The Complete Guide to Federal Student Loans

 June 22, 2020
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According to The College Board, the average cost of tuition and fees at public four-year institutions is about three times higher than it was 30 years ago. Though student borrowing is on the decline, many still rely on student loans to pay for college.

To fund your education, you can either take out private loans from a lender or bank, or federal loans from the U.S. Department of Education. Federal student loans are often preferred to private student loans because they come with lower interest rates, protections from the government and opportunities for loan forgiveness.

To help you understand how federal student loans work, we’ve assembled this complete guide to federal student loans — complete, in that we’ll cover all the kinds of federal student loans available, along with your repayment options and other details. Specifically…

Types of federal student loans

The U.S. Department of Education grants several different types of student loans backed by the federal government. Borrowers wishing to receive any of these loans need to fill out the Free Application for Federal Student Aid (FAFSA) to see if they qualify.

Direct subsidized loans: Undergraduate students with financial need may be eligible to receive direct subsidized loans. The Department of Education pays the interest on these loans while you are in school at least half time, and for a six-month grace period after you leave school. There are borrowing limits for direct loans and your school determines the amount you can borrow.

Direct unsubsidized loans: Undergraduate and graduate students do not need to demonstrate financial need to receive direct unsubsidized loans. These loans also come with borrowing limits, and your school will determine how much you can borrow based on the rest of your financial aid package and the cost of attendance. You are responsible for paying all interest that accrues on unsubsidized loans. If you do not make interest payments while you are in school or during the grace period, the interest that accrued is added to your principal balance.

Direct PLUS loans: Graduate or professional students or parents of undergraduate students are eligible to apply for grad PLUS or parent PLUS loans. Unlike subsidized and unsubsidized loans, PLUS loans require a credit check. These loans are available for borrowers without an adverse credit history — meaning you can’t have defaulted, gone into collections, had a foreclosure or other circumstances in the last few years.

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Federal Family Education Loan Program: The FEFL program ceased loan origination after June 30, 2010, but allowed private lenders to make education loans backed by the federal government. The program included Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, FFEL PLUS loans and FFEL consolidation loans.

Direct consolidation loans: Borrowers with existing federal loans are eligible to apply for a direct consolidation loan. Consolidating with a direct consolidation loan is free and allows you to simplify your repayment by combining your loans into one monthly payment. All the federal loans listed above are eligible for direct consolidation along with:

  • Supplemental loans for students
  • Federal Perkins loans
  • Nursing student loans
  • Nurse Faculty loans
  • Health Education Assistance loans
  • Health Professions Student loans
  • Loans for Disadvantaged Students
  • Federal Insured Student loans
  • Guaranteed Student loans
  • National Direct Student loans
  • National Defense Student loans
  • Parent Loans for Undergraduate Students
  • Auxiliary Loans to Assist Students

Students cannot consolidate loans taken out in their parent’s name into loans in the student’s name. You also may not consolidate any private loans with direct consolidation, however the balance on your private loans will be considered when deciding how long you need to repay your consolidation loan.

Student loan interest rates

One of the most important factors to consider when comparing student loans is the interest rate. Federal student loans are often preferable because they typically come with a better rate than banks or private lenders.

Rather than using your credit history to assign you an interest rate, Congress sets one rate for each type of loan for all federal borrowers each school year. For July 2021 to July 2022, the federal student loan interest rates were:

  • Direct subsidized loans for undergraduates: 3.73%
  • Direct unsubsidized loans for graduates: 5.28%
  • Direct PLUS loans: 6.28%

Remember, the interest on student loans compounds daily, which means you’ll end up paying more than you initially borrowed.

Even though you don’t have to pay the interest while you’re in school on subsidized loans, as soon as you enter repayment any balances will start accruing interest. You can use a student loan interest calculator to estimate how much you’ll actually end up repaying.

While federal student loan interest certainly adds up over time, private lenders often set interest rates higher than what the government has on offer. While PLUS loans are sometimes an exception to this, federal loans generally save you money on interest in the long run.

Student loan forgiveness

Another benefit of federal student loans is the chance of receiving student loan forgiveness. Forgiveness for your loans means just that — the remaining debt is forgiven and you don’t have to pay it back. Unfortunately, getting forgiveness is not that simple.

The federal government offers two different student loan forgiveness programs:

Public Service Loan Forgiveness

Borrowers who are employed full time by a government or not-for-profit organization may be eligible for federal student loan forgiveness after a certain period of time.

The program requires borrowers to make 120 monthly payments on their federal loans before being considered for forgiveness. Additionally, those payments must be made through certain repayments plans and while you are employed by a qualifying organization.

Standard repayment plan payments qualify, but you will not save any money through forgiveness if you make 120 monthly payments on this plan, as the balance will be paid in full. If you intend to seek loan forgiveness, you should switch to an income-driven repayment plan.

The PSLF program is a great benefit for those passionate about working in nonprofit or government industries, especially ones that don’t pay high salaries. The requirements are tight, though, so it’s not in your best interest to chase forgiveness through this program if you’re not fully committed to it.

Teacher Loan Forgiveness

Teachers have the opportunity to earn student loan forgiveness a bit faster through the Teacher Loan Forgiveness program. Borrowers who teach full time for five consecutive years in a low-income school may be eligible for up to $17,500 in federal loan forgiveness.

