A Complete Guide to Federal Student Loans

Funding your college education is an important consideration. On average, a four-year undergraduate degree costs $35,331 per year for one student. Fortunately, you can fund your education in several ways: look for scholarships or grants, use your savings or work part-time. Another option is securing a federal student loan, which allows you, your parent or your guardian to borrow directly from the government.

MoneyGeek explores the ins and outs of federal student loans. We’ll enumerate the different types available and who is eligible for each. Using federal loans to fund your college education has benefits and drawbacks; you may want to consider these to determine your best option.

The U.S. Department of Education’s William D. Ford Federal Direct Loan (Direct Loan) Program makes federal student loans possible. The Department of Education serves as the lender and guarantees your loan.

A federal student loan is an excellent option for funding college because it covers multiple expenses. Besides your tuition, it also takes care of room and board (even off-campus), books and supplies. You can purchase electronic devices such as laptops or software, and if you commute to school, you can also use federal loans to cover transportation costs.

Although most students qualify for federal student loans, the Department of Education still looks at several factors to determine eligibility. A high school diploma or GED is necessary. U.S. citizens and eligible noncitizens can qualify but must enroll in an eligible program delivered by an eligible school.

Some programs have additional requirements. For example, you must show financial need to qualify for a Direct Subsidized Loan. Direct PLUS loans involve a credit check as part of the application process.

Unlike private loans, you usually don’t start repaying your federal loan until after you graduate or your enrollment status falls below half-time. Interest rates are also lower and fixed, ranging from 4.99% to 7.54%, depending on your loan type. Federal student loans also offer student loan forgiveness options.

Understanding how federal student loans work can help determine whether they fit your financial needs. Arming yourself with information puts you in a better position to manage your debt well.

If you’re leaning towards getting a federal student loan, it helps to understand the different loan types and how they work. Remember, not all loans are available to all students.

• Direct Subsidized Loans: These are one of the two kinds of Stafford loans the Department of Education offers to undergraduate students. Although you don’t need to undergo a credit check, you must show financial need to qualify. Since it’s a subsidized loan, you don’t pay interest while still in school or during the six months post-graduation.
• Direct Unsubsidized Loans: This is the other Stafford loan the Department of Education offers. As the name implies, interest begins to accrue immediately after fund disbursement. You can choose to defer payment on interest, but it will be capitalized, or added to your balance, leading to a higher balance when you begin repayments. Financial need isn't required, so your school determines how much you can borrow. This loan type is available to undergraduate, graduate and professional students.
• Direct PLUS Loans: Direct PLUS Loans come in two kinds. Grad PLUS is available to graduate and professional students, while the Department of Education offers Parent PLUS loans to parents of undergraduate dependents. Like Direct Unsubsidized Loans, you do not need to show financial need to be eligible. However, the application process includes a credit check. Those who have adverse credit standing may need to comply with additional requirements.
• Direct Consolidation Loans: This loan type is best for students with several federal student loans. You can use it to combine them, so you only need to manage one payment. You'll have a fixed interest rate based on the weighted average of your original loans' interest.

Several factors affect the maximum amount you can borrow with a federal student loan. These include your profile (if you’re an undergraduate, graduate or a parent) and how long you've been in college. MoneyGeek's guide breaks this down to give you a clearer picture.

Part of understanding how federal student loans work is knowing how to qualify for one. Our guide covers the various eligibility requirements you must comply with if you want to apply for a federal loan. It’s best to check these to ensure you don’t encounter challenges later.

Federal student loans are an excellent option to fund your college education, but they’re not for everyone. They offer multiple benefits but aren’t without their own set of risks. MoneyGeek explores both areas to give you a more comprehensive understanding.

• You don't need good credit standing or a co-signer to qualify: Unlike private loans, federal student loans aren't credit-based, so you don't need a solid credit history. Having a low credit score won't require you to find a co-signer.
• You have more flexible payment terms: Some loans don’t require you to begin repaying your loan until after you’ve graduated. There’s also a grace period, which lasts for six months post-graduation. The Department of Education shoulders the interest during this time for subsidized loans.
• You can make income-based payments: Four repayment options allow you to pay based on your earnings and family size. These are the Pay As You Earn Repayment Plan, Revised Pay As You Earn Repayment Plan, Income-Based Repayment Plan and Income-Contingent Repayment Plan.
• Interest rates are lower and fixed: Federal student loans typically have lower interest rates than private loans, and these remain the same throughout the life of your loan. Your rate will not change, regardless of market conditions.
• You can take advantage of hardship options: Some students may be eligible for a deferment if they encounter hardship. These can include losing your job or having a medical crisis.

• They offer lower borrowing limits: Private student loans typically allow borrowers to receive higher loan amounts. Borrowing limits for federal student loans are highly regulated, resulting in lower figures. Unfortunately, they may not cover all your educational expenses. You may need to apply for another form of financial aid.
• Funds are disbursed directly to your school: Once your loan is approved, the money is sent directly to your school, ensuring expenses like tuition and room and board become a priority. Private loan funds are released to you, giving you more control over how to use them.
• Not all schools are eligible: Not all schools qualify to use federal loans. If your career school or college isn’t part of the list, you must find other ways to fund your education.
• Presence of origination fees: Federal loans have origination fees. Your proceeds might be slightly less than you originally anticipated. Since loan limits are already lower than private loans, your funds may not cover your annual costs.
• Some loans require a credit check: Applicants who apply for Direct PLUS Loans must undergo a credit check. If your credit score is low or less than satisfactory, the Department of Education may require you to comply with additional prerequisites before approval.

In 2021, the average student debt in the U.S. was $37,693, which means if you’re looking for funding options, you’re not alone. Applying for a federal student loan is always an option. If you’re leaning in this direction, here are the steps you need to take.

The subject of federal student loans is complex and can be overwhelming. MoneyGeek's guide provides additional information by collating the most commonly asked questions about this topic.