned money toward your educational expenses.

Beyond work-study, you could try to secure a decent-paying college job that offers flexible hours. Some businesses located near colleges might tend to hire students and be willing to work around your exam schedule, for example. This can be a game changer for paying for your college education.

Crowdfunding

There’s no shame in asking friends and family to help contribute toward your future. With a 529 college savings account, you can create a free, shareable link via the Gift of College or UGift to receive funds in place of birthday or holiday gifts. Alternatively, you can try crowdfunding platforms such as GoFundMe.

Private student loans

Although private student loans should be last on your list, they are still a viable option. If you have a robust credit score or a cosigner who does, you can potentially snag a decent interest rate with a reputable lender.

Also, you always have the option to refinance your student loans, especially if you see a better deal offered by another lender. Just know that it’s not advisable to refinance your federal loans since you’ll miss out on their particular benefits, such as repayment plans and student loan forgiveness.

Frequently asked questions

How do you qualify for federal student loans?

In order to receive federal financial aid, you must be a U.S. citizen or eligible noncitizen who attends or plans to attend an eligible college or university at least half-time, as noted above. Furthermore, you must maintain satisfactory academic progress in order to receive financial aid. Although the Department of Education reviews your and your family’s financial documents when calculating your loan and grant amounts, there’s no defined income limit to apply.

Is there a limit to how much I can borrow in federal student loans?

Yes, federal student loans have a maximum amount you’re allowed to borrow each year, as well as an aggregate total for your entire degree. The Department of Education sets these limits, but it’s ultimately up to your school and depends on various factors, such as loan type, your school’s cost of attendance and your current status (such as undergrad vs. graduate student).

The only exception is a parent PLUS loan, which has no limit beyond the school’s cost of attendance (minus other aid you’ve already received).

How do I apply for more financial aid?

Your financial aid is determined by your Expected Family Contribution, which is a calculation of what your family can reasonably contribute toward your college education. However, if you’ve experienced financial hardship or extenuating circumstances, you can contact your school’s financial aid office to inquire about appealing your financial aid award letter.

In the end, it’s up to your school whether your case merits a review.

Alternatively, you can apply for an emergency student loan, which often comes with low or no interest and can help in a bind.

And, of course, private student loans can be used to cover the remaining gaps. Just remember that private lenders tend to impose higher interest rates and don’t usually offer the flexible repayment plans you’ll get with federal student loans.



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