Many people must borrow to pay for their education — 54% of bachelor’s degree recipients graduated with debt in 2020-21, according to the College Board, averaging $29,100 in student loans.
But there’s more than one type of student loan: Both federal and private loans are available, and there are big differences between them.
For most borrowers, it’s typically wise to exhaust eligible federal student loans first since they offer unique borrower benefits. Check out the biggest advantages of federal loans so you can see if they are right for you.
Types of federal student loans
The Department of Education offers several different types of federal student loans. Here are your options if you want to borrow federal loans:
- Direct Subsidized Loans: These are available only to undergraduates with proven financial need. The government pays the interest costs while you're in school and during other eligible periods of nonpayment, making these loans more affordable. Your credit history isn’t a factor for loan approval, although there are annual and lifetime limits to how much you can borrow.
- Direct Unsubsidized Loans: Direct Unsubsidized Loans are offered to undergraduate, graduate, and professional students. You don’t need to show financial need, but you’re responsible for all interest charges. These loans offer affordable fixed interest rates and you can qualify regardless of credit history.
- Direct PLUS Loans: These are available to parents of undergraduates and to graduate or professional students. The borrowing limit is the school-certified cost of attendance (minus any other financial aid you received), but you typically can't get these loans with adverse credit.
- Direct Consolidation Loans: Direct Consolidation Loans allow you to consolidate one or more existing federal student loans into a new loan. Your interest rate won’t change with a consolidation loan (it is a weighted average of included loans), but you can gain access to more repayment plans, depending on your circumstances.
6 advantages of federal student loans
There are some major advantages of federal student loans that most private lenders can’t match. That’s why many borrowers turn to federal loans first before considering private options.
1. Affordable, fixed interest rates
Federal student loans come with low, fixed interest rates. White rates are determined based on type of loan and academic year when funds are disbursed, everyone who qualifies for a certain loan type receives the same standardized interest rate.
Here are the rates for loans disbursed between July 1, 2023 and July 1, 2024:
- Direct Subsidized and Unsubsidized Loans (undergraduates): 5.50%
- Direct Unsubsidized Loans (graduate or professional students): 7.05%
- Direct PLUS Loans: 8.05%
For many borrowers, the average student loan interest rates for private loans tend to be higher than federal loans. As of Oct. 2, 2023, for example, the average rate for a 10-year, fixed rate loan was 7.29% for borrowers with credit scores of 720 or higher who used the Credible marketplace.
Lower rates generally result in smaller monthly payments and lower total borrowing costs. Private lenders may also offer variable-rate loans, which can be riskier as rates and monthly payments can change based on economic conditions.
2. Flexible repayment plans
The many federal repayment options are one of the big advantages of federal student loans. Borrowers can change their plan as needed, choosing from the following types of plans:
- Standard Repayment: Loans are paid in full within 10 years with evenly distributed, fixed monthly payments for the duration. Direct Consolidation Loan borrowers can have up to 30 years to complete repayment.
- Graduated Repayment: You’ll generally pay off your debt within 10 years, but Direct Consolidation Loan borrowers could have up to 30 years to complete repayment. Payments start out low and slowly increase every two years. This can be a good option for new graduates who expect their pay to rise in the future.
- Extended Repayment: This plan provides up to 25 years to repay your loan. Payments can be fixed or graduated, and you must have more than $30,000 in debt to enroll.
- Income-driven repayment plans: There are several income-driven plans available, each with its own rules and eligibility requirements. In general, you’ll pay 10% to 20% of your discretionary income for 20 or 25 years. After you make the required payments, any remaining balance will be forgiven.
Private lenders generally don’t provide the same flexibility. You must stick with the repayment plan you agreed to when you borrowed, and income-driven options are rarely offered.
3. Loan forgiveness and discharge programs
There are multiple opportunities for borrowers to get federal student loans forgiven or discharged, depending on your job or circumstances. These include:
- Public Service Loan Forgiveness (PSLF): If you work for an eligible not-for-profit or government employer, you may qualify for PSLF. After making 120 qualifying payments, any remaining balance can be forgiven.
- Teacher Loan Forgiveness: Up to $17,500 in Direct Subsidized or Unsubsidized Loans can be forgiven if you teach full-time for five consecutive years in a low-income school or educational service agency.
- Income-driven repayment forgiveness: After 20 or 25 years on an income-driven payment plan, the remaining balance of your loans can be forgiven.
- Discharge or cancellation: Federal student debt can be discharged in certain situations, such as if you have a total and permanent disability, your school closed, or your school is found to have acted fraudulently.
Private lenders don’t generally offer forgiveness. Some private lenders will discharge your debt in the case of serious disability or death, but policies vary.
