Federal Student Loans: What are they, How to Apply & What's the Catch?

Explore the basics of federal student loans, including eligibility requirements, types of loans available, and tips for managing loan repayment.

Federal Student Loans for College

Everyone knows college can be a springboard to success, opening doors to a world brimming with opportunities. Yet, for many, these doors can seem locked, with the keys lying just out of reach due to the intimidating costs of higher education.

Here’s where federal student loans come into play, offering a helping hand to those who dream of striding confidently into the future with a degree in hand.

But what exactly are these loans, and why should you consider them?

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Which Student Loans are Federal?

Federal student loans are unique in the world of educational funding. They are loans provided by the U.S. government, specifically designed to fund students’ higher education expenses. 

These loans distinguish themselves from private loans by offering unique rights and repayment features. Such features can include:

  • Income-driven repayment plans.
  • Potential for loan forgiveness.
  • Options for deferral or forbearance during financial hardship.

In terms of functionality, the U.S. government, acting as the lender, disburses the loan amount to cover college expenses. The borrower – the student – is then responsible for repaying this loan over time, with interest. 

It’s worth mentioning that federal student loans typically come with lower interest rates than private loans, and borrowers can enjoy more favorable terms.

In the United States, student loans were first introduced in the postwar period, and their growth accelerated after the establishment of Sallie Mae in 1973. Student loans are now a mainstream scheme to finance higher education, and the Department of Education estimates that there are nearly 45 million of student debt holders in the US, with 2.5 million borrowers owing more than $100,000 each.

Types of Federal Student Loans

Hang tight! Before diving headfirst into applying for federal student loans, let’s take a detour to explore the various types available.

The process of navigating the intricate world of student loans can prove to be a pretty daunting task. This is mainly due to the existence of several types of loans to pick from.

To simplify the process, here is an overview of the four primary types of federal student loans and the distinct traits that each one possesses.

Direct Subsidized Loans

If you are an undergraduate student with financial need, Direct Subsidized Loans can be a great option to fund your education.

The U.S. Department of Education will pay for the interest on these loans while you are studying at least half-time, during the grace period, and during any deferment periods. This makes them a cost-effective solution to help you achieve your educational goals.

Who's it for?

Undergraduate students demonstrating financial need.

Why choose it?

The government covers the interest while you're in school at least half-time, during grace and deferment periods.

Direct Unsubsidized Loans

Federal Direct Unsubsidized Loans are versatile student loans accessible to both undergraduate and graduate/professional students regardless of financial need.

Although students are responsible for paying the interest, these loans provide more availability and flexibility compared to other federal student loan options.

Who's it for?

Students with an undergraduate, graduate, or professional degree, regardless of financial need.

Why choose it?

Offers more flexibility in terms of availability.

Direct PLUS Loans

If you need more money to pay for educational costs that aren’t covered by other financial aid, Direct PLUS Loans can help.

These loans are available to parents of dependent undergraduate and graduate or professional students. They do require a credit check and have higher interest rates, but they can be a helpful solution if you need extra funding.

Who's it for?

Graduate or professional students and parents of dependent undergraduate students needing additional funding.

Why choose it?

It helps cover educational expenses not covered by other financial aid, albeit with a higher interest rate.

Direct Consolidation Loans

If you have multiple federal student loans and find it challenging to track them all, there is a solution called Direct Consolidation Loans.

This option allows you to merge all eligible loans into one loan with one servicer. Although it does not lower your interest rate, it can make repaying your loans easier and give you access to more repayment plans or forgiveness programs.

Who's it for?

Borrowers with multiple federal student loans wanting to simplify management.

Why choose it?

It enables you to combine all your eligible federal student loans into a single loan with one loan servicer.

How to Apply for Federal Student Loans

Securing federal student loans requires more than just understanding the different types. It demands knowledge about who qualifies and adeptness in navigating the application process.
First and foremost, it’s important to note that federal student loans are not accessible to all.

Only U.S. citizens or eligible non-citizens enrolled at least half-time in an eligible degree or certificate program can qualify.

Moreover, the eligibility for some loan types, like Direct Subsidized Loans, is contingent upon demonstrating financial need.

Applying for a student loan: easy as 1-2-3

Pay attention to deadlines

Timing plays a significant role in applying for federal student loans. Ideally, prospective students should complete the FAFSA as soon as possible, after October 1 in the year before they plan to attend school.

Complete the Free Application for Federal Student Aid (FAFSA)

You can find this online, and it’s absolutely free. Remember, the keyword here is ‘free.’

Never pay for this process.

