What Are the Different Types of Federal Student Loans?

Studying is a cruise when you love your majors

Federal student loans help make higher education a reality for millions of Americans. And while it's not always ideal to borrow for your education, federal loans typically come with low interest rates and benefits that can help when taking out a loan is your only option.

U.S. consumers owed $1.57 trillion in student loan debt in 2020, according to Experian data. Even if you hope to keep your own loan portion to a small percentage of your total college bill, federal loans are a good place to start when you need to borrow. Think of it as an investment in your future.

How Do Federal Student Loans Work?

When you take out a federal student loan, you borrow money from the U.S. government—specifically, the Department of Education—for your education expenses and agree to pay it back over time, plus interest. Your loan payments typically kick in six months after you leave school, and the loan may or may not accrue interest while you're attending college depending on which types of loans you have.

Federal student loans feature a 10-year repayment schedule, though programs like income-driven repayment can stretch out that term for eligible borrowers who need lower monthly payments. Interest rates on new federal student loans are updated every year on July 1, and interest rates are fixed for the life of the loan once disbursed.

To be eligible for any type of federal student loan, you'll need to fill out the Free Application for Federal Student Aid (FAFSA) for each school year you attend college. You'll be offered federal student loans as part of your financial aid package provided by your school's financial aid office. To accept the federal student loans offered, you'll fill out a promissory note agreeing to the loan's terms and work with your school's financial aid office to make sure you receive your loan funds. If you're a first-time borrower, you'll be required to complete online credit counseling to show you understand your loan obligation.

Here are the three main types of federal student loans.

Federal Direct Subsidized Loans

Direct subsidized loans are loans for undergraduate students with financial need. The interest on these loans is paid for, or "subsidized," by the government while you're in school at least half time; during the six months after you leave school (known as your grace period); and during any deferment periods, such as when you need to postpone payments to head back to school or money struggles get in the way of making your payments.

  • Who is eligible: Undergraduate students who have financial need.
  • Rates and fees: The interest rate on federal direct subsidized loans for the 2020-2021 school year is 2.75%. The loan fee, which is deducted prior to loan disbursement, is 1.057% for student loans disbursed before October 1, 2021.
Borrowing Limits for Subsidized Loans
YearDependent studentsIndependent students
First-year undergraduate$3,500$3,500
Second-year undergraduate$4,500$4,500
Third-year undergraduate and beyond annual loan limit$5,500$5,500
Graduate studentNot applicableNot applicable
Subsidized aggregate loan limit$23,000$23,000

Federal Direct Unsubsidized Loans

Unlike with subsidized loans, you don't need to prove financial need for direct unsubsidized loans. They have higher borrowing limits than subsidized loans, but interest accrues the entire time you're in school instead of being paid for by the government. If you don't pay off the accumulated interest by the time you finish school, it's all added to your principal balance—so you start paying interest on your interest. The best way to avoid that is to pay all your accrued interest before your first loan payment is due. If you're eligible, opt for subsidized loans first, then take out additional unsubsidized loans as necessary.

  • Who is eligible: Undergraduate, graduate and professional students; you do not need to prove financial need.
  • Rates and fees: The interest rate on federal direct unsubsidized loans for the 2020-2021 school year is 2.75% for undergraduates and 4.30% for graduate and professional students. The loan fee, which is deducted prior to loan disbursement, is 1.057% for student loans disbursed before October 1, 2021.
Borrowing Limits for Unsubsidized Loans
YearDependent StudentsIndependent Students
First-year undergraduate$5,500$9,500
Second-year undergraduate$6,500$10,500
Third-year undergraduate and beyond$7,500$12,500
Graduate studentNot Applicable$20,500
Unsubsidized aggregate loan limit$31,000$57,500 (undergrads)
$138,500 (grads)

PLUS Loans

If you have a parent footing some of your undergrad bill or you're in graduate or professional school, you can also consider a PLUS loan. This is the only federal student loan that requires a credit check, though there is no minimum credit score required. That said, you could be denied if you have an adverse credit history, which includes foreclosure, bankruptcy or seriously delinquent accounts.

Interest on all PLUS loans begins accruing once the loan is disbursed. Payments on parent PLUS loans begin immediately unless you request a deferral. If you're a graduate or professional student, however, you won't need to begin making payments until six months after you leave school. Paying the accrued interest before your first payment due date prevents it from being added to your existing loan principal.

  • Who is eligible: Graduate and professional students, as well as parents of undergraduate dependent students who are in school at least half time.
  • Rates and fees: The current interest rate on PLUS loans is 5.30%. The fee is 4.228% for loans disbursed before October 1, 2021.
  • Borrowing limits: PLUS loans can be taken out for the full cost of attendance (determined by the school), less any other federal student aid the student receives.

When to Consider Private Student Loans

Private student loans don't come with a lot of the perks you'll get with a federal student loan, but they can be helpful for certain borrowers. Compared with federal loans, private student loans typically have higher interest rates, less flexibility and more eligibility restrictions. However, federal aid doesn't always cover your school costs in their entirety, and private student loans can offer advantages.

For one, some private loans don't charge fees. Plus, for borrowers looking at PLUS loans, an excellent credit score could land you a better interest rate with a private loan. You can check your credit report and credit scores for free from Experian to see where your credit health stands—you might want to take steps to gain extra points on your credit score to secure better private loan rates. Keep in mind that some private student loans charge variable interest rates—a feature that could cost you more in the long run than the fixed rates offered by federal student loans.

Beyond Student Loans

Student loans may not be the most fun part of college, but they are often necessary for making your education plan work. Don't take these loans lightly or overreach and borrow more than you need. Consider your college's work-study program if it's available to you or finding other ways to make money while you're in college to reduce the amount you need to borrow. And don't underestimate the "free money" available for those seeking to learn: There are lots of grants and scholarships you may qualify for that can help ease the financial burden and start you on your way toward earning your degree.