It’s important to know how student loans work so you can determine the best way to pay for your education. You can borrow federal or private student loans to pay for college, though federal loans are the more popular option — only an estimated 7.2% of the nation’s outstanding student loans is private debt, according to 2022 data from Enterval Analytics.
Learn more about federal student loans before you decide if this type of funding is right for you.
- How federal loans work
- 4 types of government loans
- How to apply for federal loans
- Loan forgiveness and other benefits
- Federal vs. private student loans
What are federal student loans?
While private loans are offered by online lenders, banks, and credit unions, federal student loans are issued by the Department of Education. Because these loans come from a government agency, they generally have more favorable terms for borrowers. They can also be easier to qualify for since most types of federal loans don’t require a credit check.
When you apply for federal loans, there are different programs you may be eligible for, depending on factors such as your family’s income and the degree you are pursuing. Each comes with similar benefits, including the ability to cap payments at a percentage of your discretionary income and a chance to qualify for loan forgiveness.
However, you must meet certain eligibility requirements to borrow any kind of federal student loan. Specifically, you must:
- Be a U.S. citizen, permanent resident, or eligible noncitizen
- Have a valid Social Security number (unless you’re from Republic of the Marshall Islands, Federated States of Micronesia, or the Republic of Palau)
- Be accepted or enrolled in an eligible degree- or certificate-granting program
- Attend school at least half-time
- Make satisfactory academic progress, as determined by your school
- Apply for loans using the Free Application for Federal Student Aid (FAFSA)
- Demonstrate that you’re eligible to obtain an education at a college or career school — in other words, show that you have a high school diploma (or equivalent certification) or are enrolled in an eligible career pathway program
4 types of federal student loans
There are several different kinds of federal loans, each of which carries its own eligibility and repayment policies.
1. Direct Subsidized Loans
Direct Subsidized Loans are the most affordable type of federal debt because you’re not responsible for interest fees while you’re in school and during any eligible period when payments are paused. This means your balance won’t increase due to unpaid interest during these times.
Your interest rate is a standard, fixed interest rate, and no credit check is required. However, not everyone will qualify for these loans.
- Eligibility requirements: You must be an undergraduate with demonstrated financial need and meet the general eligibility requirements for federal financial aid.
- Interest rate: 4.99% for the 2022-23 school year.
- Fees: 1.057% origination fee for the 2022-23 school year.
- Loan amounts: Up to $3,500 annually for first-year undergraduates, $4,500 for second-year undergraduates, and $5,500 for undergrads in their third year and beyond. You can borrow a lifetime maximum of $23,000.
2. Direct Unsubsidized Loans
Direct Unsubsidized Loans are available to undergraduate and graduate students, regardless of their income or credit history. You don’t need to demonstrate financial need to be eligible.
These loans can be more affordable than Direct PLUS Loans (more on those below). But you’re responsible for all interest costs, which will begin accruing as soon as the money is distributed. If you don’t pay interest while in school, that cost will be added to your loan balance.
- Eligibility requirements: Available to undergraduate and graduate students, regardless of their financial need.
- Interest rates: 4.99% for undergraduate borrowers in the 2022-23 school year and 6.54% for graduate or professional students.
- Fees: 1.057% origination fee for the 2022-23 school year.
- Available loan amounts (dependent undergraduates): Many undergrads are considered dependent students, and can borrow up to $5,500 in their first year, $6,500 in their second year, and $7,500 in their third year and beyond. There’s a lifetime limit of $31,000, including all Subsidized and Unsubsidized Loans you borrow.
- Available loan amounts (independent undergraduates): If you qualify as an independent student, you can borrow up to $9,500 in your first year, $10,500 in your second year, and $12,500 in your third year and beyond. There’s a lifetime limit of $57,500, including all Subsidized and Unsubsidized Loans you borrow.
- Available loan amounts (graduates): You can borrow up to $20,500 annually if you’re a graduate or professional student. There’s a lifetime limit of $138,500, including any federal loans you borrowed for your undergraduate education.
3. Direct PLUS Loans
Direct PLUS Loans are available to graduate students and parents of undergrads. They’re more expensive than other federal loans, and they’re the only type that requires a credit check.
However, your credit score isn’t a factor — instead, your financial history is checked for “adverse credit.” You might have adverse credit if you’ve had delinquent debt in the past two years or a default, bankruptcy, repossession, foreclosure, or wage garnishment in the past five years.
Even with adverse credit, you could still qualify for a PLUS loan by adding an endorser (similar to a cosigner) to the loan or by documenting extenuating circumstances related to your credit history.
- Eligibility requirements: For Parent PLUS Loans, you must be the biological or adoptive parent of a dependent undergraduate student (stepparents may qualify in some cases). For Grad PLUS Loans, you must be a graduate or professional student enrolled at least half-time in an eligible program. Whether you’re a parent or grad student, you can’t have adverse credit.
- Interest rate: 7.54% for the 2022-23 school year.
- Fees: 4.228% origination fee for the 2022-23 school year.
- Available loan amounts: Up to the school-certified cost of attendance, minus any other financial assistance provided.
4. Direct Consolidation Loans
Direct Consolidation Loans allow you to combine your existing federal debt into one new loan. Doing so can simplify your monthly payments — and potentially lower them — as well as grant access to certain repayment and forgiveness plans.
