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What You Should Know About Federal Student Loans

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Many students take out loans to help pay for college. Federal student loans are loans provided by the U.S. government. These loans usually have better terms than loans from banks or other private sources. Here’s what you need to know about federal student loans for college.

On Aug. 6, 2021, the U.S. Department of Education announced a final extension of the student loan payment pause until Jan. 31, 2022. The pause includes the following relief measures for eligible loans: a suspension of loan payments, a 0% interest rate, and stopped collections on defaulted loans.


WHY CONSIDER A Federal Student LOAN?

College loans provided by the U.S. Department of Education’s federal student loan program, known as the William D. Ford Federal Direct Loan Program, generally have lower interest rates and more flexible repayment terms than private loans.

If you demonstrate financial need, you may qualify for a Direct “subsidized” loan. The advantage of subsidized loans is that the government pays the interest on the loan while you are in college. If you are unable to demonstrate financial need, you may still be eligible for an “unsubsidized” federal student loan. With a Direct “unsubsidized’ loan, you are responsible for paying the interest even while you’re in school.


The U.S. Department of Education offers the following four types of Direct Loans.

  • Direct Subsidized Loans are made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. Loan interest is subsidized (paid by the government) while the student is in school at least half-time and for a period of six months after the student leaves school.
  • Direct Unsubsidized Loans are loans made to undergraduate, graduate and professional students without regard to financial need. Students are responsible for paying interest on a direct unsubsidized loan during all repayment periods and even while they are in school. However, students enrolled in an eligible college or career school at least half-time usually qualify for “in-school deferment.” During this deferment period, students do not have to make interest payments while they are in school and for six months after leaving school, but interest will accrue during that time and will be added to the balance of the loan. This deferment is usually granted automatically to students who qualify.
  • Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. Borrowers who have an adverse credit history must meet additional requirements to qualify.  
  • Direct Consolidation Loans allow students to combine all of their eligible federal student loans into a single loan with a single loan servicer.

How Much Can I Borrow?

There are limits on the amount of subsidized and unsubsidized loans that you may receive each academic year (annual loan limits) as well as limits on the total amount you may receive for undergraduate and graduate study (aggregate loan limits).

The amount you can borrow may vary depending on what year you are in school and whether you are a dependent or independent student. For example, dependent undergraduate students may borrow up to $3,500 per year in Direct Subsidized Loans and $2,000 per year in Direct Unsubsidized Loans, for an annual limit of $5,500.

Parents and graduate students who are eligible for PLUS loans can borrow an amount up to the cost of attendance at the school the student attends minus any other financial aid the student receives.

If you are a dependent student whose parents are ineligible for a Direct PLUS Loan, you may be able to borrow more than the limit on Direct Unsubsidized Loans. Check with your college’s financial aid office for more information.


The interest rate on federal student loans is established annually and varies depending on the type of loan. Federal student loans also have fees, which will be deducted from your award. Below are the interest rates and fees for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans first disbursed on or after July 1, 2021, and before July 1, 2022.


Federal Direct Loans

Eligibility: Undergraduate and graduate students with or without financial need.

Annual Loan Limits: Dependent undergraduates: $5,500 first year, $6,500 second year, $7,500 third year and beyond; limits for independent and graduate students are higher.

Interest Rate for Direct Subsidized Loans and Direct Unsubsidized Loans: 3.73%

Interest Rate for Direct Unsubsidized Loans for Graduate and Professional Students: 5.28%

Fees: 1.057%*

*The fee on Direct Subsidized Loans and Direct Unsubsidized Loans is a percentage of the loan amount and is proportionately deducted from each loan disbursement.


Eligibility: Parents of dependent undergraduate students with or without financial need; graduate and professional students with or without financial need.

Annual Loan Limits: Up to the total cost of college for the year, minus any financial aid already received.

Interest Rates for Direct PLUS Loans: 6.28%

Fees: 4.228%



To apply for a federal student loan, you must submit a completed FAFSA (Free Application for Federal Student Aid) between October 1 and June 30. For a Direct PLUS Loan, you will also be required to complete the Direct PLUS Loan Application and sign a promissory note. Many states and colleges set priority deadlines by which you must submit the FAFSA form to be considered for the aid programs they administer. Additionally, because some states and schools have limited funds, you should try and submit your completed FAFSA as soon as you can after October 1 to have the best chance to qualify for a federal student loan.

To qualify for a federal student loan, you must meet the following general eligibility requirements:

  • Demonstrate financial need (for most programs)
  • Be a U.S. citizen or eligible non-citizen
  • Have a high school diploma or recognized equivalent, such as a General Education Development (GED) certificate, or have completed a high school education in a homeschool setting approved under state law
  • Have a valid Social Security number (with the exception of students from the Republic of the Marshall Islands, Federated States of Micronesia, or the Republic of Palau)
  • Be enrolled or accepted for enrollment as a regular student in an eligible degree or certification program
  • Be enrolled at least half-time to be eligible for Direct Loan Program funds
  • Maintain satisfactory academic progress in college or career school
  • Be registered with Selective Service, if male (must register between the ages of 18 and 25)


To qualify for a parent PLUS loan, the borrower must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time at an eligible school; not have an adverse credit history (unless certain additional requirements are met); and meet the general eligibility requirements for federal student aid.


To qualify for a grad PLUS loan, the borrower must be a graduate or professional student enrolled at least half-time at an eligible school in a program leading to a graduate or professional degree or certificate; not have an adverse credit history (unless certain additional eligibility requirements are met); and meet the general eligibility requirements for federal student aid.


If federal student loans do not cover all of your college expenses, there are other financial aid options. In addition to federal student loans, the federal government also awards grants (which is financial aid that doesn’t have to be repaid unless, for example, you withdraw from school) and work-study (which is a work program through which you earn money to help pay for school). It also offers a number of other financial aid and loan repayment programs as well as tax breaks for education.


The federal government offers several loan repayment options. Borrowers are assigned a payment plan when they first begin repaying their loans, but they can change repayment plans at any time, free of charge.

  • The standard plan sets up the same payment amount every month (with a minimum payment of $50).
  • The graduated plan starts out with lower payments that increase every two years. Payment amounts are set at amounts that will enable the student to repay this loan within 10 years.
  • The extended plan sets up either a fixed or graduated payment over a period of 25 years and applies only to loan amounts above $30,000.
  • Income-driven plans allow payments to fluctuate according to the borrower's annual income, family size, and other factors. The federal government offers several income-driven plans with different qualifications. For example, the Revised Pay As You Earn plan reduces monthly loan payments to 10 percent of discretionary income and forgives the remaining loan balance after 20-25 years of consistent payments.

The Federal Student Aid website features a free Loan Simulator to help you review different repayment plans and select the best one for your situation.

With few exceptions, not repaying a student loan will lead to garnishment of wages and income tax refunds, and a negative impact on your credit history. It’s important to think carefully about your future educational and career goals before taking out a student loan and understand how student debt can impact your financial future. To get an idea of how much of your expected future salary will go toward paying off your student loan, see 1st Financial Bank USA’s Student Loan Repayment and Affordability Calculator.

Portions of this article were  excerpted from the US Department of Education’s Federal Student Aid website.




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