Federal Student Loans: Everything You Need to Know

College is expensive, but luckily, there are a lot of options out there to help students fund their education including federal student loans. Federal student loans, sometimes known as government loans, are funded by the U.S. Department of Education. Keep reading to learn everything you need to know about federal student loans! 

Good-to-know definitions

• Subsidized = the government pays your interest while you are in college and up to 6 months after you leave)
• Unsubsidized = loan interest begins accruing as soon as your school receives the loan money
• Interest = the price paid for borrowing money expressed as a percent rate over a period of time
• Grace period = typically six months after you graduate or leave school before you begin to make payments
• Deferment = a period in which loan payments are temporarily paused
• Cost of attendance = total amount it will cost for a student to attend a college for 1 year
• Credit check = an examination of someone’s credit history
• Dependent students = Dependent students are required to list their parental information on the FAFSA
• Aggregate loan limit = the maximum amount of money students can borrow throughout their entire education
• Independent students = someone who will not receive any financial support for their education from their parents or guardians

See also: What if my parents refuse to pay for college or complete the FAFSA?

What are the different types of federal student loans? 

Federal student loans are offered by the U.S. Department of Education to help eligible students cover the cost of higher education. This could include four year college or university, community college, trade school, or technical school. 

Direct Subsidized Loans 

Direct Subsidized Loans are available to undergraduate students who demonstrate financial need. There is no interest charged while an undergraduate student is in school at least half-time, during the grace period and during deferment periods. The grace period is typically six months after you graduate or leave school before you begin to make payments. 

Frequently asked questions about Direct Subsidized Loans

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to undergraduate and graduate students with no requirement to demonstrate financial need. Your school will determine the amount you can borrow based on the cost of attendance and other financial aid you receive. Interest is charged during all periods and may be capitalized which means that unpaid interest can be added to your loan’s principal balance.

Frequently asked questions about Direct Unsubsidized Loans

Also see: All about subsidized vs unsubsidized loans

A helpful chart on the main differences between Direct Subsidized Loans and Direct Unsubsidized Loans

Direct PLUS Loans 

There are two types of Direct PLUS Loans: the Grad PLUS loan and the Parent PLUS loan

Grad PLUS Loan

Grad PLUS Loans are available to graduate or professional students enrolled at least half-time at an eligible school in a program leading to a graduate or professional degree or certificate. Graduate students can borrow Grad PLUS loans to cover any cost not already covered by other financial aid or grants, up to the full cost of attendance. In order to obtain a Grad PLUS loan you will need to pass a credit check and meet the general eligibility requirements for federal student aid. 

Parent PLUS Loan

Parent PLUS loans allow parents of dependent students to borrow money to cover any costs not already covered by the student’s financial aid package. Parent PLUS loans are the financial responsibility of the parents, not the student and cannot be transferred to the student when the student graduates. This type of loan has no grace period and parents must start to repay the Parent PLUS loans as soon as the loan is fully dispersed to the student or the school. 

Read more: Parent PLUS loans: Everything you need to know

Who is eligible for federal student loans?

To be qualify for federal student loans, regardless of what type, you will need to have the following qualifications: 

• Be a U.S. citizen or eligible non-citizen
• Have a valid Social Security number
• Be enrolled or accepted for enrollment as a student with an eligible degree or certificate program, at least half-time

If you fit the above criteria, then you should ensure you qualify for the specific federal student loan you are interested in. View the chart below to determine if you are eligible for federal student loans. 

What are the borrowing limits for federal student loans? 

The borrowing limits for federal student loans can vary depending on the academic year of enrollment, the student’s standing (independent or dependent) and the amount of other financial assistance allocated to the student for educational purposes. 

First-year undergraduate students

Dependent students (except students whose parents are unable to obtain PLUS Loans)

The limit for first-year undergraduate dependent students annually is $5,500 and no more than $3,500 of this amount may be in subsidized loans.

Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)

The limit for first-year undergraduate independent students annually is $9,500 and no more than $3,500 of this amount may be in subsidized loans.

Second-year undergraduate students

Dependent students (except students whose parents are unable to obtain PLUS Loans)

The limit for second-year undergraduate dependent students annually is $6,500 and no more than $4,500 of this amount may be in subsidized loans.

Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)

The limit for second-year undergraduate independent students annually is $10,500 and no more than $4,500 of this amount may be in subsidized loans.

Third-year and older undergraduate students

Dependent students (except students whose parents are unable to obtain PLUS Loans)

The limit for third-year and older undergraduate dependent students annually is $7,500 and no more than $5,500 of this amount may be in subsidized loans.

Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)

The limit for third-year and older undergraduate independent students annually is $12,500 and no more than $5,500 of this amount may be in subsidized loans.

Graduate and professional students

Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)

The limit for graduate or professional independent students annually is $20,500 which are unsubsidized only.

Subsidized and Unsubsidized Aggregate Loan Limit

Dependent students (except students whose parents are unable to obtain PLUS Loans)

The limit is $31,000 with no more than $23,000 of this amount may be in subsidized loans.

Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)

The limit is $57,500 for undergraduates with no more than $23,000 of this amount may be in subsidized loans. 

