Ultimate Guide to Federal Student Loans

Abigail Eun
Abigail Eun

Abigail Eun is a freelance writer and personal finance expert. Through diligent research and continuous learning, she has honed her knowledge in budgeting, saving, investing, and debt management. Abigail is passionate about helping people get their finances in order. She believes that everyone should have access to the information they need to make sound financial decisions. Her goal is to provide clear and concise information that is easy to understand.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 10, 2023

According to the U.S. Department of Education, an estimated 42.9 million Americans have federal student loans. 

Federal student loans are a favorable option when it comes to paying for the cost of education. This is because federal student loans offer flexible repayment terms, borrower protection measures, and loan forgiveness options. Most federal student loans also do not require credit checks or cosigners to be qualified for a loan. 

If you’re a college student looking to take out federal student loans to pay for the cost of education, keep reading. In this article, we’ll cover everything that you need to know about federal student loans.

Jump Ahead > What is a Federal Student Loan?Types of Federal Student Loans • Federal vs. Private Student Loans

What is a Federal Student Loan?

A federal student loan is a student loan that is offered by the U.S. Department of Education. Federal student loans can be taken out by both students who can demonstrate financial need and students who cannot. 

To receive a federal student loan, you need to submit your Free Application for Federal Student Aid (FAFSA). The FAFSA opens every year on October 1st and is due on June 30th of the following year. Once you submit your FAFSA, the schools that you applied to will send you a financial aid package that details which federal student loans you qualify for and how much you can borrow.

Three Types of Federal Student Loans

The U.S. Department of Education offers three types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. The federal government also offers a refinancing option called Direct Consolidation Loans.

Federal Loan TypeQualificationsInterest Rate (2022-23)Borrowing LimitsImportantLoan Specifics
Direct Subsidized LoansMust be an undergraduate student who can demonstrate financial need.4.99% – You will not be charged for interest during school attendance (as long as you’re enrolled for at least half-time), grace period, and during any deferment periods.$3,500 – $5,500 per yearMay be referred to as Stafford Loans or Direct Stafford Loans.
Subsidized means that the government will pay the interest on your loan while you are in school, during your grace period, and during any deferment periods. 
No credit check.
Direct Unsubsidized LoansMust be an undergraduate, graduate, or professional student. No financial need is required; open to all students who meet academic qualifications. 4.99% for undergraduate students – Interest will accrue during school attendance, grace period, and any deferment period.
6.54% for graduate and professional students – Interest will accrue during school attendance, grace period, and any deferment period.
Dependent Undergraduate: $5,500-$7,500 per year ($31,000 in total)
Independent Undergraduate: $9,500 – $12,500 per year ($57,500 in total)
Graduate/Professional Student Limit: $20,500 per year ($138,500 in total)
May be referred to as Stafford Loans or Direct Stafford Loans.
Unsubsidized means that the government will not pay the interest on your loan, and interest will accrue throughout the entire loan.
No credit check. 
Direct PLUS LoansThere are two types of Direct PLUS Loans:
Grad PLUS Loans: Must be a graduate or professional student who has maxed out Direct Unsubsidized Loan borrowing limits.
Parent PLUS Loans: Must be a parent of an undergraduate student. 

7.54%Net cost (cost of attendance MINUS any financial aid received)A credit check will be conducted to verify whether you qualify for the Direct PLUS Loan. To qualify, you must not have an adverse credit history.

Direct Consolidation Loans

The Direct Loan Consolidation program is offered by the federal government and allows you to combine all of your federal loans into a single loan. The new loan will have a fixed interest rate that is based on the average of the interest rates of your current loans. 

Pros of Student Loan Consolidation

  • Longest loan repayment term offered: You can receive a loan repayment term that is up to 30 years long, which is longer than most private loans can give you. This means that your monthly payments will be smaller and you won’t have to repay your loan hastily.
  • One single loan payment: If you consolidate all of your federal loans, you only have to make one payment per month as opposed to making each payment individually. This makes payments easier to make. 
  • No credit check: You do not need to have a strong credit history to consolidate your federal student loans.
  • Some federal benefits: Some consolidated student loans can qualify for Public Service Loan Forgiveness or income-driven repayment. 

Cons of Student Loan Consolidation

  • You cannot use a Direct Consolidation Loan to combine private loans. Only loans taken out from the U.S. Department of Education can be consolidated through a Direct Consolidation Loan. Note that private loans can be consolidated through refinancing with your individual private lender. 
  • May have a higher interest rate: The interest rate on a Direct Consolidation Loan will be the average of the interest rates you currently have. As a result, your new interest rate may be higher than some of the individual interest rates you had previously.
  • May lose certain federal benefits: Loan consolidation may take away from federal benefits, such as discounts on interest rates, student loan cancellation options, or credit for any payments before consolidation. 

What’s the Difference Between Loan Consolidation and Loan Refinancing?

