Federal student loans: What are the different types, How much can you borrow, and What are your repayment options

If you see any kind of federal student loan (Direct, Stafford, or PLUS) listed in your college’s financial aid award package/letter, then you might be wondering: What are they? How do they work? We break it all down for you here.

What are federal student loans? 

Federal student loans are loans from the government to individuals, to support at least half-time study at the undergraduate or graduate level. You must be working towards a degree or certificate. 

There are three types of federal student loans: 

  1. Direct Subsidized Loans (also known as Stafford Subsidized Loans)
  2. Direct Unsubsidized Loans (also known as Stafford Unsubsidized Loans)
  3. Parent PLUS loans (also known as Direct PLUS Loans)

The first two are always given directly to the student, who then must repay the loans after graduation. The last one (PLUS loans) are given to parents of undergraduates; only graduate students may directly get PLUS loans. Parent PLUS loans cannot later be transferred to the student’s name; it will legally remain the parent’s financial obligation to repay.

Note that sometimes people colloquially call these federal loans “Department of Education loans” or “FAFSA loans,” which refers to this same group of loans. 

What’s the difference between Direct Subsidized loans, Direct Unsubsidized Loans, and PLUS Loans? Which one is best?

These three types of federal loans are very different!

Direct subsidized loans are the most affordable ones.

They have the lowest interest rates. Interest also doesn’t accrue (get added) during college. This means that if you borrow $3000 in Year 1 (and nothing after), then when you graduate, your loan balance will still be $3000 and you’ll only need to pay interest on that. 

Direct UNsubsidized loans are slightly less affordable.

But they are still way better than private loans! They have the same interest rates as the federal subsidized loans, but interest DOES accrue (get added) while you’re in college. This means that every month (while you’re studying) that you don’t pay interest, that interest gets added to your loan balance. Then the next month, interest will get calculated based on your new (higher) loan balance. Note that if you accept this type of loan, you’ll have the option to make interest-only payments while in college. This way, your original borrowed amount will still be the same when you graduate. If you choose not to make any payments while in college, your borrowed amount will be much higher. 

PLUS loans are the least affordable type of federal loan–and (if you’re an undergrad) are actually given to your parents.

PLUS loans have a higher interest rate than the Direct loans, and interest accrues while you are studying. Their rates are meant to be similar to what you’d get on the private (non-governmental) market. This means that if your parents/ co-signers have excellent credit, you may actually get a better rate from a private student loan company. That’s why we recommend you always shop around to get a price check (interest rate estimate) from multiple companies, and compare your options. (Here’s a link to one.)

Also, if you are an undergraduate and your parent is unwilling to take on debt for you (or doesn’t qualify because they have “adverse credit”), then this option might not actually work. 

Summary of Terms

Each year, the federal government sets different interest rates. So for any loans first disbursed (paid out) between July 1, 2023 and July 1, 2024, these are the terms and rates:

Direct Subsidized LoanDirect Unsubsidized LoanPLUS Loan
EligibilityBased on financial need; Undergraduates onlyCan qualify regardless of financial need;Undergraduate and graduate studentsCan qualify regardless of financial need; For parents of undergraduates, or directly to graduate students
Interest rate 5.50% 5.50% (undergrad)
7.05% (graduate)
Origination fee1.057%1.057%4.228%
Interest accrues while studying?NoYesYes
Max borrowing amountFor dependent students: $3500 (first year), $4500 (second year), $5500 (third year and beyond)Maximum is set for total between subsidized and unsubsidized: $5500 (first year), $6500 (second year), $7500 (third year and beyond)The maximum is the cost of attendance at the school, minus any other financial assistance received.

How do I qualify for these loans?

For all federal student loans, you need to complete the FAFSA. Based on this information, your college will provide you with a financial aid award letter, which details how much you’ve been offered in grants and federal loans. You can only borrow up to the amount offered to you in your award letter. However, if you feel you did not receive enough, you could appeal for more aid. To make it even easier, Going Merry has a free Financial Aid Appeal Generator to help write the letter for you! Check it out here.

