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How do federal student loans work?

Dive into our primer on getting a student loan from the DoE.

Given ever-rising costs of higher education, chances are you’ll need a student loan to pay for at least part of your undergraduate or graduate degree. Your school might suggest federal loans, but it’s sometimes hard to tell exactly what you’re getting into. Here’s a rundown as to why you might want to consider them first.

What’s a federal student loan?

A federal student loan is a loan issued by the federal government that students can use to cover college costs, including tuition, fees, living expenses, textbooks, transportation and more.

Federal loans come with a low fixed interest rate set by Congress each year, and they’re often the least expensive student loan option out there. They also come with more flexible repayment plans, deferment and forbearance options and even student debt forgiveness programs that you can’t find anywhere else.

Fill out the Free Application for Federal Student Aid (FAFSA) to apply for a student loan. Your deadline to submit your application depends on your state, though the sooner the better. Reach out to your school’s financial aid office for your specific deadline.

Who’s eligible for a federal student loan?

Unlike other types of debt, you don’t need to have a job or a credit score to qualify for a federal student loan. But you have a handful of requirements to qualify.

  • US citizen or eligible noncitizen. If you’re not a citizen, permanent resident or US national, you must have the right type of visa.
  • Valid Social Security number. This requirement doesn’t apply to Micronesia, Marshal Islands or Palau citizens.
  • Registered with Selective Service. Men between 18 and 25 must register to have their names added to a lottery in the event of a military draft.
  • Regular student. You must be on track to receive a degree or certificate at the end of your program.
  • Enrolled or accepted to an eligible program. Your school must participate in the Title IV program.
  • Satisfactory academic progress. This usually means you have to maintain a 2.0 GPA, pass at least two-thirds of attempted credits and graduate within 150% of the normal length of your program.
  • No defaults on student loans. You can’t be more than 270 days late on a student loan repayment or owe money on federal grants.
  • Proof of qualification. You must have a high-school degree or its equivalent or be enrolled in a career pathway program.

3 types of federal student loans

If you’re an undergrad or graduate student, you’ll most likely get a loan through the William D. Ford Federal Direct Loan Program — also commonly called Stafford Loans. Some of these loans are subsidized, meaning the government forgoes interest under specific circumstances. With others, interest starts adding up as soon as your school gets the funds.

Learn more about how each loan program works.

1. Direct subsidized loans

To qualify for a direct subsidized loan, you must be an undergraduate student who can demonstrate financial need. You won’t pay interest on this loan while you’re in school, during your grace period and if your loan is in deferment.

How much you can borrow depends on which year you’re in your program and whether you’re a dependent. If you’re a dependent but your family can’t qualify for a PLUS Loan, the Department of Education counts you as an independent student.

Year in schoolAnnual limit for dependent students
Total limit$23,000

The current interest rate for direct unsubsidized loans is 5.5% . The current origination fee is 1.059% of the loan amount.

2. Direct unsubsidized loans

Direct unsubsidized loans are available to undergraduates, graduates and professional students. And you don’t need to show financial need to qualify.

You’re able to borrow more through the direct loan program, but rates can be higher. Also, interest continues to add up while you’re still in school, during your grace period and during deferment and forbearance.

Like with direct loans, how much you can borrow depends on which year you’re in your program. It also depends on whether your parents count you as a dependent on their tax returns. If you’re a dependent but your family can’t qualify for a PLUS Loan, the Department of Education counts you as an independent student.

Year in schoolAnnual limit for dependent studentsAnnual limit for independent students
Graduate and professional studentsN/A$20,500
Lifetime limit$31,000
  • Undergraduates: $57,000
  • Graduate and professional students: $138,000 (including undergraduate loans)

The current interest rate on direct unsubsidized loans for undergraduates is 5.5% . The interest rate for graduate and professional students is 7.05% . The current origination fee for all students is 1.059% of the loan amount.

3. Direct PLUS Loans

Direct PLUS Loans are for parents of undergraduate students, graduate students and professional students. You don’t need to demonstrate financial need to qualify, and loan amounts are limited to the school’s cost of attendance. Any scholarships or other financial aid are subtracted from the amount you’re eligible to borrow.

