Understanding the Four Types of Federal Student Loans

The federal government offers four primary types of student loans. Each possesses its own unique eligibility criteria, cost structure, and strategic deployment depending on your financial situation. First things first, to qualify for any federal student loan, you must:

• Be a U.S. Citizen or eligible non-citizen
• Have a valid Social Security Number (SSN)
• Have a high school diploma or recognized equivalent
• Be enrolled or accepted for enrollment in an eligible degree or certificate program
• Maintain satisfactory academic progress
• Not be in default on a federal student loan
• Use aid only for educational purposes.

With that criteria met, options for students and families are described below.

1. Direct Subsidized Loans

Direct Subsidized Loans are considered the most favorable type of federal loan. These are only available to undergraduate students who demonstrate financial need.

“Financial need” is the strictest eligibility determiner of all the federal loans. To find out if you qualify, students must fill out the FAFSA (“Free Application for Federal Student Aid”). Your school will determine whether you qualify for a subsidized loan based on your documented financial need.

Congratulations! You qualified for a direct subsidized federal loan. The Department of Education will pay for all the interest accrued on the loan, as long as you meet one of three criteria:

• You’re actively enrolled as at least a half-time student (Half-time students take between 6-8 credits in a semester.)
• You have graduated in the past 6 months (A 6-month “grace period” for new graduates is provided)
• You are in a period of approved deferment (E.g., a temporary pause on payments granted by your loan servicer (while you are enrolled in graduate night-school?)).

Subsidized loans have a fixed interest rate per academic year, rendering them affordable and predictable. Every student that qualified for the 2024-2025 academic year received a 6.53% rate on their federal student loan.

Direct subsidized loans are the most favorable because you are not on the hook for any interest accrued while an active student, with a 6-month grace period to get your legs beneath you to boot. These loans also have the most stringent criteria for the same reasons, which is why there are three other options to explore should you not qualify….

2. Direct Unsubsidized Loans

Unlike the first entry on the list, Direct Unsubsidized Loans are available to graduate students in addition to undergrads. This is regardless of financial need, another key difference between the two.

Perhaps the biggest difference is that unlike subsidized loans, interest on unsubsidized loans begins accruing immediately after the funds are disbursed. You should expect to pay at least the interest while enrolled in school, or it will “capitalize” and add to the principal balance of the loan. These function much like a standard loan.

This is still a fine option. Undergraduate students who qualify for an unsubsidized loan share the same fixed interest rate as subsidized loans, assuming both loans were taken out in the same academic year. Graduate and professional students pay a higher rate.

3. Direct PLUS Loans

PLUS Loans are available in two forms:

1. Parent PLUS Loans for parents of dependent undergraduate students
2. Grad PLUS Loans for graduate and professional students

Unlike other federal loans, PLUS Loans require a credit check. There is no minimum score to qualify, but applicants with adverse credit history may need to meet additional requirements to become eligible.

PLUS loans are not subsidized, so borrowers are responsible for all interest from the date of disbursement. They also carry a higher fixed interest rate than Direct Subsidized or Unsubsidized Loans.

These are often used as a secondary financing option to cover the remaining costs of education not met by other aid. They are best suited for graduate students or parents who need additional borrowing capacity beyond their federal loans.

4. Direct Consolidation Loans

If you’ve already borrowed through federal student loan programs and to simplify the repayment process, a Direct Consolidation Loan may help. This program allows you to combine multiple eligible federal student loans into one, with a single monthly payment and a fixed interest rate.

The new interest rate is calculated based on the weighted average of the underlying loans, rounded up to the nearest one-eighth of a percent. Consolidation may also open the door to certain benefits, such as:

• Access to income-driven repayment plans
• Eligibility for Public Service Loan Forgiveness
• The ability to extend the repayment term

However, unpaid interest may capitalize when the loans are consolidated, which can increase the total amount you repay over time.

How to Apply for Federal Student Loans

The first step in applying for any federal student loan is to complete the FAFSA each year you attend college. With the exception of Consolidated Loans, FAFSA must be filled out for each year the student attends college. Federal student aid is not a one-time process, and your application is re-evaluated with each annual upload.

The application may be submitted online at studentaid.gov or by mail. Based on your FAFSA and your school’s cost of attendance, you’ll receive a financial aid offer outlining the types of loans you qualify for & the dollar amounts said loans will disburse.

Most students are eligible for at least one type of federal loan, even if they do not demonstrate financial need. Plus, the application is free. There’s no reason to avoid checking which loans you may qualify for.

What If Federal Aid Isn’t Enough?

Federal student loans generally come with better terms than private options, so we like to recommend exploring federal loan availability first. However, if there’s still a gap between your aid package and the total cost of attendance, private student loans may be necessary. These loans depend on creditworthiness and come with less borrower protection, so be sure to review options carefully.

If you or a family member is navigating college funding decisions, we’re here to help you understand your options and map how student loans fit into your broader financial picture. Education is a big investment; with the right strategy, you can fund it without compromising your other financial goals.

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