Federal Student Loans – The Ultimate Guide

Andrew Zoeller and Brian Attridge Published on May 10, 2019

federal student loans

Most college graduates—69%, to be exact—leave school with student debt, and the bulk of these loans are federal. In fact, the total balance of all outstanding loans in the U.S. is currently a staggering 1.6 trillion dollars, according to the Federal Reserve. The population of the entire U.S. is only around 329 million, which means there’s about $4,800 in student loan debt for every person in the country—that includes babies, retirees, and people who never went to college!

As a student (or a parent of a student), it’s critical that you understand how to finance your education in a way that will give you the best options after graduating, and minimize the long term impact on your finances. After scholarships, grants, and other sources of funding that you don’t have to pay back, federal student loans are generally the most attractive option, because most of them come with competitive interest rates. Federal student aid also comes with a very flexible set of benefits and repayment plans.

Unfortunately, if you’ve tried researching your federal student loan options on the U.S. Department of Education website, you may have found that it’s organized like a plate of spaghetti. Fortunately, Purefy has put together this comprehensive guide to help you decide how to finance your education.

Federal student loan basics

Let’s start with a few basics. If you take out a federal student loan, your lender (the entity you repay over time) is the U.S. Department of Education. These are sometimes called “Direct” loans, because the money comes directly from the federal government.

The interest rate on your loan will be fixed for the entirety of your repayment term, and federal student loan interest rates are frequently (but not always) lower than private student loan interest rates.

Some federal loans require you to pass a basic credit check, or to have a cosigner. A cosigner is someone who is equally responsible for your loan, should you be unable to make payments in the future—for most students this is a parent or close relative.

That said, the credit checks for federal student loans are much less stringent than for private loans, and you just need to meet a minimum standard. You don’t get a better rate for having good credit.

As far as repayment, you do not have to make payments on your federal student loans until you leave school or drop below half-time enrollment. As a borrower you also have access to the federal forbearance program, which lets you postpone loan payments if you are having financial difficulty.

Furthermore, if you enter certain career paths after college, you may be eligible to have a portion of your loans forgiven, through programs like Public Service Loan Forgiveness.

Federal student loan application process

To apply for federal student loans, you will need to complete the Free Application for Federal Student Aid (FAFSA) by the deadline. Keep in mind, that the earlier you submit the FAFSA, the more likely you are to qualify for federal student aid.

Your Federal loan offers will be presented to you in a federal student aid report, and also in the financial aid award letter you’ll receive from your school. The aid letter will summarize the cost of attendance, any scholarships and grants you’ve received, the federal student loans you are eligible to take out, and the remaining gap to be filled. This gap is usually filled either through family college savings (if available), or through private student loans. For more information, see our step-by-step guide to applying for loans.

Types of federal student loans

At the moment, there are four main types of federal student loans, which each have different eligibility criteria, interest rates, and loan limits:

1. Direct Subsidized loans

  • Subsidized loans are only available for undergraduate students
  • Applicants must demonstrate financial need to receive a loan
  • The fixed interest rate is 5.05% for the 2018-2019 school year
  • The government pays the interest on subsidized loans while you are in school, and for the first six months after leaving school (the “grace period”). They will also pay the interest during any deferment periods, like if you go back for a graduate degree
  • The maximum loan amount you can receive can be up to $5,500, but it depends on your grade level and dependency status 

2. Direct Unsubsidized loans

  • Unsubsidized loans are available for undergraduate, graduate, and professional students
  • There is no requirement for applicants to demonstrate financial need
  • Your school determines the amount you can borrow (up to the maximum loan amount). They base this on the cost of attendance and your other financial aid
  • With unsubsidized loans, you are responsible for the interest while you are in school
  • If you don’t pay the interest while you are in school, the amount of interest that builds up will capitalize (get added into) your loan balance after you leave school
  • The fixed interest rate is 5.05% for undergraduate students or 6.60% for graduate/professional students for the 2018-2019 school year
  • The maximum loan amount you can receive is up to $20,500, but it depends on your grade level and dependency status. Also, if you have subsidized loans, these get subtracted from the same maximum (i.e. if you have $5,500 in subsidized loans, the unsubsidized max goes down to $15,000) 

3. Direct PLUS loans

  • Direct PLUS loans are available for graduate/professional students (Grad PLUS loan) and parents of undergraduate students (Parent PLUS loan)
  • There is no requirement to demonstrate financial need, but a credit check is required
  • If you have certain derogatory marks on your?credit report, you must meet additional requirements to qualify
  • The maximum loan amount is the cost of attendance (determined by your school) minus any other financial aid you receive.
  • The fixed interest rate is 7.60% for the 2018-2019 school year, and there is also a substantial loan fee which gets subtracted from y our disbursement (see the loan fees table further down this page)

