Federal Student Loan Review

For most students, federal student loans will be the most affordable option if you need to borrow money to pay for college. Loans from the Department of Education come in several shapes in sizes — from Direct subsidized and unsubsidized loans for undergrads to a Direct PLUS student loan for graduate students. This federal student loan review will break down all your options and answer your questions like, “What is a Direct PLUS loan?” so you can find the best loan to help you finish your degree.

Federal Student Loans at a glance

LenderLoan AmountAPY RangeTermsKey Benefit
Federal Student Loans$12,500–100% of attendance2.75%–5.30%10–25 yearsAffordable fixed rates

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What we like about it

Federal student loans offer affordable fixed rates — 2.75% for Direct subsidized and unsubsidized loans for undergrads and 4.30% for Direct unsubsidized loans for graduate students. If you take out a subsidized loan, the Department of Education will pay your interest until you begin making payments six months after you finish school.

Parents and graduate students can also use a federal PLUS loan to help pay for either their child’s education or their own graduate school costs. These loans are more expensive than subsidized and unsubsidized loans. The current interest rate for a Direct loan PLUS is 5.30%

Both Direct subsidized and unsubsidized student loans as well as Direct PLUS student loans qualify for public service loan forgiveness, which forgives your remaining balance if you work for the federal, state, local or tribal government. Certain non-profit employees also qualify.

Things to consider

You have to fill out the FAFSA each year to qualify for federal student loans. You’ll also run into limits on how much you can borrow at each level. The limits for Direct undergraduate loans vary based on your year in school and whether you are a dependent or independent student.

Currently, the most you can borrow per year in a subsidized loan is $5,500 — and that’s only for third-year students and beyond who qualify — the rest of your loans up to the limit have to be unsubsidized, meaning they accrue interest while you’re still in school. You can use a parent or student PLUS loan to cover the full cost of attendance.

You should also watch out for fees. While the interest rates may look good, the fees add to the total cost you have to borrow. Direct subsidized and unsubsidized loans come with a 1.062% loan fee, while the student loan PLUS comes with a hefty 4.236% loan fee.

What you need to know

Federal student loans come in two varieties: The first is subsidized and unsubsidized Direct student loans, and the second is Direct PLUS student loans. Both types come with different fees, interest rates and limits.

Both undergraduate and graduate students can take advantage of subsidized and unsubsidized student loans. You can borrow up to $12,500 (with no more than $5,500 being subsidized) per school year if you’re an independent student in your third year or higher. First and second-year students and those who are still claimed as dependents have lower limits. The current interest rate is 2.75% for undergrads and 4.30% for graduate students. You’ll also have to pay a 1.062% loan fee.

Graduate students and parents of undergraduates can use federal PLUS loans to help cover the cost of attending school. These federal student loans don’t have any borrowing limits, allowing you to borrow up to the total costs of attendance (as certified by the school). The interest rate is currently 5.30%, and you’ll pay a 4.236% loan fee.

To apply for a federal student loan, follow these steps:

  1. Complete the FAFSA. This document is your gateway to all forms of federal financial aid. You have to complete it every year to use federal student loans.
  2. Wait for a letter from your school. It will send you a financial aid offer with the loans and grants you qualify for.
  3. Discuss with your school’s financial aid office. You’ll have to work with your school’s financial aid office to decide how much of your available federal student loans you want to use for each school year.
  4. Complete entrance counseling. This 20–30-minute online course explains your obligation to repay your student loans.
  5. Sign your promissory note. This document shows that you understand the amount you’re borrowing and how much you’ll owe. Once you sign it, you can receive your federal student loan funds.

Collateral and criteria 

Federal student loans are unsecured, meaning you don’t have to put up any collateral to receive them. However, if you fall behind on your payments and default on your student loans, the Department of Education can garnish your tax refunds and wages to recoup the money that you borrowed, plus any interests and fees.

Federal Student Loans vs. Sallie Mae

Sallie Mae offers private student loans to both graduates and undergraduates. You won’t have the same loan restrictions as with federal student loans, but you most likely see a higher interest rate — Sallie Mae’s fixed rates for undergraduate students range from 4.50% to 12.35%. It doesn’t charge any fees, but you might need a co-signer for Sallie Mae to approve you for a loan or a lower interest rate. Overall, undergraduate students will be better off exhausting their federal options before turning to a private lender like Sallie Mae.

Federal Student Loans vs. Discover Private Student Loans

Discover has some of the best private student loans around. For a fixed-rate loan, interest rates fall between 4.74% and 12.39%. It never charges fees for student loans, and it gives you a good grade reward for each year you keep a 3.0 GPA or higher. But not even this award can help Discover catch up to the rates of federal student loans. You’ll usually be better off exhausting your federal options before turning to Discover.


Trevor Wallis

Contributing Writer

Trevor Wallis is a St. Louis-based personal finance writer who teaches people how to achieve freedom through good money practices. He’s written for Bankrate, NextAdvisor, Rewards Credit Cards and Online Loans. When he isn’t writing, he’s roasting specialty coffee and planning new ways to use credit card rewards to explore the world with his wife and newborn son.

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    Adam Benjamin
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    Adam Benjamin is an editor for The Simple Dollar, Reviews.com, and Freshome. He covers everything from finance to internet providers and hopes to make it accessible for all readers.