PLUS Loans are the only federal loan that considers your credit score when you apply. If you don’t have a strong credit history, you can apply with an endorser who signs off on your loan and agrees to pay it if you can’t. The endorser can’t be your child if you’re taking out a direct PLUS loan as a parent.

Alternately, you can provide documentation explaining the circumstances that hurt your credit history — though losing a job or a bad economy typically doesn’t count. You might also be able to qualify if you complete a credit counseling program for PLUS Loan applicants.

Direct PLUS Loans currently come with a 5.3% interest rate and a loan fee of 4.236%. Loan fees are deducted from your loan amount before your school receives the funds. Like with a direct unsubsidized loan, interest adds up while you’re still in school, during grace periods and during deferment and forbearance.

How cost of attendance affects your loan amount

Aside from annual and lifetime limits for different loan programs, there’s one limit that overrides them all: Your school-certified cost of attendance (COA). COA includes tuition, fees, supplies and other general living expenses associated with attending the school, and each financial aid office has their own way of calculating it.

According to federal law, students can’t receive financial aid packages worth more than the COA. This includes loans in addition to grants, scholarships and work-study.

What happens after I get a federal loan?

The government first disburses the funds to your school’s financial aid office. After the school collects your tuition and fees, the financial aid office typically contacts you with instructions for picking up any remaining funds.

The grace period

Federal loans come with a six-month grace period before you need to start making full repayments according to your repayment plan. This grace period goes into effect as soon as you drop below half time. So if you take a semester off or lighten your course load, you’ll need to start paying off your student loans earlier.

If you have a direct subsidized loan, you don’t need to worry about paying it off until your grace period is up. Students with direct unsubsidized or PLUS Loans might want to consider making at least interest-only repayments while in school to avoid something called interest capitalization.

Interest capitalization is when a lender adds to your loan balance all of the interest that accumulates while you put your payments on hold. It means paying off a larger loan amount and more in interest.

Repayment plans

After your grace period expires, it’s time to choose a repayment plan. Typically, your loan servicer helps you decide which is right for you, showing you how to sign up.

Federal student loans come with a wide range of repayment plans:

  • Standard repayments. Take up to 10 years to pay off your loan with the same fixed repayment each month.
  • Graduated repayments. Take up to 10 years to pay off your loan with gradually increasing repayments each month.
  • Extended repayment plans. Take up to 25 years to pay off your loan with either fixed or gradually increasing repayments each month.
  • Revised Pay As You Earn (REPAYE) repayment plans. Take up to 20 years for undergraduate debt and 25 years for graduate debt to make monthly payments worth 10% of your income after taxes. If your loan isn’t paid off by the end of your term, the government forgives your debt.
  • Pay As You Earn (PAYE) repayment plan. Take up to 20 years to pay off your student loan with 10% of your income. The government forgives any remaining debt.
  • Income-Based repayment (IBR) plan. Make monthly repayments of 10% to 15% of your income after taxes over 20 to 25 years.
  • Income-Contingent repayment (ICR) plan. Take up to 25 years to pay either 20% of your income after taxes or what your payments would have been if you paid off your loan with a 12-year standard repayment plan. If you still have any debt after 25 years of repayments, the government forgives your remaining student debt.
  • Income-Sensitive repayment plan. Take up to 10 years to pay off your loan with repayments based on your income. How much you pay each month varies depending on your lender.

Federal loan deferment

When it comes to federal loans, deferment generally refers to pausing your repayments when you’ve hit a temporary financial roadblock. Interest continues to add up on most federal loans, with the exception of direct unsubsidized loans.