Two more notes on specific loans:

  • The most affordable type of loan (Direct Subsidized) is only given to students with demonstrated financial need. The school, however, can choose whether (and how much) to offer you with the other two types of loans. 
  • Parent PLUS loan for undergraduates (or Grad PLUS, for graduate/professional students) requires that the parent (or graduate student) pass a credit check. If your parent has bad credit, your family might not be eligible for this loan. 

Finally, before you receive your loan funds, you’ll also need to complete the federal government’s entrance counseling, which helps you understand your obligations to repay the loan. 

What if my award letter is vague–and just says “Direct Loans” or “Stafford loans”? 

Oh man, we could rant for a while about why we think college award letters are awful. We have seen many instances where a college doesn’t specify if the loan is subsidized or unsubsidized. In this case, we recommend you simply reach out to the financial aid office to clarify what you’ve been offered.

What are the current federal student loan interest rates?

The 2023-2024 student loan rates are:

  • Direct Loans – Subsidized: 5.50% interest + 1.057% one-time origination fee
  • Direct Loans – Unsubsidized: 5.50% interest (for undergrads) or 7.05% interest (for graduate students), plus 1.057% one-time origination fee
  • PLUS loans (for parents or graduate students): 8.05% interest, plus 4.228% one-time origination fee. 

For more information on how student loan fees work, check out this guide to understanding student loans

Also remember that federal student loan interest rates get re-adjusted every year, so next year’s rate could be higher or lower than this one’s. Just to give you an idea of how much it might fluctuate, here are the rates for the last several years, for undergraduate Direct loans: 

  • 2022-2023: 4.99%
  • 2021-2022: 3.73%
  • 2020-2021: 2.75%
  • 2019-2020: 4.45%
  • 2018-2019: 5.05%
  • 2017-2018: 4.45%
  • 2016-2017: 3.76%

You can see that the rates have been steadily rising for the last few years, since 2020.

How much can I borrow in federal student loans?

Here’s what it is for dependent undergraduates (this means you haven’t qualified as an “independent” on the FAFSA):

Subsidized onlyTotal of all subsidized & unsubsidized loansParent PLUS
First year(Freshmen)$3500$5500Total cost of attendance minus financial assistance already offered
Second year(Sophomores)$4500$6500(As above)
Third year & beyond(Juniors, Seniors, and Fifth-Years)$5500$7500(As above)
TOTAL (across all years you’re in college)$23,000$31,000(As above)

However, remember that you can only borrow up to the amount actually offered to you by your college, in your financial aid award letter. If you need more than that, you’ll need to consider taking a private loan, from a company like Earnest

When do I begin repaying?

For Direct Loans (subsidized and unsubsidized), once you graduate, drop below half-time enrollment, or leave school, you’ll begin your “grace period.” This is six months of free time for you to find a job and get financially adjusted, before you’ll need to start making your monthly payments. However, interest DOES accrue (even on subsidized loans!) during this period. 

For unsubsidized loans, you will have the option to begin making interest-only payments while in college. This will prevent your interest from accruing and “capitalizing”–meaning that you’ll then need to pay interest on your interest. However, if you don’t think you’ll be earning enough during college, you can choose to defer all payments until after the grace period. You’ll just need to repay more money overall. (For more information on capitalization, check out our full How Student Loans Work explainer here.)

For PLUS loans, you are required to make monthly payments immediately after disbursement (i.e., after you get the money). There is no grace period. However, as a parent borrower, you can request a six-month deferment after your child leaves or completes school. 

How long do I have to repay my loans?

Under the standard and graduated loan payment plans, you have 10 years to repay. However, since a shorter repayment term means higher monthly payments, if you find that these payments are unmanageable, you have a few options: 

  • Refinance your loans into “Direct Consolidated Loans” – which will extend your repayment plan to up to 30 years. 
  • Switch to income-based repayment. You can choose between a few different plans, but they will all extend your repayment term to 20-25 years. 