Review your Student Aid Report (SAR)

After you’ve submitted your FAFSA, you’ll receive a SAR. This report summarizes the information you provided on your FAFSA and will tell you about your eligibility for financial aid.

Accept your aid

If you’re eligible, your school will send you an aid offer. It’s up to you to accept it, so take your time and make an informed decision.

Study the Master Promissory Note (MPN)

A Master Promissory Note is a bit like the rulebook for your federal student loan. It’s a legal document that outlines the terms of the loan, including how much you’re borrowing, your interest rate, and your repayment schedule. When you sign your MPN, you’re saying to the feds, “I understand and agree to these terms.”

Why is your MPN so important?

Here are a few reasons:

  • It’s legally binding: Once you sign your MPN, you’ve committed to repay your loan according to its terms. It’s not something to take lightly.
  • It contains important loan details: Your MPN is where you’ll find crucial information about your loan, including payment due dates and the consequences of missing payments.
  • It can affect your financial future: Defaulting on a student loan can have serious implications for your financial future. Understanding and following the terms of your MPN can help you avoid those outcomes.

So, when you’re presented with your MPN, don’t just skim it. Read it carefully, understand it, and make sure you’re comfortable with its terms before you sign.

Benefits of Federal Student Loans

Getting a loan is never an easy decision. But how do you know whether a loan is the right choice for you or if it’ll make your life much more complicated? 

Well, you can start off by making a list. This can help you see all the crucial factors that require attention and possibly even simplify them.

To help you start, here’s our version of it:

The Pros

Lower Interest Rates

Compared to private loans, federal student loans often have lower interest rates. Your wallet will thank you.

No Need for Credit History or a Co-signer

Especially beneficial for young borrowers, federal student loans typically don't require a credit history or a co-signer.

Flexible Repayment Plans

Life's unpredictable, and the federal government gets that. They offer multiple repayment plans based on your income and other factors.

Deferment and Forbearance Options

Federal student loans offer deferment and forbearance options, allowing you to temporarily stop making payments or reduce your payment amount during financial hardships.

The Cons

Not Enough Funds

Sometimes, federal loans might not cover all your educational expenses. 

Subsidized Loans Limit

There's a limit to how much you can borrow on subsidized loans.

Can Lead to Debt

If you borrow more than you can afford to repay, you could end up with a significant amount of debt that might be challenging to manage.

Default Consequences

If you fail to make your student loan payments or default on your loan, it can lead to serious consequences. These can include wage garnishment, a decrease in your credit score, and difficulty qualifying for other forms of credit.

How Can I Repay My Federal Student Loan?

Repayment is the final piece of the federal student loan puzzle. It’s a stage of your loan journey that requires planning and understanding various repayment options.

Standard Repayment Plan

With the Standard Repayment Plan, you will make a consistent monthly payment until your loans are fully paid off. You must pay a minimum of $50 every month towards your loans, and you have up to 10 years to repay them.

Graduated Repayment Plan

The Graduated Repayment Plan involves starting with smaller payments and gradually increasing them every two years. Like the standard plan, the repayment period is up to 10 years. This plan can be a good choice if you expect your income to rise steadily over time.

Federal student loans are complex debt contracts that enable borrowers to cap repayments to a fraction of their income, have the balance forgiven after at least twenty years in good standing, and accrue interest without capitalization while the loan is in negative amortization.

Extended Repayment Plan

With the Extended Repayment Plan, you can repay your loans over an extended period, up to 25 years. Payments may be fixed or graduated. To qualify, it is necessary to have over $30,000 in unsettled Direct Loans.

Income-Driven Repayment Plans

Income-Driven Repayment Plan caps your monthly payment at a certain percentage of your discretionary income. The specific rate and the repayment period (usually 20-25 years) depend on the particular plan and your individual circumstances.

Repayment strategies should be customized to your financial situation. Review each plan carefully, consider your income projections, and choose a plan that sets you up for successful loan repayment without compromising your financial stability.

Important Dates to Keep in Mind for Loan Repayment and Forgiveness

August 1, 2023

The first student loan forgiveness under the Income-Driven Repayment (IDR) Account Adjustment is expected to start. Borrowers who reach their 20- or 25-year loan forgiveness milestone by this date should have their balances discharged within the subsequent two or three months.

September 1, 2023

The interest freeze from the student loan pause ends. Interest is expected to start accruing again on federal student loans on this date.

October 1, 2023

Student loan payments are expected to resume. The student loan pause technically expires at the end of August. Still, it will take some time for the Education Department and its contracted loan servicers to generate and send out billing statements to borrowers. The first payment due dates after the student loan pause ends are expected to be sometime in October.