The limit is $138,500 for graduate or professional students, and no more than $65,500 of this amount may be in subsidized loans. The graduate aggregate limit includes all federal loans received for undergraduate study (graduate students would only have subsidized loans if they attended graduate school prior to 2012).

What if I need to go over the aggregate loan limit for federal student loans? 

Unfortunately, you are not eligible to receive additional federal student loans if your loan amount reaches the aggregate loan limit. However, if you repay some of your loans and bring your outstanding loan debt below the aggregate limit, you could then borrow again up to the amount of your remaining eligibility under the aggregate limit. 

What are some benefits of taking out federal student loans? 

Flexibility

Federal student loans generally offer more flexible options than private student loans. For example, you can change your repayment options even after receiving a federal student loan which offers a lot of flexibility for students based on their financial situation. 

Lower interest rates

Federal student loans typically offer lower fixed interest rates compared to private loans, which can save students money over the life of the loan. 

Loan forgiveness programs 

Federal student loans offer various loan forgiveness programs such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness, for borrowers who work in certain public service or teaching positions. 

Also see: All you need to know about Biden student loan forgiveness

No credit check

Most federal student loans do not require a credit check which makes them accessible to a wider range of students including those with limited or no credit history. The exceptions for no credit check include Direct PLUS Loans. 

You don’t need a cosigner

Most federal student loans do not require a student’s credit to be considered therefore it is typically unnecessary to apply for a federal student loan with a cosigner. 

There is a grace period

Federal student loans typically have a grace period which is usually six months after you graduate, leave school or drop below half-time enrollment. During this time you are not required to make loan payments.

How much should I borrow in federal student loans? 

Deciding how much to borrow in federal student loans is a critical financial decision that should be made extremely carefully in order to avoid excessive debt. Here are some helpful tips to help you determine what an appropriate borrowing amount should be:

Calculate your educational costs

You should begin by calculating the cost of attendance at the school of your choice. This should include tuition, fees, room and board, books, supplies, transportation and any personal expenses. Then, you should review the financial aid award letters from your schools in order to determine how much assistance you’re receiving, including grants, scholarships and work-study. 

Once you have this information figured out, you should then calculate the difference between your educational costs and the financial aid you have received. This will be the amount you need to cover with student loans or other sources of funding. 

Borrow wisely

Now that you have an estimated amount of money you will need to borrow, make sure you are only taking out that amount of money! Try your best to avoid taking out more than necessary. 

Make sure that taking out federal student loans is a last-resort option. Double check that there are no other sources of financial support such as scholarships, grants or family funds you can use towards your education.

Don’t forget that federal student loans have annual and aggregate or lifetime limits depending on the loan type! Therefore, do not exceed these limits as excessive borrowing could lead to unmanageable debt. 

How do I take out federal student loans? 

Taking out federal student loans can seem like a daunting task, however, no need to worry! There are some relatively simple steps you will need to take out federal student loans. 

Complete and submit the FAFSA

The FAFSA is the beginning of your federal student loan journey! You’ll need to complete the FAFSA entirely which includes providing personal information such as your Social Security number, driver’s license and income information. If you are a dependent student, you will also need your parent’s financial information.

You should submit your FAFSA to your chosen schools and make sure that these institutions are eligible for federal aid. In order for a school to be eligible the school must offer an eligible degree or certificate program that leads to the gainful employment of the student. 

Review financial aid award letter and accept the federal student loans 

Once your FAFSA has been processed, your selected schools will send you financial aid award letters. Within these letters are the types and amounts of federal student aid you are eligible for including grants, scholarships and loans. Be sure to compare the award letters from different schools to make an informed decision! 

In order to accept the federal student loans, follow the instructions provided by the school. This often will involve logging into your selected institution’s financial aid portal. You can decide to accept all or part of the loans offered. 

Choose a repayment plan

Federal student loans have various repayment options such as income-driven plans, standard repayment, and extended repayment. Your loan servicer will provide you with information on your repayment options. Your first payment is usually due after the grace period, which is six months after graduating, leaving school, or dropping below half-time enrollment. 

Federals student loans: bottom line for students

Federal student loans are government-funded and designed to help students pay for higher education. Federal student loans can include Direct Subsidized Loans, Direct Unsubsidized Loans, Grad PLUS Loans and Parent PLUS loans. Eligibility for federal student loans is determined by completion of the FAFSA and loan amounts are subject to yearly limits. Federal student loans provide flexible repayment plans as well as loan forgiveness programs for times of financial hardship. 

It is extremely important to manage these federal student loans responsibly. Ultimately, federal student loans should be a last-resort option for students. First students should use scholarships, grants and work-study programs before taking out loans. 

Overall, federal student loans allow education to become more affordable and accessible to a wider range of students while offering important borrower protections and financial aid options. 

Key Takeaways

• There are different types of federal student loans including Direct Subsidized Loans, Direct Unsubsidized Loans, Grad PLUS Loans and Parent PLUS Loans.
• Subsidized loans do not accrue interest while you’re in school or during deferment while unsubsidized loans accrue interest from the time they are disbursed.
• To qualify for federal student loans, you generally must be a U.S. citizen, eligible non-citizen or eligible international student and you must complete the FAFSA. 
• Federal student loan interest rates are typically lower than private loans and are set by the government.

Frequently asked questions about federal student loans