The ultimate guide to federal student loans

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For prospective students, the long-term economic benefits of attending college have never been higher, but so have the costs. If you don’t have the cash on hand to pay for potentially thousands of dollars each year, you could qualify for federal aid. Federal student loans are a type of funding provided by the U.S. Department of Education that can help students pay for tuition, fees, books, housing and more. Here’s what you should know about these types of loans as you explore ways to pay for college.

Summary: Federal student loans

Direct Subsidized
Direct Unsubsidized
Direct PLUS
Direct Consolidation
Maximum loan amount
Undergraduates: $23,000 aggregate
Undergraduates: $31,000 to $57,500 aggregate
Graduates: $138,500 aggregate
Up to the cost of attendance
N/A
Interest rate
Undergraduates: 2.75%
Undergraduates: 2.75%
Graduates: 4.3%
5.3%
Weighted average of consolidated loans
Origination fee
1.057%
1.057%
4.228%
N/A

What is a federal student loan?

A federal student loan is a loan offered by the federal government used to pay for higher education costs. When you complete your Free Application for Federal Student Aid (FAFSA), your award letter details the money you’ll receive for school in the form of grants, scholarships, work-study and loans. Federal student loans are the only type of funding you’ll need to pay back.

Aside from Direct PLUS Loans, most federal student loans don’t require a credit check, and many students can borrow without the need of a co-signer and delay repayments until six months after they graduate.

Federal student loans offer borrowers benefits and protections that private student loans can’t. For instance, you’ll qualify for Public Service Loan Forgiveness (PSLF) and income-driven repayment plans only if you have federal student loans. You can also take longer to repay your loans in some cases, with Direct Consolidation loans stretching repayment to 30 years.

One of the most significant benefits of federal student loans currently is the period of administrative forbearance due to COVID-19. Through Sept. 30, 2021, the government has suspended payments on federal student loans, including collection attempts on overdue and defaulted loans. This relief is exclusive to federal student loans.

Types of federal student loans

Federal student loans are currently available under the William D. Ford Federal Direct Loan Program. Within that program, you can choose from four main types of loans.

  • Direct Subsidized Loan. Undergraduates who can demonstrate financial need may qualify for subsidized loans. The U.S. Department of Education will pick up your interest tab while you’re in school (as long as you’re enrolled half time), for the first six months after you’re done with school and during a deferment period.
  • Direct Unsubsidized Loan. These are for undergraduate and graduate students, along with those pursuing a professional degree. There is no financial need requirement. You’re on the hook for all interest charges while you’re in school, during the grace period and during any deferment periods.
  • Direct PLUS Loan. There are two types of PLUS loans: grad PLUS loans and parent PLUS loans. Grad PLUS loans are available for professional students and graduate students who have maxed out their Direct Unsubsidized Loan limits, and parent PLUS loans are for parents of undergraduate students. Applicants can borrow up to the full cost of attendance, minus other financial aid.
  • Direct Consolidation Loan. If you have several types of federal student loans, you can combine all of them into one loan with one interest rate and monthly payment using a Direct Consolidation Loan.

Federal loan interest rates

The U.S. Congress sets the federal student loan interest rates each year. Interest rates may vary each year, but they’re fixed once you receive the loan funds. Interest rates on federal student loans for the 2020–21 school year are:

  • Direct Subsidized Loan: 2.75 percent.
  • Direct Unsubsidized Loan: 2.75 percent (undergraduate) or 4.3 percent (graduate).
  • Direct PLUS Loan: 5.3 percent.

Since 2013, interest rates on federal loans have been tied to the 10-year Treasury note. For Direct Subsidized and Direct Unsubsidized Loans, interest rates are the 10-year yield plus 2.05 percent or 3.6 percent for undergraduate and graduate students, respectively. For Direct PLUS Loans, interest rates are the 10-year yield plus 4.6 percent. The 10-year Treasury is a gauge of investor outlook for economic growth, which means that a faster-growing economy makes it more expensive for people to go to college and an economic downturn makes it cheaper.

How much can I borrow with a federal student loan?

The amount you can borrow in federal student loans partly depends on your status as an independent or dependent student, which is based on whether your parents financially support you. How much you can borrow is also based on your year in school, and only a certain amount may be subsidized each year.

If you’re an undergrad student and your parents don’t qualify for a parent PLUS loan, you may be able to borrow up to the independent undergraduate limits.

Dependent undergraduate student Independent undergraduate student Graduate or professional degree student
Year 1 $5,500 (up to $3,500 may be subsidized) $9,500 (up to $3,500 may be subsidized) $20,500 to full education costs
Year 2 $6,500 (up to $4,500 may be subsidized) $10,500 (up to $4,500 may be subsidized) $20,500 to full education costs
Year 3 and beyond $7,500 (up to $5,500 may be subsidized) $12,500 (up to $5,500 may be subsidized) $20,500 to full education costs
Lifetime maximum limit $31,000 (up to $23,000 may be subsidized) $57,500 (up to $23,000 may be subsidized) $138,500 to full education costs

Pros and cons of federal student loans

If you’re on the fence about federal student loans, weigh the pros and cons to see if it’s the right move for you.