For Parent PLUS loans only:

  • You must be the biological or adoptive parent (or, in some cases, the stepparent) of the student
  • Your child must be a dependent who is enrolled as an undergrad at least half-time at a school that participates in the Direct Loan Program (a “title IV” school)

4. Direct Consolidation loans

  • Consolidation loans are typically used by borrowers who have multiple student loans already, and have left school
  • Consolidation loans allows you to combine all your eligible federal student loans into a single loan with a single?loan servicer (the company who handles your payments on behalf of the government) 
  • This consolidated loan receives the weighted average interest rate of all your loans (rounded up to the nearest one-eighth of a percent)
  • The primary benefits are:
    1. You want to?simplify your monthly payments?
    2. You need to get on an income-driven plan

Federal student loan borrowing limits

Loan limits are one area where federal student loans can be very confusing. There is a limit on how much you can receive in direct unsubsidized loans, and also a limit on what you can receive on direct unsubsidized and subsidized loans, combined. The limits vary from $5,500 to $12,500 for undergraduates, depending on what year of school you are in, and your dependency status (whether your parents claim you as a dependent for tax purposes).

For graduate or professional students, the maximum loan amount for direct unsubsidized loans is $20,500. Grad PLUS loans can be used to cover any remaining college costs not covered by other financial aid.

For parents of a dependent undergraduate student, you can receive a Parent PLUS loan for the remainder of your child’s college costs not covered by other financial aid.

This chart helps explain the loan limits for Subsidized and Unsubsidized Loans: 

Dependent Students Independent Students
Subsidized Total subsidized
+ unsubsidized
Subsidized Total subsidized
+ unsubsidized
First-Year Undergraduate
Annual Loan Limit
$3,500 $5,500 $3,500 $9,500
Second-Year Undergraduate Annual Loan Limit $4,500 $6,500 $4,500 $10,500
Third-Year+?Undergraduate Annual Loan Limit $5,500 $7,500 $5,500 $12,500
Graduate/Professional Annual Loan Limit n/a n/a n/a $20,500
Undergraduate Lifetime Loan Limit $23,000 $31,000 $23,000 $57,500
Graduate/Professional Lifetime Loan Limit (includes undergrad loans) n/a n/a $65,500 $138,500

Federal student loan fees

Federal student loans do come with fees—these fees get subtracted from your total loan disbursement, so the amount you borrow from the government will actually be less than your original loan request. The below chart shows the current fees—note that the fee for PLUS loans is much higher than subsidized or unsubsidized loans. That’s one reason to think about choosing private student loans over Parent PLUS loans or Grad PLUS loans—most private student loans come with no fees, and borrowers with excellent credit can get a lower rate.

Loan Type First Disbursement Date Loan Fee
Direct Subsidized Loans and Direct Unsubsidized Loans 10/1/2018–9/30/2019 1.062%
Direct PLUS Loans 10/1/2018–9/30/2019 4.248%

Federal student loan repayment plans

One attractive aspect of federal student loans is the flexibility of the repayment plans that borrowers are eligible for. The standard plan will usually have you paying off your loans in 10 years, but there are a multitude of other options to lower your payments and extend your term. With federal student aid, you are also free to pay off your loans ahead of schedule.  After finding steady employment, a growing number of borrowers now choose to refinance federal loans after they graduate to reduce their interest rate and to pay off the loans sooner. But keep in mind, this will sacrifice access to federal benefits like forbearance and loan forgiveness.

1. Standard Repayment Plan

  • Your payments will stay the same and the loans will be paid off within 10 years (consolidation loans can extend the standard plan up to a total of 30 years)
  • This plan is eligible for all types of federal student loans

2. Graduated Repayment Plan

  • Your monthly payments will start out low and will increase every two years
  • The payments are still structured so that the loans are paid off within 10 years (or up to 30 years for consolidation loans)
  • You will pay more over time than under the 10-year Standard Repayment Plan
  • This plan is eligible for all types of federal student loans

3. Extended Repayment Plan

  • Your payments may be fixed or graduated as above, but the loans are set to be paid off within 25 years
  • Your monthly payments will be lower than under the 10-year plans, and you will pay more over time than under those plans
  • This plan is eligible for all types of federal student loans, but you must have at least $30,000 in outstanding balance among all your federal student loans

Income-Driven Repayment plans

In addition to the three plans above, federal student loans have multiple repayment plan options which are based on your discretionary income. For these plans, the discretionary income used to calculate your payment is the difference between your adjusted gross income and 150 percent of the poverty guideline amount for your family size and state. Each year you must “recertify” your income and family size, even if there has been no change in your income or family size. 

