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The ultimate guide to federal student loans

College student doing homework
Zak Kendal/Getty Images
College student doing homework
Zak Kendal/Getty Images
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For prospective students, the long-term economic benefits of attending college have never been higher, but neither have the costs. If you don’t have the cash to pay for thousands of dollars in tuition each year, you could qualify for federal student loans, which are a type of funding provided by the U.S. Department of Education.

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: 4.99%
Undergraduates: 4.99%
Graduates: 6.54%
7.54%
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 U.S. Department of Education that is used to pay for higher education costs. To apply for a federal student loan, you’ll have to complete the Free Application for Federal Student Aid (FAFSA). Once you submit this form, any college that you’ve been accepted to will send an award letter detailing any financial aid that you’re eligible for, including grants, scholarships, work-study and loans. Federal student loans are the only type of funding you’ll need to pay back after you leave school or graduate.

Aside from Direct PLUS Loans, federal student loans don’t require a credit check, and most students can borrow federal loans without needing a co-signer. They can also delay repayment until six months after they graduate.

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

Currently, one of the most significant benefits of federal student loans is the period of administrative forbearance due to COVID-19. Through Aug. 31, 2022, the government has suspended interest charges on federal student loans, and payments are not required. It’s also halted collection attempts on overdue and defaulted 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 not charge interest while you’re in school (as long as you’re enrolled at least half time), during the six-month grace period after you graduate and during any deferment periods.
  • Direct Unsubsidized Loan. These loans are for undergraduate and graduate students, along with those pursuing a professional degree. There is no financial need requirement. You’ll accrue interest while 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. 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 one monthly payment using a Direct Consolidation Loan.

Federal loan interest rates

U.S. Congress sets the federal student loan interest rates each year based on the 10-year Treasury note yield. Interest rates may vary year to year, but they’re fixed once you’ve received the loan funds. Interest rates on federal student loans for the 2022–23 school year are:

  • Direct Subsidized Loan: 4.99 percent.
  • Direct Unsubsidized Loan: 4.99 percent (undergraduate) or 6.54 percent (graduate).
  • Direct PLUS Loan: 7.54 percent.

How much can I borrow with a federal student loan?

The amount you can borrow in federal student loans partly depends on whether you’re 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.

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) Up to full education costs
Year 2 $6,500 (up to $4,500 may be subsidized) $10,500 (up to $4,500 may be subsidized) Up 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) Up 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) Up 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 approval. Direct Subsidized and Direct Unsubsidized Loan borrowers won’t have to go through a credit check during the application process. If you don’t have a credit history, you’ll still be able to qualify for federal loans.
  • Flexible repayment terms. The standard repayment plan lasts 10 years, but you can also apply for one of several different repayment plans if the standard plan doesn’t fit your budget. For instance, you may choose a repayment plan that is based on your income.
  • Loan forgiveness options. There are a few different ways to access loan forgiveness programs with federal student loans. There are five different income-driven repayment plans that will forgive any balance remaining after a 20- or 25-year repayment period, and the Public Service Loan Forgiveness (PSLF) program discharges your loan after you make 120 on-time payments while working for a government agency or a nonprofit.
  • Hardship options. With federal student loans, you can qualify for deferment or forbearance if you lose your job, have a health crisis 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 borrowing 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 2022-23 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 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.

How to apply for a federal student loan

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. If you submit a paper application, it will take about seven to 10 days to be processed.
  2. Receive your Student Aid Report (SAR). After you submit the FAFSA, the Department of Education will send you an SAR, which explains your eligibility for federal student aid.
  3. Read your offers. The schools you list on the 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 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. This will explain how student loans work so you’re not surprised after graduation.
  6. Sign for the loan. Read through and sign the master promissory note, which includes the terms of the loan.
  7. Renew your application. If you need more financial aid, you’ll need to submit a new FAFSA each school year.

Will federal student loans be forgiven?

Talk of federal student loan forgiveness has been circulating since before President Biden took office in 2021. Part of the president’s campaign was a promise to cancel $10,000 of student loan debt per borrower, but the plan hasn’t been without its critics. Some lawmakers have debated Biden’s authority to forgive student debt, and many more have questioned the logistics of such a proposal.

While there have been no official moves on the student loan forgiveness front, recently the administration has been hinting at the possibility of following through on Biden’s promise — at least partially. Three sources close to the matter told the Washington Post that the administration was planning on canceling $10,000 in federal debt for borrowers below a certain income threshold, and officials have suggested that any decision regarding student loan forgiveness would be made before the end of the payment pause.

Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Student loans editor