Pros

  • Easier qualification. Direct Subsidized and Direct Unsubsidized loan borrowers won’t have to go through a credit check during the application process. So if you’re new to credit, your lack of credit history won’t stop you from borrowing money to pay for school.
  • Flexible repayment terms. The standard repayment plan lasts 10 years, but you can apply for one of eight different repayment plans if the standard plan doesn’t fit with your budget. For instance, you may choose a repayment plan that increases monthly payments over time or one that is based on your income.
  • Debt forgiveness options. There are a few different ways to access loan forgiveness programs with federal student loans. An income-driven repayment plan forgives any balance remaining after a 20- or 25-year repayment period, depending on your plan. Public Service Loan Forgiveness (PSLF), on the other hand, discharges your loan if you work for the U.S. government or a nonprofit and you make 120 on-time payments.
  • Hardship options. With federal student loans, you can receive a forbearance or postponement if you lose your job, endure a health scare or go back to college. There are also periods of administrative forbearance, like the period currently in place due to the coronavirus pandemic.

Cons

  • Lower borrowing limits. Federal student loans have low borrower limits compared to private student loans. If you’ve maxed out your federal aid, you may need to find other ways to supplement your funding.
  • Origination fees. All federal Direct Loans come with an origination fee, which is taken from the loan proceeds. For the 2020-21 school year, the fee is 1.057 percent for Direct Subsidized and Direct Unsubsidized loans and 4.228 percent for Direct PLUS Loans.
  • Not available for all schools. Applicants can use federal Direct Loans to pay for education only at accredited postsecondary institutions. If your school does not qualify, then you’ll have to find another type of financial aid.
  • Credit check for certain loans. The Department of Education does run a credit check for Direct PLUS loan applicants. If you have an “adverse credit history,” you’ll need to either find a co-signer who will take on the responsibility of paying the loan if you can’t or prove to the Department of Education that your poor credit report is due to circumstances beyond your control.
  • Higher interest rates. Graduate students, professional students and parents of undergrad students may apply for a Direct PLUS loan. But borrowers with strong credit may get a better interest rate on a private student loan, as long as they’re okay relinquishing the built-in protections of a federal loan.

How to repay federal student loans

Federal student loans come with different repayment options, like:

  • Standard Repayment Plan: Loans are automatically enrolled in the standard plan, which has a fixed monthly amount where your loans are paid off within 10 years.
  • Graduated Repayment Plan: Payments start low, then gradually increase every two years for up to 10 years (30 years for Direct Consolidation Loans).
  • Extended Repayment Plan: Borrowers with more than $30,000 in loans can make fixed or graduated payments for up to 25 years.
  • Pay As You Earn Repayment Plan (PAYE Plan): Under PAYE, your monthly payments will be 10 percent of your discretionary income, but never more than what you would pay under the standard plan. Any outstanding loan balance remaining after 20 years is forgiven.
  • Revised Pay As You Earn Repayment Plan (REPAYE Plan): With REPAYE, you’ll pay 10 percent of your discretionary income for 20 or 25 years, depending on your studies. At this time, your remaining balance is forgiven.
  • Income-Based Repayment Plan (IBR Plan): Monthly payments on the IBR Plan are either 10 percent or 15 percent of your discretionary income (depending on when you first received your loans), but never more than what you would pay on the standard plan. The remaining balance on your loans after 20 or 25 years is forgiven.
  • Income-Contingent Repayment Plan (ICR Plan): With an ICR Plan, you’ll pay either 20 percent of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income — whichever is less. Any remaining balance is forgiven after 25 years.
  • Income-Sensitive Repayment Plan: Only available for FFEL borrowers, the Income-Sensitive Repayment Plan bases your monthly payments on your annual income. This plan lasts a maximum of 10 years.

How to apply for federal student loans

Applying for a federal student loan is free, and it starts with submitting the FAFSA. The application opens on Oct. 1 each year, and submission deadlines depend on your school and state. The FAFSA should be your first step when searching for financial aid for college.

Here‘s how to get started:

  1. Fill out the FAFSA. Applicants will need to complete and submit the FAFSA form. If you complete the form online, your application will be processed within three to five business days. Processing a paper application will take about seven to 10 days.
  2. Receive your SAR. After you submit the FAFSA, the Department of Education will send you a student aid report (SAR), which explains your eligibility for federal student aid.
  3. Read your offers. The colleges you listed on your FAFSA will have access to your financial information. They’ll use it to calculate your financial aid offer, which may include federal student loans, federal grants and work-study programs. These offers vary with each school.
  4. Accept the financial aid. Contact your school to accept the financial aid. If it includes federal student loans, the school will tell you how to accept them.
  5. Attend loan counseling. Before you receive your loan funds, you’ll need to complete entrance counseling.
  6. Sign for the loan. Read through and sign the master promissory note, which includes the terms of the loan.
  7. Renew your application. You’ll need to submit a new FAFSA each school year.

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