The vast majority of student loans in the United States are provided by the federal government, with the Department of Education acting as a lender for millions of students each year.
Generally, federal loans come on more favorable terms than private student loans that are also in the market, and there are a variety of federal student loans available. They all understand some level of interest payments, which means the amount of debt will increase as it goes unpaid, but by thinking about the options you can find the right one for you
Four types of federal student loans
- Subsidized direct loans
- Direct unsubsidized loans
- Direct PLUS loans
- Direct consolidation loans
Currently, the Department of Education is declaring a temporary period of emergency Covid-19 assistance for students receiving federal student loans. Until January 31, 2022, there is an interest rate of 0% on all loans and they stopped collections on overdue loans. The information in this article refers to the standard conditions that will come into effect from February.
Subsidized direct loans
Subsidized loans are available for undergraduate students who meet the conditions proving that they have a special financial need. If you are eligible, you will be able to take advantage of more advantageous conditions and certain interest-free periods.
Currently, the interest rate for this student loan period is 2.75%, fixed for the entire loan. There is also an origination fee, which is deducted proportionately from each loan payment you receive. Direct subsidized loans are also eligible for additional loan cancellation programs and offer several repayment plans designed to help recipients in times of financial hardship.
Direct unsubsidized loans
Unlike the subsidized version, direct non-subsidized loans earn interest throughout life (barring exceptional circumstances, such as the covid-19 relief period). Subsidized loans are available for undergraduates and postgraduates and there is no financial requirement to enroll.
The interest rate, origination fees, and discount options for unsubsidized loans are the same as for the subsidized version. However, the annual interest rate for graduates and professional students is considerably higher and currently stands at 4.3%.
Direct PLUS loans
Direct PLUS loans are available to graduate and professional students (Grad PLUS loan) or parents of dependent undergraduates (Parent PLUS loan). Subsidized and non-subsidized loans both have a borrowing limit and the Direct PLUS options are a boost in case the primary loan is not enough.
A credit check may be required, but applicants with poor credit history can still obtain a Direct PLUS loan by using a co-signer or endorser. However, keep in mind that these loans have a 5.3% higher interest rate and an origination fee of 4.228%.
Direct consolidation loans
Unlike other types of federal loans, direct consolidation loans are generally applied for after students have graduated and are used to combine all eligible student loans into one loan.
There are no administration fees and the interest rate will be weighted according to reflect the different terms and conditions of the loans included in the package. You can tie consolidation loans to income levels, which means you pay back at a rate tied to your income.
Using a direct consolidation loan can simplify the repayment by combining all the payments into one package, but you can risk losing access to certain benefit programs if you choose to consolidate the loans. You will lose credit earned in the Public Service Loan Forgiveness Plans (PSLF) you are committed to if you take out a direct consolidation loan.