May 24, 2022

Your Guide to Different Types of Federal Student Loans

Tuition Options|Student Loans

College can be a significant cost that is out of reach for most students, but here are several different federal loan options to help you pay for college.

Attending college can be difficult for many students to afford without financial assistance. With even a semester of community colleges costing thousands of dollars these days, college affordability often makes a big difference in which college you’re able to choose. Thankfully, there are several higher education loan options out there to help you pay your college bills, including scholarships, federal aid, and Income Share Agreements (ISA).

Today, we’re going to focus on federal loans. The federal loan program is robust and offers many different types of student loans. The regulations surrounding federal student loans can differ for each one as well. Though specific eligibility requirements vary, you could qualify for one or more of the following types of federal student loans for college or graduate school. But before you sign on the dotted line, it helps to know the differences between your loan options.

Below are the different types of student loans you might encounter and which one could potentially be the best fit for you.

1. Direct subsidized federal loan

These loans are for students with demonstrated financial need. The fixed interest rate for these loans is pretty low at (as of 2020) 4.53%. Similar to many other federal financial aid, the interest rate is fixed, which is especially great if you lock it in at a low rate. But, since you have to apply for a new loan every year, and the percentage does change from year to year, the rate you get on your freshman year loans will likely be different from the rate on your senior year loans.

With subsidized federal debt, the Department of Education will cover the interest that accrues on your loans while you’re enrolled at least half-time in school. For example, one year of interest on a $5,500 loan would be $277 for a class of 2019 college freshmen. If you qualify for a subsidized direct loan, the government will take care of that interest for you.

The schools to which you’ve been accepted will then detail the amount you can borrow in your college award letter.

Interest rate: 4.53% for undergraduates (2019-20 Rate)

Aggregate loan limit: $23,000 for undergraduates

Loan fee: 1.059% (Through Sept. 30, 2020)

Terms: 10 to 25 years

2. Direct unsubsidized federal loan

Unlike subsidized federal loans, a direct unsubsidized loan is also for graduate and professional students, not only undergraduate students, and loan eligibility is not based solely on financial need or merit. They’re useful if you just don’t have quite enough money on hand to pay for school but don’t qualify for financial need by government guidelines. Almost everyone is eligible for this federal student loan, as long as they’re enrolled at least half-time in school.

With unsubsidized loans, you’re on the hook for accruing interest while you’re enrolled, as well as during a grace period or while in deferment or forbearance. What’s more, the interest capitalizes when it goes unpaid, meaning that it will be added to the principal of the original loan amount.

Interest rate: 4.53% for undergraduates, 6.08% for postgraduates (2019-2020)

Aggregate loan limit: $31,000 to $57,500 (depending on your dependency status) for undergraduates, $138,500 for graduates

Loan fee: 1.059% (2019-2020)

Terms: 10 to 25 years

3. Direct Grad PLUS loan

PLUS loans, whether they’re for graduate students or parents, are unique in that they require the applicant to undergo a credit check. The Direct Grad PLUS loan, specifically, was built for graduate and professional students who have had more time to improve their credit score (unlike undergraduates entering college, who might have never held a credit card).

If you’re trying to qualify for PLUS loans but have an adverse credit history, enlisting a creditworthy cosigner can help your case. Grad PLUS loans also give the student loan borrower six months after they finish or leave school to begin making payments.

During any period when you’re not required to make payments, interest will accrue on your loan. You may choose to pay the accrued interest or allow the interest to be capitalized (added to your loan principal balance) when you have to start making payments. Your loan servicer will notify you when your first loan payment is due.

Interest rate: 5.30% (after July 1, 2020, and before July 1, 2021)

Aggregate loan limit: The cost of attendance minus any other financial aid

Loan fee: 4.236% (for loans disbursed Oct. 1, 2019, and Oct. 1, 2020)

Terms: 10 to 25 years

4. Direct Parent PLUS loan

This loan type is for biological, adoptive, and step-parents to support their dependent undergraduates.

A key difference between Parent PLUS loans and other types of loan options is that parents are expected to make payments while their children are in school, though they may request deferment during the loan application process.

The government does not offer a way for parents to transfer a PLUS loan to their children, but some private lenders do allow you to refinance a Parent PLUS Loan in a child’s name.