Like PSLF, the Teacher Loan Forgiveness program also comes with fairly rigorous requirements beyond putting in your time and making monthly payments. Teachers have to meet certain eligibility requirements and may be subject to proficiency testing. Grad PLUS and parent PLUS loans are not eligible for forgiveness.

You may be able to receive loan forgiveness from both programs, but you have to meet the requirements separately; meaning if you teach for five years and receive Teacher Loan Forgiveness, you’ll then need to make an additional 120 monthly payments to qualify for PSLF.

Repayment options

Federal student loans offer several different repayment options to give borrowers flexibility. When your loans enter repayment, you will automatically be enrolled in the Standard Repayment Plan. You can request a different payment plan at any time over the life of your loan. Explore the different options to decide which is best for you.

Repayment plan Eligible loans Monthly payment and length of repayment Eligibility and benefits
Standard Repayment Plan All direct and direct consolidation loans A fixed monthly payment that ensures the loan is paid off in 10 years (or 10 to 30 years for consolidation loans) *All borrowers are eligible
* You usually save money in the long run on interest payments
Graduated Repayment Plan All direct and direct consolidation loans Payments start low and increase over time, typically every 2 years. You’ll pay off the loan within 10 years (or 10 to 30 years for consolidation loans) * All borrowers are eligible
* Low monthly payments to begin, however this means you’ll generally pay more over time
Extended Repayment Plan All direct and direct consolidation loans Payments are either fixed or graduated and the loan is paid off within 25 years * Borrowers with more than $30,000 in direct loans are eligible
* Lower monthly payments than standard repayment
Revised Pay as You Earn Plan (REPAYE) All direct and direct consolidation loans issued to students Monthly payments are 10% of your discretionary income. Payments are recalculated each year based on your income and family size. * Borrowers with an eligible loan qualify for this plan.
* Any outstanding balance on your loan for undergraduate studies will be forgiven after 20 years or 25 years for graduate or professional studies. However, you may have to pay tax on the amount forgiven.
Pay as You Earn Plan (PAYE) All direct and direct consolidation loans issued to students Monthly payments are 10% of your discretionary income, but never greater than your standard repayment plan would be. Payments are recalculated each year based on your income and family size. * Borrowers who were a new borrower on or after Oct. 1, 2007, and received a disbursement of a direct loan on or after Oct. 1, 2011, are eligible.
* You must have a high debt-to-income ratio
* Your monthly payment will never be more than the 10-year Standard Plan amount.
-Any outstanding balance will be forgiven after 20 years
Income-Based Repayment Plan (IBR) All direct and direct consolidation loans issued to students Monthly payments are 10% or 15% of your discretionary income (depending on the date you first received the loans). Payments are recalculated each year based on your income and family size. * Borrowers must have a high debt-to-income ratio
* Monthly payments never greater than what you would have paid through standard repayment
* Any outstanding balance will be forgiven after 20 or 25 years
Income-Contingent Repayment Plan (ICR) All direct and direct consolidation loans Monthly payments will be 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income. Payments are recalculated each year based on your income and family size. * Borrowers with eligible loans can select this plan
* Any balance remaining after 25 years may be forgiven
* This plan is a great option for borrowers seeking PSLF
Income-Sensitive Repayment Plan Federal Stafford loans, FFEL Loans Monthly payments are calculated using your annual income. Loans are paid in full within 15 years. * Only available for FFEL Program loans

The repayment plan you choose will depend on your goals and budget. If you’re looking for low monthly payments, you might have to accept the fact that you’ll likely pay more over time. If you’re aiming to pay the loans off as quickly as possible, expect to make high monthly payments.

Note also that there are a host of student loan repayment assistance programs, depending on where you live, what field you studied and other factors. Check out our searchable guide to these programs to see if you can get help on repayment.

Trouble repaying student loans

If you are facing financial hardship, you can work with your loan servicer to temporarily suspend your payments through deferment or forbearance.


Federal student loan deferment allows eligible borrowers to pause payments on their student loans in certain situations. Eligible reasons include cancer treatments, extreme economic hardship (such as receiving welfare or serving in the Peace Corps.), military service or educational fellowship.

Direct subsidized loans will not accrue interest while loans are in deferment, but all other loans will — meaning you will end up paying more on the loan when you resume payments. Any period your loans spend in deferment will not qualify toward PSLF requirements. The Department of Education recommends borrowers explore income-driven repayment plans before requesting a deferment.


Similarly, student loan forbearance allows borrowers to pause monthly payments without negatively impacting your credit score. The eligibility requirements for forbearance are bit less strict than deferment, but all direct loans accrue interest while in forbearance except in special circumstances. You may only keep your loan in forbearance for up to 12 months at a time. You may request another forbearance period, but the total limit is three years.

Any federal borrower can request a forbearance, but loan servicers are required to grant them to borrowers in certain situations, like serving in an AmeriCorps position or the National Guard.

An income-based repayment plan is still preferable to a forbearance, so make sure you review all your repayment options. But if forbearance is your only choice, try to continue making interest-only payments.

Above all, if you are struggling to make your monthly student loan payment for any reason, contact your servicer right away. Skipping payments can end up costing you late fees or hurting your credit score. Lenders are generally willing to work with borrowers who are transparent about their situations.

Rebecca Safier contributed to this report.

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