The ultimate guide to federal student loans

Written by

Dori Zinn,

Edited by

Rhys Subitch

Published on December 22, 2024 | 6 min read

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Key takeaways

Federal student loans are, for many students, the best option for covering postsecondary education and related expenses.
With fixed interest rates, clear grace periods and forbearance options, federal loans offer predictable repayment schedules.
Some borrowers may even qualify for loan forgiveness under Public Service Loan Forgiveness, income-driven repayment plans or the Teacher Loan Forgiveness program.
Though federal student loans have benefits compared to private loans, consider any borrowing carefully before committing to a debt.

If you don’t have cash on hand to completely cover the cost of attendance for college — around $38,000 per year on average, according to the Education Data Initiative — you’re not alone. More than 42 million borrowers have federal student loan debt.

To access this assistance, you must complete the Free Application for Federal Student Aid (FAFSA). Then, any college you’ve been accepted to will let you know how much financial aid you can receive, including loans, grants and scholarship funds.

Summary: Federal student loans

	Direct Subsidized	Direct Unsubsidized	Direct PLUS	Direct Consolidation
Maximum loan amount	Undergraduates: $23,000 aggregate	Undergraduates: up to $57,500 aggregate; graduates: $138,500 aggregate	Up to cost of attendance	None
Interest rate	Undergraduates: 6.53%	Undergraduates: 6.53%; graduates: 8.08%	9.08%	Weighted average of consolidated loans
Origination fee	1.057%	1.057%	4.228%	None

What are the different types of federal student loans?

Federal student loans are currently available under the William D. Ford Federal Direct Loan Program. Within that program, you can choose from four main types of loans:

Direct Subsidized Loan. Undergraduates who can demonstrate financial need may qualify for subsidized loans. The U.S. Department of Education will not charge interest while you’re in school as long as you’re enrolled at least half-time, during the six-month grace period after you graduate and during any deferment periods.
Direct Unsubsidized Loan. These loans are for undergraduate and graduate students, along with those pursuing a professional degree. There is no financial need requirement. You’ll accrue interest while in school, during the grace period and during any deferment periods.
Direct PLUS Loan. There are two types of PLUS loans: grad PLUS loans and parent PLUS loans. Grad PLUS loans are available for professional and graduate students who have maxed out their Direct Unsubsidized Loan limits. Parent PLUS loans are for parents of undergraduate students. Applicants can borrow up to the full cost of attendance, minus other financial aid.
Direct Consolidation Loan. If you have several types of federal student loans, you can combine all of them into one loan with one interest rate and one monthly payment using a Direct Consolidation Loan.

What are the current federal loan interest rates?

U.S. Congress sets the federal student loan interest rates each year based on the 10-year Treasury note yield. Interest rates may vary from year to year, but they’re fixed once you receive the loan funds. Interest rates on federal student loans for the 2024-25 school year are:

Direct Subsidized Loan: 6.53 percent.
Direct Unsubsidized Loan: 6.53 percent (undergraduate) or 8.08 percent (graduate).
Direct PLUS Loan: 9.08 percent.

What are the borrowing limits for federal student loans?

The amount you can borrow in federal student loans partly depends on whether you’re an independent or dependent student, which is based on whether your parents financially support you. How much you can borrow is also based on your year in school.

If you’re an undergrad student and your parents don’t qualify for a parent PLUS loan, you may be able to borrow up to the independent undergraduate limits.

	Dependent undergraduate student	Independent undergraduate student	Graduate or professional degree student
Year 1	$5,500 (up to $3,500 may be subsidized)	$9,500 (up to $3,500 may be subsidized)	Annual limit of $20,500 (subsidized only)
Year 2	$6,500 (up to $4,500 may be subsidized)	$10,500 (up to $4,500 may be subsidized)	Annual limit of $20,500 (subsidized only)
Year 3 and beyond	$7,500 (up to $5,500 may be subsidized)	$12,500 (up to $5,500 may be subsidized)	Annual limit of $20,500 (subsidized only)
Lifetime maximum limit	$31,000 (up to $23,000 may be subsidized)	$57,500 (up to $23,000 may be subsidized)	$138,500 (up to $65,500 may be subsidized)

What are the pros and cons of federal student loans?

If you’re on the fence about federal student loans, weigh the pros and cons to see if it’s the right move for you.