December 1, 2023

The deadline for consolidating loans to benefit from the IDR Account Adjustment. Some borrowers may need to consolidate their loans via the federal Direct consolidation program to qualify or maximize the available benefits.

Federal Student Loan Forgiveness Programs

Student loan forgiveness programs are a beacon of hope for borrowers under significant debt. These programs can forgive part or all of your federal student loans under specific circumstances.

Public Service Loan Forgiveness (PSLF): A Reward for Public Service

If you work full-time in a public service job that meets the qualifications, the Public Service Loan Forgiveness Program could help you find relief from your student loans.

Under this program, after you make 120 eligible payments and meet specific criteria, the remaining balance of your loan can be completely forgiven. This option is a rewarding pathway for those dedicating their careers to public service.

Teacher Loan Forgiveness: Acknowledging Our Educators

The Teacher Loan Forgiveness program is tailored for teachers serving in low-income schools or educational agencies. If you meet the requirements, you could be eligible for up to $17,500 in loan dismissal for your Direct Subsidized and Unsubsidized Loans and your Subsidized and Unsubsidized Federal Stafford Loans.

It’s an acknowledgment of the vital role teachers play in shaping the future of our society.

Income-Driven Repayment Forgiveness: Tying Payments to Income

Income-driven repayment plans not only cap your monthly payments at a fraction of your discretionary income but also offer a route to loan forgiveness.

Any remaining loan balance will be forgiven after adhering to the terms of your chosen income-driven plan for either 20 or 25 years.

Alternatives to Federal Student Loans

While federal student loans offer many benefits, they are not the only method of financing your education.

Various alternative options can complement or even replace your need for federal loans.

Private Student Loans: Banking on Borrowing

Private student loans are offered by private lenders like banks, credit unions, and online lenders. These loans can fill the gap when federal loans, scholarships, and work-study aren’t enough to cover the full cost of your education. 

However, they often come with higher interest rates and less flexible repayment options, so consider them carefully.

Scholarships and Grants: Free Money for Education

Scholarships and grants are essentially free money for your education. Unlike loans, they don’t need to be repaid. They are awarded based on factors like academic achievement, athletic ability, cultural background, or field of study. 

Start by exploring opportunities for state grants and then extend your search for federal grants.

Work-Study Programs: Earn While You Learn

Federal Work-Study provides part-time jobs for students with financial needs, allowing them to earn money to help pay for college expenses. The program promotes both community service and work that is relevant to the student’s field of study.


The key difference between these two lies in how the interest accumulates. With Subsidized Loans, the U.S. Department of Education has your back, covering the interest:

  • While you’re in school, at least half-time.
  • For the first six months after you leave school.
  • During any deferment periods.

On the contrary, with Unsubsidized Loans, the interest accrual is on you. Even if you postpone your payments, the interest continues to accumulate, increasing the total amount you owe.

One primary benefit of choosing an income-based repayment plan is affordability. Your monthly payments are tied to your discretionary income and family size, not the loan size.

The bonus? After 20-25 years of repayment, any remaining loan balance receives forgiveness.

Deferment provides you with a breathing space—it lets you pause your federal student loan payments during financially tough times. For specific loan types, the government picks up the tab for the interest during deferment, stopping your loan balance from skyrocketing.

Several elements can make you ineligible for federal student loans. Some of these include lacking a high school diploma or GED, not being registered in an eligible program or school, defaulting on an existing federal student loan, or holding a drug offense conviction while on federal student aid.

Banks often perceive student loans as risky. The reason? Repayment heavily depends on your future income potential. Additionally, with loan forgiveness programs and flexible repayment options, banks may not see a total return.

Finally, the fact that student loans cannot be discharged in bankruptcy can result in extended periods of not making payments.


In conclusion, federal student loans are a valuable resource for students who need financial assistance to pursue higher education. Each loan type, application step, and repayment plan has unique characteristics that could profoundly impact your future.

Don’t let this be the end of your exploration. Dig deeper. Seek personalized advice from financial advisors who can guide you toward the best choices for your situation. And above all, remember, your education is worth every penny.

Next Steps: What Else Can I Do?

  1. Understand Your Needs: Gauge your financial situation. How much assistance do you need?
  2. Research: Delve into the specifics of each federal student loan type, but also look into federal grants or state grants.
  3. Consult: Speak with a financial advisor or your school’s financial aid office for personalized advice.
  4. Apply: Submit your FAFSA form and wait for your award letter.
  5. Decide: Weigh the pros and cons, and choose the best loan type for your circumstances.

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