Interest rate: 5.30% (2020-2021)

Aggregate loan limit: The cost of attendance minus any other financial aid

Loan fee: 4.236% (2020-2021)

Terms: 10 to 25 years

5. Direct Consolidation Loan

Consolidating any of the federal student loan types above allows graduates (or dropouts) to pool multiple loans into a single loan with a single loan servicer. This means you can make a single monthly payment, too.

That payment would also likely be lower than your past loans, as the repayment period can be extended up to 30 years.

Although consolidation is convenient, it’s not right for everyone. It might give one borrower access to income-driven repayment options, but it might erase another’s progress toward Public Service Loan Forgiveness.

Before deciding to consolidate, it’s critical to consider your own situation.

Interest rate: The weighted average of the interest rates on your existing loans.

Loan fee: n/a

Terms: Up to 30 years

Federal Student Financial Aid and the FAFSA

Am I eligible for Federal Student Aid?

In order to be eligible for federal student aid there are several requirements you must meet. Including:

  • Financial need
  • Being a U.S. citizen or an eligible noncitizen
  • Remaining in good standing on any federal student loans you already have
  • Being in or accepted for an eligible degree or certificate program
  • Maintaining adequate academic progress
  • Review the rest of the eligibility requirements here.

How do I apply for Federal Student Aid?

Many states and colleges use the FAFSA for their financial aid programs. You can find grants and scholarships, student loans, and work-study programs through Federal Student Aid (FSA) to help pay for college or career school. Use the Free Application for Federal Student Aid (FAFSA) to access them. The federal deadline for the 2020-21 school year is June 30, 2021.

Create an FSA ID account if you’re going to submit your FAFSA online or track its status online. If you’re going to submit a paper FAFSA by mail and won’t be tracking its status, you won’t need an FSA ID.

Do I need a Cosigner?

Finding a cosigner for student loans can be tough but you almost never need a cosigner for federal student loans. There is one exception though, if you are a graduate student or parent applying for direct PLUS loans and have a poor credit history, you may not be eligible without an “endorser,” who is similar to a cosigner. So, if you find an endorser who does not have an adverse credit history, you can receive a direct PLUS Loan.

How do I check the status of an application?

You can check the status of your FAFSA by going to fafsa.gov and logging in. You can also check by contacting the Federal Student Aid Information Center.  You can also visit the FSA Contact Us page for a detailed guide listing phone numbers and other ways to reach experts about federal student aid, student loan forgiveness, FAFSA, loans and loan consolidation, and more.

What if I’ve Exhausted all my Loan Options? 

Federal loans were established to help low to no credit borrowers afford the rising costs of college. But take the time to consider each of these different loans before deciding which one’s best for you – and only you.

If you’ve exhausted your federal loan options and need additional financing, an Income Share Agreement (ISA) could be a great option for you.

If you like the idea of an ISA – is a way of borrowing less traditional private student loans – check out these schools that offer ISAs! Although this list is not extensive, if none of these schools line up with your plans, check out our student’s page for a list of even more schools.

An ISA is a terrific tool to consider as you pursue higher education. Although it can be a wonderful option for many students, it’s not the right path for every student.

Run the numbers to ensure your projected salary won’t leave you paying more under an ISA than you would have paid to borrow traditional federal and private student loans. Ensure too that you’re okay giving up some forgiveness and assistance options that you would have gotten with federal loans. It depends on the terms offered by the ISA program.

An ISA can also be an excellent solution if your school isn’t eligible for federal loans, doesn’t work with reputable private lenders, or you want to have education protections throughout paying back your outstanding student loan debt.

Choosing your financial aid is an important decision; think about where you want to be when you graduate, specifically what career you’re thinking about, and make sure to do your research before deciding on one.

Interested in learning more about Income Share Agreements or how to fund your education with one? Check out more on the Meratas blog.

About the author

This post was prepared by the author, in her/his personal capacity. The views expressed are her/his own, and do not necessarily reflect the views of Meratas Inc.
The information contained in this site is general in nature and should not be considered to be legal, tax, accounting, financial or other professional advice. In all cases, you should consult with professional advisors familiar with your particular situation prior to making any important decisions. Although every effort has been made to provide complete and accurate information, Meratas Inc. makes no warranties, express or implied, or representations as to the accuracy of this content. Meratas Inc. assumes no liability or responsibility for any error or omissions in the information contained herein or the operation or use of these materials. Copyright 2022

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