4. Subsidized interest benefits
With Direct Subsidized Loans, the government covers interest costs while you're in school and during eligible deferment periods. This provides substantial savings, as other federal loans (and essentially all private loans) begin charging interest from the day your loan is disbursed.
If you don't pay this interest, it will eventually capitalize. In other words, your interest will be added onto your principal balance and you’ll pay interest on your interest.
5. Deferment and forbearance options
Life happens, and sometimes making your loan payments can be challenging. There are many options to pause payments on federal student loans, including:
- Economic hardship deferment: Payments can be paused for up to 36 months per program if you receive means-tested benefits like welfare, are serving in the Peace Corps, or work full time but have earnings below 150% of the poverty level where you live.
- Unemployment deferment: If you receive unemployment benefits and are looking for work, you can take advantage of this deferment for up to three years.
- General forbearance: Forbearance requests must be submitted to your loan servicer, who has discretion to pause payments due to medical expenses, financial difficulties, employment changes, or other acceptable hardships.
- Special emergency deferment: Federal student loan interest rates were set to 0% and payments were paused for more than three years during the COVID-19 pandemic.
While most private lenders offer some options to temporarily pause loan payments, it’s entirely at their discretion. Private lender policies are also usually less generous about when payments are paused and for how long.
6. No credit check or cosigner required
Borrowers of most federal student loans don’t need to undergo a credit check or have a qualified cosigner (PLUS Loans are the exception). This is ideal for students, many of whom haven’t had time to build a strong credit history.
Most private lenders require good credit and solid proof of income. If a borrower doesn't have sufficient financial credentials, they can ask a cosigner to share responsibility for the loan. In addition, borrowers without excellent credit typically pay higher rates.
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How to maximize the benefits of federal loans
While federal student loans do have many advantages, it’s still wise to exercise caution before taking on debt. These tips can help you maximize federal loan benefits.
Borrow only what you need
You may be offered more in federal student loans than you actually need. If that’s the case, consider borrowing less than the maximum, as a higher loan balance will be harder to pay off later.
Since there are annual and lifetime limits on Direct Subsidized and Unsubsidized Loans, be especially careful not to borrow unnecessary money when using these loans — otherwise you could use up your limited funds early in your academic career.
If you find that you have borrowed more than necessary, it’s not too late. You can cancel your loan before it’s disbursed at any time by contacting your school. If you’ve already received the cash, you could return it to your school or loan servicer — plus, you won’t be charged interest or fees on the canceled portion if you do so within 120 days of loan disbursement. Contact your school for exact directions, as policies and timelines can vary.
Understand your loan terms and conditions
Read the details of your federal loans to fully understand the rules and benefits. New borrowers must also undergo entrance counseling, which explains your rights and repayment terms in more detail.
Staying informed about your options can help you manage debt if your finances get tricky. For example, if you need to lower your student loan payment, you can research different repayment plans. If you’d like to get out of debt quickly, you can pay off your loans early without penalty. Many lenders also offer autopay discounts to help you reduce borrowing costs.
If you have questions about your loan or are having problems managing your debt, review your loan’s paperwork, contact your loan servicer, or consult the Federal Student Aid help center.
Stay informed on changes to federal loan policies
Federal policy on student loans is always evolving, especially since the COVID pandemic.
While the Supreme Court struck down President Joe Biden’s loan forgiveness proposal, for example, his administration is still trying to enact it through other legal channels. Alternative relief has also recently been implemented in the form of the SAVE plan, which aims to make repayment more affordable.
To stay up to date on new programs that could help, subscribe to the Department of Education’s mailing list or check the Federal Student Loan announcements page. In addition, make sure your student loan servicer has your current contact information so it can communicate important news or changes to your account.
Utilize federal loan resources and tools available
While federal student loans certainly have benefits, all the options and programs can be complex. If you’re feeling overwhelmed, there are resources that can help.
For example, Federal Student Aid’s loan simulator tool can help you compare payment plans and review estimated costs. The PSLF help tool can help you determine your eligibility and progress toward Public Service Loan Forgiveness. And an online loan calculator can help you estimate your repayment amount and total loan costs.
Private student loans can cover funding gaps
While federal student loans have many benefits, some borrowers max out the borrowing limits on Direct Subsidized and Unsubsidized Loans. If that happens, you may not be able to get enough funding to cover all you need. And while Direct PLUS Loans don't come with such strict limits, they do charge relatively high origination fees — many private lenders don't.
If you’ve exhausted your eligibility for federal student aid, private student lenders can help cover extra costs. Applicants with excellent credit and a stable income may even qualify for lower rates than what’s available on federal loans. Each lender offers different rates and terms, so it’s important to compare options and find the best lender for your situation. Learn more about how to apply for student loans if you need extra funding.
