Federal Student Loans Review: Subsidized and Unsubsidized Direct Loans

Federal direct student loans are the best option for students who need to borrow money to pay for college. The U.S. government offers these loans.

Unlike private student loans, federal direct student loans don’t require credit history or a co-signer. They also offer borrowers more flexible repayment options and protections to prevent default. Federal loans are the only way to access loan forgiveness programs like Public Service Loan Forgiveness, income-driven repayment plans and borrower defense to repayment.

Use federal student loans before you consider taking out private student loans.

Federal direct student loans at a glance

• Undergraduate borrowers can take out two types of direct loans: subsidized and unsubsidized. Those who qualify for the need-based subsidized version save more money in interest.

• Loans offer flexible repayment options, including income-driven repayment (IDR) plans like the new IDR plan, called SAVE.

• No credit history, income or co-signer is needed to apply.

How federal direct student loans could improve

Federal student loans are the best option for students, but they're not perfect. They could improve by:

• Eliminating student loan origination fees.

Federal direct student loan details

• Interest rates, fees and terms

  • Soft credit check to qualify and see what rate you’ll get: No credit check required.

  • All eligible borrowers receive the same interest rate: 5.50% for direct subsidized loans and direct unsubsidized loans for undergraduate students, and 7.05% for direct unsubsidized loans for graduate or professional students. These rates are effective July 1, 2023 for all loans taken out for the 2023-24 academic year. Rates are fixed over the life of the loan.

  • Loan terms: 10 to 30 years once repayment begins, depending on the repayment plan.

  • Loan amounts:

    • Dependent undergraduate: Up to $31,000 for a borrower's undergraduate career; $23,000 can be subsidized.

    • Independent undergraduate: Up to $57,500 for a borrower's undergraduate career; $23,000 can be subsidized.

    • Graduate: Up to $20,500 per year and $138,500 for a borrower's entire college postsecondary career, including undergraduate loans.

  • Application or origination fee: 1.057% origination fee.

  • Prepayment penalty: None.

  • Late fees: Yes. While the U.S. The Department of Education doesn’t charge fees for late payments, your loan servicer might.

• Requirements

  Financial

  Borrowers are not required to have credit history or income for federal direct loans. But it’s still important to borrow only what you can afford to repay.

  Other

  • Citizenship: U.S. citizens and eligible noncitizens.

  • DACA borrowers: Not eligible.

  • Location: Available in all 50 U.S. states.

  • Must be enrolled half-time or more: Must be enrolled half-time or full-time.

  • Loan can be used for past due tuition: Yes.

  • Types of schools served: Any school authorized to receive federal aid.

• Repayment options

  In-school repayment options

  Federal direct student loan payments are automatically deferred while borrowers are enrolled at least half-time in school and for the six-month grace period after leaving school. However, there is no penalty for making payments while in school, so you may opt to make immediate or interest-only payments to reduce your debt.

  Post-school repayment options

  Borrowers are automatically enrolled in the standard 10-year repayment plan. To change your repayment plan, you must contact your loan servicer. You can use the Federal Student Aid office’s Loan Simulator to see which plans you might be eligible for and to get monthly and overall payment estimates.

  • Grace period: 6 months.

  • Income-based repayment option: Yes.

  • Standard repayment: You'll have fixed payments to pay off the entire loan in 10 years.

  • Graduated repayment: Your payments start out lower and increase, typically every two years, to pay off the full loan in 10 years.

  • Extended repayment: Your payments are fixed or graduated in order to pay off the full loan in 25 years.

  • Saving on a Valuable Education (SAVE): Any borrower with an eligible federal direct loan can qualify for payments set between 5% and 10% of your discretionary income. Some borrowers qualify for $0 monthly payments. If you took out $12,000 or less, your remaining debt will be forgiven in just 10 years of repayment, rather than 20 to 25.

  • Pay As You Earn (PAYE): Your qualifications depend on your income and amount of outstanding debt. If you qualify, your payments will be set at 10% of your discretionary income and your loan term increases from the standard 10 years to 20 years.

  • Income-Based Repayment (IBR): Your qualification is based on your income and amount of outstanding debt. If you qualify, your payments are set at 10% or 15% of your discretionary income and your loan term increases from the standard 10 years to 20 or 25 years.

  • Income-Contingent Repayment (ICR): Your qualifications depend on your income, tax filing status and the number of people in your household. Your payments are capped at 20% of your discretionary income or the amount of your fixed monthly payments on a 12-year loan term, whichever is less. Your loan term increases from the standard 10 years to 25 years.

  • Consolidation: You can consolidate your federal student loans into a single loan with a weighted interest rate. Consolidation can increase your loan term to up to 30 years, depending on the amount you owe.