Federal student loans come with several different deferment options:

  • In-school deferment. Defer your student loans while you’re still in school and during the six-month grace period after you drop below half time. Interest doesn’t add up on subsidized loans.
  • Graduate fellowship deferment. Defer your student loans while you attend a graduate fellowship program full time. Repayments start as soon as you leave for most loans.
  • Rehabilitation training program deferment. Defer your student loans if you enter rehab for any reason, including recovering from an injury or addiction. Repayments start as soon as you leave the program for most federal loans.
  • Unemployment deferment. If you can’t find a job, you might qualify for six months of unemployment deferment. Borrowers can get a total of 36 months of unemployment deferment over the life of a student loan.
  • Economic hardship deferment. Former students who qualify for federal benefits programs or are serving in the Peace Corps can get up to 36 months of economic hardship deferment as long as it meets the government’s requirements.
  • Military service and post–active duty deferment. Servicemembers who are about to go on active duty or returning from active duty can defer their federal loans for up to 13 months after their military service ends.
  • Parent PLUS borrower deferment. Parents who take out a loan in their student’s name can apply to defer payments until the six-month grace period is up.

How deferment and forbearance work on student loans

Direct consolidation loans

By the time you graduate, you may carry more than one student loan in your or your parents’ name. To make repayments easier, consider consolidating your student loans with a direct consolidation loan. Consolidation loans can be especially beneficial to borrowers that have multiple servicers.

A direct consolidation loan is a new student loan that you can use to pay off all of your student loans. With this option, you have up to 30 years to pay off your debt and can potentially qualify for lower monthly repayments than you would with other loans. It can also give you access to more repayment programs if you don’t have a direct loan.

The interest rate on a direct consolidation loan is a weighted average of all loans you want to include, rounded up to the closest one-eighth of a percent.

Federal student loan forgiveness programs

In addition to flexible repayment programs and extensive deferment options, you might be eligible to have your federal loan forgiven. Aside from forgiveness built into income-based repayment plans, several forgiveness programs are available to federal borrowers:

  • Public service loan forgiveness. People who work in a qualifying nonprofit or government job while making at least 120 repayments can potentially have their loan forgiven after 10 years.
  • Teacher loan forgiveness. Teachers who work at low-income schools or educational service agencies for at least five years in a row might be able to get up to $17,500 of their student debt forgiven.
  • Federal Perkins Loan cancellation. This program offers loan forgiveness programs on Perkins Loans by profession — a former federal loans program. Teachers, public service workers, librarians and some volunteers are eligible to get up to 100% of their debt forgiven. The federal government stopped its Perkins loan program as of June 30, 2018.

What are the benefits of a federal student loan?

  • Competitive rates. It’s hard for private student loans to beat the rates on federal loans, which are set by the government and the same for everyone regardless of income or creditworthiness.
  • Forgiving repayment programs. Few lenders offers different income-based repayment plans, let alone graduated or extended repayment.
  • Forgiveness options. Federal loans tend to offer more forgiveness options than private student loans, including forgiveness after paying off a loan on an income-based repayment plan.
  • More options to pause payments. With federal loans, you can apply for deferment or forbearance in a variety of situations, including going back to school, starting a medical residency or joining the Peace Corps.
  • No cosigner needed. Students can generally qualify on their own without a credit history or income.
  • Less time comparing options. Federal loans are a one-size-fits-all product — there’s nothing to compare. Private lenders, on the other hand, have different rates, terms and repayment options.

Where do federal loans fall short?

  • Lifetime limits. Depending on your degree, you could hit the maximum amount you’re able to borrow. After that, you’ll need to find other sources of financing.
  • Doesn’t cover all educational costs. Bar study courses and relocating for a residency might be directly related to your degree, but you can’t take out a federal student loan to cover costs after you’ve graduated.
  • Not for international students. International students must check out private student loans and personal loan options instead.
  • Your grades matter. You’re no longer eligible for any kind of federal aid if your GPA drops below 2.0 — including work-study and scholarships.

What’s the difference between federal and private student loans?

Federal student loans are funded by the government. Everyone gets the same rates and fees, which are set by Congress, as well as access to a variety of repayment plans and forgiveness programs. You don’t need good credit or a cosigner to qualify.

Private student loans come from private lenders such as banks, credit unions, state agencies and even schools. They’re designed to pick up where federal loans can’t cover. You usually need good credit, a regular job or a cosigner to qualify. There are more options for noncitizens.