You can only consolidate federal student loans through the Direct Consolidation Loan program that is offered by the federal government. Doing so allows you to combine multiple federal student loans into one, and the new loan’s interest rate is the average of your previous loans’ interest rates. 

However, it is possible to consolidate your federal student loans and private student loans via private loan refinancing. Loan refinancing is when you take out a new private loan to pay off the total debt of all of your loans combined. You receive completely new loan terms, such as a new interest rate and repayment plan. However, these loan terms are determined on your credit score, income, and credit history. 

Direct Subsidized Loans

Direct Subsidized Loans are for undergraduate students who can demonstrate financial need. In order to prove your financial need to the U.S. Department of Education, you will need to fill out your Free Application for Federal Student Aid (FAFSA). 

You do not need a cosigner or a credit check to receive a Direct Subsidized Loan.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are for undergraduate, graduate, and professional students. You do not need to demonstrate financial need to apply to receive a Direct Unsubsidized Loan; this loan is for students with all financial standings. 

Borrowing Limits for Direct Subsidized and Unsubsidized Loans for Dependent and Independent Students

While there are limits to how much you can borrow in subsidized and unsubsidized federal loans, there are also combined limits based on your dependency status and year in school.

Source: Studentaid.gov

Direct PLUS Loans

Direct PLUS Loans are federal student loans that graduate students, professional students, and parents can take out. 

These loans do not have a limit, meaning that you can borrow up to the net cost of your education, or the cost of education minus any financial aid. 

To qualify for a Direct PLUS Loan, you must not have adverse credit history and will have to receive a credit check. You may need “an endorser,” or a cosigner, with a strong credit history to qualify for the loan if you have a weak credit score.

Direct PLUS Loans have fixed interest rates (meaning that they do not change) that can be higher than the interest rates offered by private student loans. Furthermore, Direct PLUS Loans may have higher origination fees than private student loans, sometimes making private student loans a more feasible option for parents, graduate students, and professional students. 

Federal Student Loans vs. Private Student Loans

Federal student loans are offered by the U.S. Department of Education, while private student loans are offered by individual companies.

When you’re debating between private and federal student loans, experts recommend taking advantage of federal student loans first because they generally offer lower interest rates, more flexible repayment terms, and more borrower protection measures

Here are the key differences between federal student loans and private student loans. 

Loan TypeFederal Student LoansPrivate Student Loans
Borrower RequirementsThe Direct Subsidized Loan is only for undergraduates with financial need; Direct Unsubsidized Loans, Grad PLUS Loans, and Parent PLUS Loans are for undergraduates, graduate students, professional students, and parents of all financial backgrounds.No financial need is required; anyone can apply.
Cosigner Needed?No for the Direct Subsidized Loan and Direct Unsubsidized Loans; yes for Direct PLUS Loans.In most cases, yes. Most students do not have long enough credit histories to qualify for a competitive private student loan or a private student loan at all.
Interest RatesInterest rates tend to be lower than the interest rates of private student loans and are always fixed, meaning that they do not change. Interest rates tend to be higher for students because of their lack of a strong credit history; may vary with a cosigner. Interest rates can be fixed (meaning that they do not change) or variable (meaning that they change based on the market).
Borrower Protection PlansThe federal government offers loan deferment, loan forbearance, and loan forgiveness to qualifying federal student loans. Depends on the lender, but selections are often limited. 
Credit Score RequirementsTypically, federal loans do not look at credit scores except the Direct PLUS Loans. Most private lenders will be looking for students & cosigners with strong credit histories and scores.
Borrowing LimitsFor undergraduates: between $5,500-$12,500 maximum with the Direct Subsidized and Direct Unsubsidized Loan per academic year.
For parents: Varies on the cost of attendance and financial aid award received for the Direct PLUS Loan.
For graduate/professional students: Varies on the cost of attendance and financial aid award received for the Direct PLUS Loan. 
High borrowing limit, up to 100% of the cost of attendance. 
Repayment PlansDirect Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period where you do not pay to make regular loan payments after graduation, after dropping out, or enrolling less than half-time. Interest accrues during the grace period for the Direct Unsubsidized Loans and not for the Direct Subsidized Loans. 
The federal government offers seven different types of repayment options: the Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan, Pay As You Earn Repayment Plan (PAYE), Revised Pay As You Earn Repayment Plan (REPAYE), Income-Based Repayment Plan (IBR), Income-Sensitive Repayment Plan (ISR), and the Income-Contingent Repayment Plan (ICRP).

Private student loans tend to have fewer repayment options in comparison to federal student loans. 

Closing Thoughts From the Nest

If federal student loans don’t seem like the best option for you, and you want to see which private loans you might qualify for, use Sparrow’s free online tool. If you submit the Sparrow application, you can compare private student loans and interest rates from more than 15+ different lenders to ensure that you’re getting the best rate on the market. 

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