However, consolidation can also lead to a longer repayment period (meaning more interest may accrue) and a potential loss of some benefits, such as rate discounts or loan cancellation opportunities.
- Eligibility requirements: You must have graduated, left school, or dropped below half-time enrollment. The loans you consolidate can’t be in default, and you must be in repayment or a grace period. Lastly, you must have eligible federal student loans, including:
- Direct Subsidized, Unsubsidized, and PLUS Loans.
- Older types of federal debt, such as Federal Family Education Loans (FFEL), Perkins Loans, Nursing Student Loans, and Health Professional Loans.
- Interest rate: Your rate is a fixed, weighted average of the loans you consolidated, rounded up to the nearest eighth of a percent.
- Fees: None.
- Available loan amounts: You can consolidate all eligible federal loans, no matter the amount.
How to apply for federal student loans
While federal loans have a lot of perks, the application process is more complicated than it is for private student loans. Here are the steps involved.
1. Create an FSA ID
Your first step is to create a Federal Student Aid (FSA) ID at StudentAid.gov. You’ll need this username and password to fill out your application for federal student aid, sign required forms, and access your account later. If you’re a dependent undergraduate, one of your parents should also create their own FSA ID.
2. Complete the FAFSA
The Free Application for Federal Student Aid (FAFSA) is your ticket to all types of federal student aid, including loans, grants, and work-study programs. You must submit it for each year you attend school, and can complete the form online by signing into your account using your FSA ID. It’s wise to complete the FAFSA soon after it becomes available on Oct. 1 annually.
You (and your parent, if you’re a dependent student) will need to provide:
- Your Social Security number
- Your driver’s license number, if you have one
- Your alien registration number, if you’re not a U.S. citizen
- Federal tax information
- Records of untaxed income, such as child support or interest earnings
- Details on assets, including cash accounts, real estate, stocks, and bonds
You will also need to list the college(s) that you attend or are applying to. Schools use your information to put together a financial aid package for the upcoming year.
3. Review your Student Aid Report
After your FAFSA is submitted, you will receive a Student Aid Report within three weeks. This is a summary of the data you provided — carefully review it for mistakes.
In some cases, your report will include a request for additional verification. If this happens, the schools to which you’ve applied will contact you with details about the extra documentation they need.
4. Review your award letter
You’ll receive a student aid award letter from each school you’re accepted into. This will detail the types of federal aid you qualify for, along with other sources of funding, such as school-sponsored scholarships.
Review this letter to see what financial support you can get and how much you’ll have to pay out of pocket. Determine which aid you want to accept and alert your school by the deadline it has set.
Typically, you’ll want to first accept awards that don’t have to be repaid, such as grants and scholarships. Then, compare the costs and benefits of borrowing federal and private loans.
Loan forgiveness and other benefits of federal loans
Federal student loans have important borrower benefits that generally aren’t offered by private lenders, including:
Flexible repayment options
There are many federal repayment plans to choose from, including several income-driven options. These plans base your monthly payments on a percentage of your discretionary income and forgive any remaining balance after you make 20 or 25 years of payments.
You can also change your payment plan as needed, free of charge, simply by contacting your loan servicer. This can help you manage fluctuations in your income. (However, keep in mind that lowering your monthly dues and lengthening your loan term can increase the total cost of your repayment.)
Generous deferment and forbearance options
Deferment and forbearance both allow you to pause loan payments for a set period. While private lenders typically offer some form of deferment or forbearance, federal options are generally longer and more flexible. Plus, federal loans are the only debts eligible for the COVID-19 student loan pause slated to last 60 days after June 30, 2023, pending Supreme Court action on the Biden administration’s proposal for mass debt relief.
Loan forgiveness
Loan forgiveness is another major benefit of federal loans. While there are several programs available, two of the most popular are:
- Public Service Loan Forgiveness (PSLF): If you work at an eligible government or nonprofit organization and make 120 qualifying payments, you can have any remaining balance forgiven.
- Teacher Loan Forgiveness: Five years of service in a low-income school or educational agency could net you up to $17,500 in federal loan relief.
- Income-driven repayment: Repay your loans on an income-driven plan for 20 or 25 years and receive forgiveness on the remaining amount.
Federal vs. private student loans
There are important differences between federal and private student loans, including the following:
- Origination fees: Most federal loans charge origination fees, while many private student lenders don’t.
- Eligibility rules: You don’t need good credit or proof of income for most federal loans. You’ll need both to qualify for most private student loans.
- Interest rates: All federal loans have fixed, standardized interest rates that aren’t based on your credit. With private loans, interest rates vary by lender and are based on your financial background. Some private loans also have variable rates, which can change over time.
- Repayment plans: When you borrow private loans, you typically choose your repayment plan before you receive the money, and you can’t change it later. Federal loans offer more repayment options than most private lenders, and you can change your repayment strategy as needed.
- Borrower protections: Federal loans offer more options for deferment and forbearance than private loans. Plus, they provide the chance to cap payments at a percentage of your income, which most private loans don’t.
- Loan forgiveness. Private lenders don’t offer loan forgiveness programs.
- Loan amount: You can often borrow up to your school’s cost of attendance with private loans. Some federal loans have lower caps, which may not be enough to cover your costs.