Under all these plans, any remaining loan balance is forgiven if your federal student loans aren't fully repaid at the end of the repayment period. The amount that is forgiven may be taxed, so keep that in mind. Periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will all count toward your total repayment period.

Another important note is that under all these plans, the lower monthly payment you receive comes at a cost: you will generally pay more over the life of the loan than you would have on the standard 10 year repayment plan. That said, these plans are a good option if you are seeking Public Service Loan Forgiveness.

At-a-glance comparison:

REPAYE Plan PAYE Plan IBR Plan ICR Plan
Eligibility No Parent PLUS loans (even if consolidated) No Parent PLUS loans (even if consolidated) No Parent PLUS loans (even if consolidated) Parent PLUS loans OK if consolidated first
Payments 10% of discretionary income 10% of discretionary income 10% of discretionary income (15% for older loans) It’s complicated. (see details in the bullets below)
Best for Better than PAYE for single borrowers Better than REPAYE for married borrowers OK for married borrowers Parents

And, the details for these repayment plans:

4. Revised Pay As You Earn Repayment Plan (REPAYE Plan)

  • If your income increases over time, you could wind up with a bigger monthly payment than you would have had under the 10-year Standard Repayment Plan 
  • If you’re married, both spouses’ finances will be considered
  • If you haven’t paid off your loan after 20 years (undergraduate-only loans) or 25 years (graduate/professional loans), the remaining balance will be forgiven (and likely taxed)
  • The government will cover the unpaid interest on subsidized loans in the first three years of repayment.
  • The government will also cover 50% of unpaid interest on subsidized loans after the first three years
  • The government will cover 50% of unpaid interest on unsubsidized loans during all periods

5. Pay As You Earn Repayment Plan (PAYE Plan)

  • To be eligible, you must have a high debt relative to your income. For example, if your federal student loan debt is higher than your annual discretionary income, you are likely to be eligible.
  • Your monthly payment will never be more than what you would have paid under the 10-year Standard Repayment Plan. Generally speaking, you only qualify if you would get a lower payment with PAYE.
  • If you're married, you can have your spouse’s finances excluded from consideration by filing your income taxes separately
  • If you haven’t paid off your loan after 20 years, the remaining balance will be forgiven (and likely taxed)
  • The government will cover 100% of unpaid interest on subsidized loans in the first three years of repayment

6. Income-Based Repayment Plan (IBR Plan)

  • To be eligible, you must have a high debt relative to your income
  • Your monthly payment will never be more than what you would have paid under the 10-year Standard Repayment Plan
  • If you're married, you can have your spouse’s finances excluded from consideration by filing your income taxes separately
  • If you haven’t paid off your loan after 20 or 25 years (depending on when you received the loan), the remaining balance will be forgiven (and likely taxed)

7. Income-Contingent Repayment Plan (ICR Plan)

  • This plan is the only available income-driven repayment option for Parent PLUS loan borrowers—but, in order to qualify for ICR, your Parent PLUS loans must be consolidated using a Direct Consolidation Loan first
  • Your monthly payment will be the lesser of:
    • 20 percent 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
  • If you're married, your spouse's income or loan debt will be considered only if you file a joint tax return or if you choose to repay your Direct Loans jointly with your spouse
  • If you haven’t paid off your loan after 20 years, the remaining balance will be forgiven (and likely taxed)

Public Service Loan Forgiveness program

The Public Service Loan Forgiveness Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. 

To qualify for Public Service Loan Forgiveness, you must: 

  • Work for the following types of organizations:
    • Federal, state, local, or tribal government
    • 501(c)(3) nonprofit organizations
    • Other types of nonprofit organizations that provide certain types of?qualifying public services
    • Full-time AmeriCorps or Peace Corps volunteer
  • Have federal student loans
  • Repay your loans on an income-driven repayment plan; and 
  • Make 120 qualifying payments

According to the Internal Revenue Service, student loan amounts forgiven under PSLF are not considered income for tax purposes. There is no income requirement to qualify for PSLF. 

Before you decide to pursue Public Service Loan Forgiveness, it’s important to know that just 206 people across the country have been released from their debt through this program. 2018 was the first year of eligibility, and as of September 2018, about 41,000 borrowers applied to have their debt forgiven, according to the Education Department's data. That means less than only 0.5% percent of people who've applied actually got federal student loan forgiveness.

For a detailed look at forgiveness programs, check out our in-depth guide.