Beginner’s Guide to Federal Student Loans

College costs continue to rise, and many students face the difficult challenge of figuring out how to pay for them. Scholarships, grants, and savings are always the best place to start. But if these don’t cover the full cost of your tuition, you can also consider taking out federal student loans.

female college student

A Guide to Taking Out Federal Student Loans

A federal Direct Loan is usually a better option for borrowers because they come with lower interest rates and offer certain borrower protections. Listed below is an overview of the five types of federal student loans you can apply for.

Direct Subsidized Loans

Direct subsidized loans are also referred to as Stafford loans. This Direct Loan is usually given based on financial need. These federal loans come with a fixed interest rate and the interest that accrues is covered while you’re still in school.

There are no annual borrowing limits on these loans. Here are the borrowing limits for dependent and independent students:

  • Freshmen: $3,500
  • Sophomores: $4,500
  • Juniors and seniors: $5,500

Direct Unsubsidized Loans

Direct unsubsidized loans are not given based on financial need. However, this type of federal student loan will begin accruing interest immediately. If possible, you should consider making payments on these loans while you’re still in school.

Direct unsubsidized loans also come with annual borrowing limits. However, these limits vary depending on your year and whether your parents are helping you pay for college.

Dependent Students:

  • Freshmen: $5,500 in Direct loans combined
  • Sophomores: $6,500 in Direct loans combined
  • Juniors and seniors: $7,500 in Direct loans combined

Independent Students:

  • Freshmen: $9,500 in Direct loans combined
  • Sophomores: $10,500 in Direct loans combined
  • Juniors and Seniors: $12,500 in Direct loans combined
  • Graduate students: $20,500 annually

See also: Subsidized vs. Unsubsidized Student Loans: What’s the Difference?

Direct PLUS Loans

Direct PLUS loans are designed for graduate and professional students. Parent PLUS loans are offered to parents helping their children pay for school.

To qualify for this Direct Loan, you’ll have to undergo a credit check. If you don’t have any credit history, you can apply with a creditworthy cosigner.

Direct PLUS loans cover the full cost of attendance after taking out any scholarships or grants you received. You’ll have a six-month reprieve after graduation before you have to begin repaying your loans.

Direct Consolidation Loans

After you’ve graduated, if you find yourself with multiple payments and federal student loan servicers, you can consider taking out a Direct Consolidation loan. This will consolidate multiple loans into a single monthly payment.

Not only will this simplify your student loan payments, but you can also extend your repayment period by up to 20 years.

How to Apply for Federal Student Loans

Before you can take out federal student loans, you need to complete the Free Application for Federal Student Aid (FAFSA). This is how the U.S. Department of Education determines what federal grants or student loans you qualify for.

You can fill out the FAFSA for the following year beginning on Oct. 1 and must complete it by the June 30 deadline. However, don’t make the mistake of waiting until the last minute to fill out the FAFSA. The earlier you apply, the better your chances are of qualifying for grants and other financial aid.

Unlike private student loans, you won’t be required to undergo a credit check for most federal student loans. But you will have to meet the following requirements:

  • Be a U.S. citizen or eligible non-citizen
  • You must have a high school diploma or GED
  • Enrolled at least part-time at an eligible college
  • You can’t have defaulted on existing federal student aid

What are the benefits of taking out federal student loans?

Many borrowers struggle to repay their student loans after graduation. Fortunately, federal aid comes with several borrower protections that can make this process easier.

Income-Driven Repayment Plans

After you graduate, you’ll automatically be placed on a standard 10-year repayment plan. But if your federal student loan payments are too burdensome, you can apply for an income-driven repayment (IDR) plan.

