Paying for school can feel like a huge burden, especially as the cost of college continues to increase. Even public universities — typically a much cheaper option than private schools — saw a 7.2 percent price hike during the 2015-2016 school year.
With a higher education costing more than ever, finding affordable financing options is essential. One of the best places to start is the federal government. Department of Education student loans tend to have lower interest rates and more generous repayment terms than private loans, making them a smart way to pay for school.
However, navigating the federal loan system can be complicated and overwhelming. There are many different kinds of loans available and you might be eligible for only a select number of them, so it’s important to understand their differences.
7 kinds of Department of Education student loans
The federal government offers different loans based on your education level and income. Each loan has its own eligibility requirements, interest rates, and repayment terms. Here are the seven kinds of loans that the Department of Education currently manages:
1. Direct Subsidized Loans
Direct Subsidized Loans are one of the best options you can use to pay for school. With subsidized loans, the Department of Education pays the interest that accrues while you’re in school at least half time, during your grace period after graduation, and if you put your loans into deferment.
Even when you’re responsible for paying the interest, the rates are low. As of January 2018, Direct Subsidized Loans have a 4.45% interest rate.
However, these unique Department of Education loans are only available to undergraduate students with financial need. The government issues the loan, but your college decides if you meet the financial requirements and how much you can borrow. Each school may have different criteria, so you might receive more in subsidized loans from one school than another.
You are only eligible for subsidized loans for 150 percent of your program’s length. For example, if you attend a four-year school to earn a bachelor’s degree, you can only receive loans for six years. If it takes longer than that to finish your degree, you will have to take out other forms of loans.
There are also limits on how much you can receive in subsidized loans each year:
- First-year undergraduate: $3,500
- Second-year undergraduate: $4,500
- Third-year and up undergraduate: $5,500
Direct Subsidized Loans are eligible for all income-driven repayment (IDR) plans and Public Service Loan Forgiveness (PSLF).
2. Direct Unsubsidized Loans
Available to both undergraduate and graduate students, Direct Unsubsidized Loans are another affordable option to pay for school.
Like Direct Subsidized Loans, Direct Unsubsidized Loans have low interest rates: 4.45% for undergraduate students and 6.00% for graduate or professional degree borrowers. The key difference between the loans is that the Department of Education will not cover the interest that accrues on unsubsidized loans.
To qualify for an unsubsidized loan, you must be enrolled at least half time in school. Unlike subsidized loans, you do not have to show financial need to be eligible for a loan.
Unsubsidized loans are eligible for all IDR plans and PSLF.
3. Parent PLUS Loans
Some Department of Education student loans are available to parents, as well. For those who want to help their children pay for school, you can take out a Parent PLUS Loan with an interest rate of 7.00%.
You can borrow up to the total cost of attendance minus any other financial aid your child receives. There is a disbursement fee with the loan; it’s 4.264 percent of your loan total.
You can take out a Parent PLUS Loan if you have a dependent that is enrolled at least half time pursuing an undergraduate degree. The loan is in your name, so you are responsible for repaying the debt after your child graduates.
Unlike most other federal loans, the government does consider your credit history when evaluating your application for a Parent PLUS Loan. If your credit doesn’t meet their criteria, you might need an endorser on the loan who agrees to make payments if you fall behind.
Another major difference is that payments on Parent PLUS Loans become due right away, not after your child’s graduation. You can request a deferment while your child is in school, but the loans will continue to accumulate interest and you’ll pay more over time.
If you can’t afford your payments under a standard 10-year plan, Parent PLUS loans are eligible for the Graduated Repayment and Extended Repayment plans. Parent PLUS Loans do qualify for PSLF, but they are ineligible for any IDR plan — the repayment options that are the most valuable to PSLF-seekers — unless you consolidate them with a Direct Consolidation Loan first.
4. Grad PLUS Loans
If you’re a student going to graduate school or pursuing a professional degree at least half time, you might qualify for a student PLUS Loan. Like Parent PLUS Loans, Grad PLUS Loans have a 7.00% interest rate and require a credit check.
However, PLUS Loans made out to students have more benefits than those made out to parents. Grad PLUS Loans are eligible for all IDR plans and qualify for PSLF without needing to be consolidated beforehand.
5. Direct Consolidation Loans
If you have federal loans, juggling multiple loan servicers and payment due dates can be stressful. One way to simplify your finances is to consolidate them into one loan with a Direct Consolidation Loan.
Combining your loans with a Direct Consolidation Loan can give you access to more IDR plans and even help you qualify for PSLF. When you consolidate, your new interest rate is based on the weighted average of the rates on your old loans. You might also be able to extend your repayment term and reduce your monthly payments.
Direct Subsidized, Unsubsidized, PLUS, Perkins Loans, and some Family Federal Education Loans can be consolidated with a Direct Consolidation Loan. To be eligible for consolidation, the loans must be in repayment or you must be in your grace period after graduation.
If your loan is in default, you need to make payment arrangements with your loan servicer or agree to an IDR plan. If your wages are being garnished because of student loan default, you cannot consolidate the loans until the wage garnishment order has ended.
6. Perkins Loans
In 2017, the Federal Perkins Loan program ended. Current borrowers with Perkins Loans still enjoy their benefits, but the government will not issue any new loans through this program.
Perkins Loans were for low-income students, and were a cheaper option than some other forms of debt. With an interest rate of just 5.00% and a nine-month grace period, they were one of the best forms of financial aid available.
However, Perkins Loan borrowers should know that these loans have limitations. Perkins Loans are ineligible for PSLF. Plus, they don’t qualify for income-driven repayment plans. In some cases, you might qualify for both PSLF and IDR plans by consolidating your debt with a Direct Consolidation Loan.
7. Family Federal Education Loans
As of 2010, Family Federal Education Loans (FFEL) are no longer available to students. For those who already have FFEL debt, however, these loans were guaranteed by the government but issued directly from private lenders.
FFEL debt is ineligible for PSLF. The only way you can qualify for PSLF is if you consolidate your loans with a Direct Consolidation Loan. If you’ve made payments toward your loans before consolidating, they do not count toward the 120 necessary payments. The Department of Education will only apply payments made on the consolidation loan.
How to apply for federal student loans
Finding a way to pay for school can be overwhelming, but Department of Education student loans can be useful tools to fund your education. Thanks to lower interest rates and added benefits, federal student loans can make it easier to afford your education.
If you’re in need of financial aid for the upcoming semester, the first step is filling out the Free Application for Federal Student Aid to access grants, scholarships, and federal student loans.