  Deferment

  You can request a student loan deferment from your loan servicer in several situations:

  • While enrolled at least half-time at an eligible college or career school, graduate fellowship program, rehabilitation training program for the disabled.

  • While experiencing economic hardship, up to three years.

  • While unemployed or unable to find full-time employment, up to three years.

  • While serving in the Peace Corps, up to three years.

  • While receiving treatment for cancer.

  • While on active military duty or for 13 months after the conclusion of that service or until you return to a college or career school.

  General Forbearance

  You can request student loan forbearance if you have financial difficulties, medical expenses, change in employment or other reasons your loan servicer deems acceptable. However, interest will usually continue to mount during a period of forbearance. If possible, you may consider making interest payments to prevent the total amount you have to repay from growing.

  General or discretionary forbearance is given for no longer than 12 months at a time. Your loan holder will decide if your request is accepted and the forbearance period. If you are experiencing hardship at the end of a 12-month period, you can request another. But, the limit on the total time you can have a general forbearance is three years.

  Mandatory forbearance

  Your loan servicer is required to give you forbearance, up to 12 months at a time, in a few situations:

  • You have been accepted to and are working in a medical or dental internship or residency program and meet certain requirements.

  • The total federal student loan amount you owe per month is or exceeds 20% of your total monthly gross income, for up to three years.

  • You have received a national service award for an AmeriCorps position you currently serve in.

  • You are engaged in qualifying teaching service for teacher loan forgiveness.

  • You have participated in services that qualify you for partial loan repayment under the U.S. Department of Defense Student Loan Repayment Program.

  • You are a member of the National Guard, have been activated by a governor and served over 30 consecutive days but you are not eligible for military deferment.

  Death or disability discharge

  Federal direct loans are forgiven if the borrower dies or becomes permanently disabled.

• Customer service

  Loan servicer: Your loan is assigned to a federal student loan servicer after it is disbursed. Your student loan servicer will manage all of your federal loan payments until your debt is repaid.

• Extras

  • Public Service Loan Forgiveness: Borrowers who make 120 payments on an eligible repayment plan while employed full-time for a qualifying public service employer may qualify for loan forgiveness.

  • Teacher Loan Forgiveness: Teachers who teach full-time in a low-income school or educational service agency for five total and consecutive academic years may be eligible for loan forgiveness of up to $17,500 in direct loans.

  • IDR loan forgiveness: After the loan term ends on any of the income-driven repayment plans, the remaining balance is forgiven.

  • Borrower Defense to Repayment loan forgiveness: If a borrower’s school misled or engaged in any other misconduct or illegal activity, borrowers may be eligible for loan forgiveness.

  • Closed School Discharge: You may be eligible for 100% discharge of your direct loans if your school closes while you're enrolled and you do not complete your program, or if your school closes within 180 days after you withdrew.

How to apply for a federal direct student loan

If you’re ready to borrow a federal student loan, you can apply by submitting a FAFSA. The form is available to complete online, with your Federal Student Aid ID. You can also submit a paper FAFSA by mail.

» MORE: NerdWallet’s FAFSA Guide

To apply, you’ll need all documents included on the FAFSA checklist, according to your dependency status.

After you submit the FAFSA, you’ll receive a FAFSA Submission Summary, which summarizes the information you included in the FAFSA as well as the amount of financial aid for which you're eligible in the applicable academic year.

When you receive your college acceptance letters, you’ll also receive a financial aid award letter that details all free money you may be eligible for (grants, scholarships and work-study) as well as the federal direct loans you can borrow.

Accept all free aid first before taking out federal loans. Also, you may not need all of the loans offered. Your school will tell you how to turn down a loan or request a lower loan amount.

If you have a cost gap to fill after you maximize all grants, scholarships, scholarships, work-study and federal loans, you may consider borrowing a private loan.

Compare private student loan options to make sure you’re getting the best rate you qualify for. In addition to interest rates, look at lenders’ repayment options and the flexibility they offer to borrowers who struggle to make payments.

STUDENT LOAN RATINGS METHODOLOGY

Our survey of more than 29 banks, credit unions and online lenders offering student loans and student loan refinancing includes the top 10 lenders by market share and top 10 lenders by online search volume, as well as lenders that serve specialty or nontraditional markets.

We consider 40 features and data points for each financial institution. Depending on the category, these include the availability of biweekly payments through autopay, minimum credit score and income requirement disclosures, availability to borrowers in all states, extended grace periods and in-house customer service.

The stars represent ratings from poor (one star) to excellent (five stars). Ratings are rounded to the nearest half-star.