With both types of loans how much you receive is determined by your school, and you can use your loan toward tuition, fees and education-related expenses while you’re a student. And they typically come with a six-month grace period before you start making payments.

The most recent stats on student loan debt

How federal and private student loans compare

Federal student loans and private student loans are intended to help students cover the upfront costs of education.

Federal student loansPrivate student loans
PurposeEducation-related expenses directly related to schoolEducation-related expenses, including some postgraduate costs
Who it’s best forAny eligible studentStudents who’ve already used up their federal loans, can’t qualify for federal loans or have postgraduate expenses, like bar study courses or residency relocation
How disbursement worksFunds go directly to your school, which forwards to you any remaining funds after paying school feesFunds go directly to your school, which forwards to you any remaining funds after paying school fees
Eligibility requirementsYou must:

  • Be a US citizen or eligible noncitizen with a Social Security number
  • If you are male, register with the Selective Service System
  • Enroll at a Title IV school
  • Enroll at least half-time for direct loans
  • Consistently earn satisfactory grades
  • Have a high school diploma or equivalent
  • Be at least 18 or the age of majority in your state
You or your cosigner must:

  • Be a US citizen or permanent resident
  • Prove a verifiable income
  • Have good credit
  • Have a low debt-to-income ratio
  • Have no previous student loan defaults
  • Go to an eligible school
  • Be at least 18 or the age of majority in your state
APR Fixed rate of 5.5% to 5.3% , depending on the student and loan type. Congress set the rates for new student loans each year, which change on July 1.Varies, though APRs can reach 18% or more, depending on the lender
Cosigner Not required for most federal loans, with the exception of Direct PLUS Loans Required for students who are younger than 18 and don’t meet the lender’s credit, income or legal residency requirements
Academic requirementsSatisfactory academic progress while enrolled, based on your school’s standardsNone
Lifetime limits
  • $57,500 for undergraduate students, $23,000 of which can be a subsidized loan
  • $138,500 for graduate or professional students, $65,500 of which can be a subsidized loan. Includes undergraduate student loans
Varies by lender, though many let you borrow up to 100% of your school’s tuition and fees
When repayment startsUsually six months after leaving school, though some come with the option of starting full or interest-only repayments immediatelySix months after leaving school, or immediately with full or interest-only repayments
  • One fixed interest rate for each program
  • Origination fee
  • Range of fixed and variable rates that can sometimes be lower than federal loans but are often much higher
  • Application or origination fees, though these aren’t very common
Use of funds
  • Less flexibility on how you use the funds
  • More flexibility — including using funds to relocate for a residency or study for the bar exam
    Repayment options
    • More flexible repayments, including income-based repayment plans, deferment, forbearance and even forgiveness programs
    • Less flexible repayments

      Bottom line

      Federal loans are typically the first place eligible students look after scholarships, grants and other types of federal aid. That’s because the rates, terms and benefits are so hard to beat that private student loan providers typically present themselves as a federal loan alternative.

      Need help deciding? Read our guide to student loans to learn which might be right for your circumstances.

      Frequently asked questions

      • What is the maximum amount of student loans I can get?

      Subsidized loans come with a lifetime maximum of $23,000. Subsidized loans can have lifetime maximums ranging from $31,000 to $138,000.

      Ultimately, your maximum depends on your loan type, your degree and whether your parents consider you a dependent.

      • Are student loans regulated by the federal government?

      Yes, both federal and private student loans are regulated by a few federal laws. These laws affect standards schools need to meet to qualify for federal funding, as well as repayment plans and forgiveness programs available to federal loan borrowers.

      • How can I find out if my community college accepts federal student loans?

      The easiest way to find out if your community college accepts federal student loans is to fill out the FAFSA. Any federal financial aid opportunities — including federal loans — will be outlined in your award letter.

      • Can I use federal loans to pay for flight school?

      Possibly — as long as you’re attending an accredited flight school, like the National Aviation Academy. However, most flight schools aren’t accredited. Check out our article to find more ways to pay for your pilot’s license.

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      Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio

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