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Federal student loan

Also called Direct Loan

A loan for college or career school funded by the U.S. Department of Education, with fixed rates set by law and federal borrower protections.

What it means

Federal student loans are requested by filing the FAFSA. Main types include Direct Subsidized Loans for undergraduates with financial need, where the government pays interest during school and certain other periods; Direct Unsubsidized Loans, where interest accrues from disbursement; and PLUS loans, which check for adverse credit history. Most do not require a credit score or cosigner.

Rates are fixed for the life of each loan, with a new rate set each year for loans disbursed that year under a formula in federal law. Borrowing limits are set by law. Protections can include income-driven repayment, deferment, forbearance and forgiveness programs, though the specific plans and rules are set by Congress and the Department of Education and have changed in recent years.

Example

Suppose a graduate leaves school with $30,000 in federal loans at an illustrative 6% fixed rate. On a 10-year standard plan, the payment is about $333.06 a month and total interest is about $9,967.

How it’s used

  • Paying tuition and living costs in college
  • Parent borrowing through PLUS loans (graduate PLUS borrowing has been restricted for new borrowers under recent law)
  • Comparing aid offers before choosing private loans

Strengths and weaknesses

Strengths

  • Fixed rates and no credit score requirement for most types
  • Income-based repayment options and other protections
  • Possible forgiveness through qualifying programs

Weaknesses

  • Borrowing limits may not cover full costs
  • Generally very hard to discharge in bankruptcy
  • Default can lead to wage garnishment and seized tax refunds

Good to know

  • Check the current repayment plan options with the loan servicer, since federal rules change.

See it in the data: College tuition relative to inflation →

Related terms

Private student loan529 planDefaultDebt-to-income ratio (DTI)Bankruptcy

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.