These plans will cap your loan payments at a percentage of your discretionary income. Here are the four IDR plans you can apply for:

  • Income-based repayment (IBR): IBR caps your monthly payments at 10% to 15% of your discretionary income. After a 20 to 25-year repayment plan, borrowers are eligible for full loan forgiveness. Borrowers who took out their loans before July 1, 2014, are eligible for the 10% rate. Anyone who took out their loans after that date will receive the 15% rate.
  • Income-contingent repayment (ICR): ICR plans cap your monthly payments at 20% of your discretionary income and sets the student loan repayment period at 25 years. There are no eligibility requirements to qualify, and Parent PLUS loans are eligible.
  • Pay As You Earn (PAYE): PAYE is eligible for borrowers who demonstrate some type of financial need. This plan will cap your monthly payments at 10% and sets the student loan repayment terms at 20 years. But you need to be a new borrower as of Oct. 1, 2007 to qualify.
  • Revised Pay As You Earn (REPAYE): This plan is similar to PAYE except all borrowers are eligible, regardless of when you took out your loans. It sets your monthly payments at 10% of your income and undergraduates are eligible for loan forgiveness after 20 years.

Loan Deferment or Forbearance

Borrowers who find themselves going through financial hardship and are unable to make their monthly payments may be eligible for federal deferment or forbearance. Both plans allow you to temporarily stop making monthly payments on your loans.

The only difference is that with deferment, you aren’t responsible for repaying the interest that accrues during that time frame. You can contact your student loan servicer to find out if you’re eligible for deferment.

Student Loan Forgiveness Programs

If you take out federal student loans, then a portion of your loans may be eligible for loan forgiveness. The U.S. Department of Education offers loan forgiveness to teachers, public service employees, veterans, and more. You can check out our guide to federal loan forgiveness programs to learn more.

Are private student loans a bad idea?

When it comes to paying for college, scholarships, grants, and federal loans are the best place to start. But for most people, this still leaves inevitable gaps in their funding. If you find yourself in this situation, private student loans may be a good way to fill these gaps.

Private student loans are offered by a private lender like a bank, credit union, or online lender. You can use them to fund your undergraduate degree or to pay for graduate school. And both students and their parents can apply for a private student loan.

There are quite a few differences between federal and private student loans. Here are a few things you should know about private student loans before you get started:

You don’t have to fill out a FAFSA to apply

Filling out the Free Application for Federal Student Aid (FAFSA) is mandatory if you want to qualify for financial aid. But this doesn’t hold true for private loans. That being said, you really should fill out the FAFSA anyway. Filling one out is your best chance of qualifying for state scholarships and grants. This is free money that won’t have to be repaid after graduation.

You’ll need to be enrolled at least part-time in an eligible school

Most private lenders will require that you be enrolled in college at least part-time. But you also must be enrolled in an eligible school. Most four-year universities qualify but alternative schools, like community colleges and trade schools, may not qualify.

If you’re planning to attend a trade school, you may be able to find a lender that offers loans specific to your situation. To find out whether your school is eligible, you should reach out to your financial aid office and private lender for more information.

There are credit and income requirements

Unlike federal loans, you will have to undergo a credit check to qualify for student loans. Private lenders will consider your income, credit history, and debt-to-income ratio before approving you for a loan.

You may have to apply with a cosigner

Unfortunately, most college students have a hard time qualifying for financial aid on their own. Most college students just don’t have a strong enough credit history or proof of income that private lenders are looking for.

Applying with a creditworthy cosigner is an option for you. In fact, over 90% of undergraduates applied with a cosigner during the 2019-2020 school year. Of course, cosigning on a private student loan comes with risks of its own. So, you might look for a lender that offers a cosigner release after several years of on-time payments.

See also: How to Get Student Loans Without a Cosigner


If you’re interested in taking out a federal student loan, the first place to start is by filling out the FAFSA. This will give you a better idea of what kinds of financial aid and loans you qualify for. If you still need to cover gaps in your funding, taking out private loans may be the right choice. Just make sure you do your research and know what you’re getting yourself into.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about various personal finance topics including student loans, credit cards, investing, building credit, and more.