How Do Federal Student Loans Work?

Find out why federal student loans are a better option than private loans.

Written by Zina Kumok / February 4, 2022
Reviewed by Mark Kantrowitz

Quick Bites

  • Federal loans offer more repayment options for borrowers than private loans.
  • There are strict annual limits for federal loans.
  • Almost all borrowers will qualify for federal student loans.
  • Federal student loans should always be your first choice.

If you’ve just started to look into your student loan options, the terminology can be a little overwhelming. That’s why it can be helpful to learn the basics first and get more specific from there.

Student loans are essentially broken up into two categories: federal and private. In this article, we’ll break down everything you need to know about federal student loans—including how to actually apply for one.

Inside this article

  1. What is a federal student loan?
  2. How to apply
  3. Federal vs. private loans

What is a federal student loan?

Federal student loans are the most common type of student loan.[1] Federal loans are administered by the federal government but serviced by third-party companies that have a contract with the government. Students who are U.S. citizens, permanent residents or among a small number of eligible non-citizen categories are eligible to file the FAFSA and qualify for federal student loans, if they are enrolled on at least a half-time basis.

Federal student loans for undergraduate students have an annual limit between $5,500 and $12,500, depending on your year in school and dependency status.[2] Upperclassmen receive more in federal student loans, and dependent students receive less than independent students. Graduate and professional school students are eligible for higher federal student loan limits.

Federal student loans are available for undergraduate, graduate and professional degrees. You can also use student loans to pay for community college, trade school or vocational college, as long as they’re accredited.[3]

Types of Federal Student Loans

There are a few different types of federal loans. You may have heard of Federal Perkins and Federal Family Education Loans (FFEL) but both are no longer being issued, though there are still borrowers repaying these types of loans.[4] Currently, new borrowers receive loans that are part of the Direct Loan program (also known as Stafford Loans and PLUS Loans).

  • Direct Loans

    Direct Loans are divided into two subcategories: subsidized and unsubsidized. Subsidized loans are only available to students who qualify for need-based aid, while unsubsidized loans are available to all students. There is no general income requirement to qualify for subsidized loans; it depends on your family’s overall finances and what you submit with the FAFSA.

    For the 2022-23 school year, the interest rate is 3.73% for Direct Loans for undergraduate students and 5.28% for Direct Unsubsidized Loans for graduate or professional students.

  • PLUS Loans

    Graduate or professional students, such as those attending law school or medical school, are eligible for Direct Unsubsidized Loans or Graduate PLUS Loans. Graduate PLUS loans are similar to Direct Unsubsidized Loans, except the annual limit is the cost of attendance minus other financial aid.

    Interest rates for Grad PLUS loans are higher than Direct Unsubsidized Loans. For the 2022-23 school year, the interest rate is 6.28% for Graduate or Parent PLUS loans.

    Parent PLUS loans are federal loans taken out by a parent and used to pay for a child’s education. They have the same annual limit and interest rate as Grad PLUS loans. Unlike other types of federal loans, Parent PLUS loans are only in the parent’s name and not the child’s. The parent will be fully responsible for making payments.


Federal loans offer a slew of repayment options. The default option is the standard 10-year plan, which has the highest monthly payments and lowest total interest paid.

Borrowers having trouble affording those payments can switch to one of four Income-Driven Repayment (IDR) plans.[5] These plans use your income, family size and location to dictate your monthly payment. These plans have either 20- or 25-year terms, depending on the loan type and repayment plan.

Other repayment plans include extended repayment and graduated repayment.

Borrowers also have access to federal loan forgiveness programs, which can eliminate your student loan balance once you meet certain criteria, like working for a specific type of employer for a minimum amount of time.

If you need a break, you can apply for deferment or forbearance.[6] These are periods where you won’t have any payments due for a certain length of time, usually up to a year at a time, with a total limit of three years. Interest may accrue during these periods, which could result in a higher loan balance and higher monthly payments when deferment or forbearance ends.

How to apply for a federal student loan

To apply for a federal student loan, you must complete the Free Application for Federal Student Aid (FAFSA). This form asks questions about your parent’s finances, including income and assets. Once you’ve completed the FAFSA, a copy is sent to all the colleges you’ve applied to. The colleges will then decide how much financial aid you qualify for and if you qualify for need-based or non-need-based aid.

Some students and parents think you need to earn below a certain amount to qualify for federal loans, but that only applies for need-based aid like subsidized loans. Unsubsidized loans are available to almost all students who complete the FAFSA.

Students and parents need to complete the FAFSA every year if they want to remain eligible for federal student loans and other types of financial aid.

How federal loans are different from private student loans

Federal student loans are often a better option than private student loans because they provide more loan forgiveness options, income-driven repayment plans and longer deferment and forbearance periods.

Federal loans usually have lower fixed interest rates than private loans. Another major difference is that federal student loans don’t require a cosigner, which is an adult who will assume financial responsibility for your student loans if you default. Private student loans almost always require a cosigner.

Applying for a private student loan is like applying for a personal loan, mortgage or auto loan. You need to meet certain income and credit score criteria to qualify for a private loan, while there is no credit score or income requirement for federal student loans. Interest rates on private student loans also depend on the credit score.

Article Sources
  1. Elan Amir, Jared Teslow and Christopher Borders, “The MeasureOne Private Student Loan Report,” MeasureOne, Dec. 15, 2021,
  2. Federal Student Aid,
  3. “Subsidized and Unsubsidized Loans,” Federal Student Aid,
  4. Federal Student Aid,
  5. Federal Student Aid,
  6. Federal Student Aid,

About the Authors

Zina Kumok

Zina Kumok

Zina Kumok has written about student loans, financial literacy and other personal finance topics for sites like Bankrate, Forbes Advisor and Business Insider. She has also written for fintech companies like Mint, Chime and Ally.

Full bio
Mark Kantrowitz

Mark Kantrowitz

Mark Kantrowitz is a nationally-recognized expert on student financial aid, the FAFSA, scholarships, 529 plans and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make smarter, more informed decisions.

Full bio

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