What are the repayment plan options for federal student loans? 

There are two types of repayment options, both for ten years: 

  1. Standard
  2. Graduated

Standard federal loan repayment means you will pay the same fixed amount for ten years. Your payments will begin once your grace period is over. 

Graduated federal loan repayment means your initial payments start out low and then increase every two years. Your final payment will be at maximum three times the value of your first payment. (So, for instance, your first payment might be for $50 and then your final payment could be for up to $150.)

In addition, if you find that your monthly payments are too high, you can apply to switch to one of these two plans with longer repayment periods: 

  1. Income-based Plan
  2. Direct Consolidated Loan

With income-based payment, your monthly payment will be a percentage of your earnings. There are a few plan options, with your monthly payment being 10-20% of discretionary income for 20-25 years. This means that if you’re not earning anything (or earning below a certain amount), your monthly payment could be $0. So it’s a good choice if you have unstable income, or very low income, as it makes your individual monthly payments more manageable. However, the disadvantage is that the loan term is much longer (20-25 years), so your overall amount repaid might be higher just because you’re repaying for more time. 

With a Direct Consolidated Loan, you can combine multiple federal student loans into one loan, so that you only need to make one payment each month. Based on your total amount (across all loans, now consolidated into one), your repayment period might also be extended: 

  • For loan value up to $7,500:  Still 10 years
  • $7,500 – $10,000: 12 years
  • $10,000 – $20,000: 15 years
  • $20,000 – $40,000: 20 years
  • $40,000 – $60,000: 25 years
  • $60,000 or more: 30 years

However, remember that if you can afford to pay more than your monthly payment, you should. This way, you’ll pay off your loans faster, which means you pay less overall. Otherwise, you’re just paying that annual interest rate for more years! This is why longer repayment periods are a double-edged sword. (For more information on why prepayment is good, check out our essential guide to how student loans work.)

If you want help calculating your total student loan debt and your monthly payments, we can help you do that via our free Insights product.

What about student loan forgiveness?

There are a number of reasons why you might not need to continue payments on your student loans–in other words, have them forgiven, cancelled, or discharged. The three most common reasons are: 

  1. Public Service Loan Forgiveness (PSLF): You can have the rest of your Direct loans forgiven, if you work for the government or a non-profit organization for 10 years and make monthly loan payments during that time. After this point, you can apply for forgiveness, and your remaining balance (what’s left that you still owe) will be voided, so you don’t have to pay it back. Note that PSLF does not forgive any PLUS loans for you or your parents.
  2. Teacher Loan Forgiveness (TFL): If you teach full-time for five complete, consecutive years at a low-income school or educational service agency, you can have $17,500 of your Direct loans forgiven. 
  3. Closed School Discharge: If your school closes while you’re enrolled or soon after you withdraw, you can have all your Direct loans discharged (which means you don’t have to pay any of it back). 

There are other reasons related to death, disability, bankruptcy, or improper college management. You can find the full list here. In all cases, you’ll need to fill out an application to request your loan be forgiven, cancelled, or discharged.

By signing up for Going Merry, you’ll gain access to lots of free college financial aid tools, including a college budget, cost analysis, and debt calculator. Sign up today!

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

Before applying for private student loans, it’s best to maximize your other sources of financial aid first.  It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities.  2) Next, fill out a FAFSA(R) form to apply for federal student loans.  Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if your struggling with your payments.  3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2.  For more information, visit the Department of Education website at https://studentaid.ed.gov.

Earnest Private Student Loans are made by One American Bank, Member FDIC, or FinWise Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Finwise Bank, 756 East Winchester, Suite 100, Murray, UT 84107.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank, FinWise Bank, and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America. 

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Charlotte Lau

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