Pros

Easier approval. Direct Subsidized and Direct Unsubsidized Loan borrowers won’t have to go through a credit check during the application process. If you don’t have a credit history, you’ll still be able to qualify for these federal loans.
Flexible repayment terms. The standard repayment plan lasts 10 years, but you can also apply for one of several different repayment plans if the standard plan doesn’t fit your budget.
Specialized programs. There are several income-driven repayment plans that will forgive any balance remaining after a 20- or 25-year repayment period. The Public Service Loan Forgiveness (PSLF) program discharges your loan after you make 120 qualifying on-time payments while working for a government agency or a nonprofit.
Hardship options. With federal student loans, you can qualify for deferment or forbearance if you lose your job, have a health crisis or go back to college. There are also periods of administrative forbearance.

Cons

Lower borrowing limits. Some federal student loans have low borrowing limits compared to private student loans. If you’ve maxed out your federal aid, you may need to find other ways to supplement your funding.
Origination fees. All federal Direct Loans come with an origination fee, which is taken from the loan proceeds.
Credit check for certain loans. The Department of Education runs a credit check for Direct PLUS Loan applicants. If you have an adverse credit history, you’ll need to either find a co-signer or prove to the Department of Education that your poor credit report is due to circumstances beyond your control.
Higher interest rates. Graduate students, professional students and parents of undergrad students may apply for a Direct PLUS Loan. But borrowers with strong credit may get a better rate with a private student loan.

How to apply for a federal student loan

Applying for a federal student loan is free, and it starts with submitting the FAFSA. The application opens on Oct. 1 each year, and submission deadlines depend on your school and state. The FAFSA should be your first step when searching for financial aid for college.

Fill out the FAFSA. Applicants will need to complete and submit the FAFSA form. If you complete the form online, your application will be processed within three to five business days. If you submit a paper application, it will take about seven to 10 days to be processed.
Receive your Student Aid Report (SAR). After you submit the FAFSA, the Department of Education will send you an SAR, which explains your eligibility for federal student aid.
Read your offers. The schools you list on the FAFSA will have access to your financial information. They’ll use it to calculate your financial aid offer, which may include federal student loans, federal grants and work-study programs. These offers vary with each school.
Accept financial aid. Contact your school to accept the financial aid. If it includes federal student loans, the school will tell you how to accept them.
Attend loan counseling. Before you receive your loan funds, you’ll need to complete entrance counseling. This will explain how student loans work so you’re not surprised after graduation.
Sign for the loan. Read through and sign the master promissory note, which includes the terms of the loan.
Renew your application. If you need more financial aid, you’ll need to submit a new FAFSA each school year.

What is the difference between federal and private student loans?

Federal loans	Private loans
Repaid after leaving school or graduation	Many require payment while in school
Fixed interest rate	May have variable interest rate
Subsidized loan options available for those who qualify	Do not offer subsidized loan options
No credit check required, except for PLUS loans	Credit check required
No cosigner required	May require cosigner
Potential to qualify for Public Student Loan Forgiveness	No forgiveness options
Income driven repayment options	Repayment options vary by lender

Is there the potential for federal student loan forgiveness?

The Biden-Harris administration relieved $175 billion in student loans between March 2021 and September 2024, with sweeping changes to the PSLF program, protections for students of defunct and for-profit colleges and the cancellation of debt for borrowers who made income-based repayments over a specified period.

Though the administration planned for forgiveness on an even broader scale, court decisions limited debt relief in practice. For now, PSLF and cancellation related to income-based repayment plans remain the surest routes to the forgiveness of federal student loans, though this may change in the future.

In addition to PSLF, partial loan forgiveness may be an option for certain career fields, including teachers who work in low-income school districts. Still, it’s best not to rely on potential forgiveness and instead have a solid plan to pay back your loans completely.

Bottom line

Federal student loans can provide significant assistance with the cost of college. There are also many benefits associated with federal loans when compared to private loans. In addition to not having to be repaid while you’re still in school, federal loans offer repayment options tied to your income level and, depending on your career path, the loan may even be eligible for forgiveness.

Even with the advantages of federal student loans, it’s important to fully understand the amount of debt you’ll be taking on and the overall cost of repayment. Before signing on the dotted line, assess any and all options as well as any grace periods and repayment plan options you’ll need to adhere to after borrowing.