A federal student loan is money the U.S. Department of Education lends directly to students or their parents to pay for college or career school
Unlike private loans from banks, federal student loans come from the government. The terms are set by federal law, not negotiated between you and a lender. Interest rates, repayment options, and forgiveness programs are the same for everyone, regardless of credit score or income. The government holds the loan throughout its life — you repay the Department of Education, not a bank.
Federal loans are distinct from private student loans, which come from banks, credit unions, or online lenders and follow different rules. They're also different from grants, which don't require repayment. Most students borrow federal loans first because the terms are more predictable and the repayment options are more flexible if your income changes.
Key Takeaways
- Federal student loans are issued by the U.S. Department of Education and have interest rates and terms set by Congress, not by individual lenders.
- The main types are Direct Subsidized Loans (government pays interest while you're in school), Direct Unsubsidized Loans (interest accrues immediately), and Direct PLUS Loans (for parents or graduate students).
- Federal loans offer income-driven repayment plans that adjust your monthly payment based on what you earn, which private loans typically do not.
- You must complete the FAFSA (Free Application for Federal Student Aid) to be considered for any federal loan, even if you think you won't may have access to.
The three main types of federal student loans
Direct Subsidized Loans are available to undergraduate students with financial need. The government pays the interest while you're enrolled at least half-time and for six months after you graduate (called the grace period). You don't owe anything during school. After the grace period ends, you begin repaying both principal and interest.
Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. Interest starts accruing the day the loan is disbursed — while you're still in school. You can choose to pay the interest as it accrues or let it capitalize (get added to the principal), which means you'll owe interest on top of interest after graduation. Most students let it capitalize and deal with the larger balance later.
Direct PLUS Loans are for parents borrowing on behalf of undergraduate children or for graduate and professional students borrowing for themselves. These loans have a higher interest rate than subsidized or unsubsidized loans and require a credit check. There is no grace period — repayment begins while the student is still in school, though you can request to defer payments until after graduation.
How federal loans differ from private loans
Federal loans have fixed interest rates set by Congress each year. Private loans have variable or fixed rates set by the lender, often based on your credit score. If your credit is poor, a private lender may charge you significantly more or deny you altogether. Federal loans don't consider credit history for subsidized or unsubsidized loans.
Federal loans offer income-driven repayment plans that cap your monthly payment at a percentage of your discretionary income — usually 10 to 20 percent depending on the plan. If your income drops, your payment drops. Private loans typically require a fixed payment regardless of income, though some offer forbearance (temporary pause) if you lose your job.
Federal loans also offer Public Service Loan Forgiveness, which erases remaining balance after 120 may have access to payments if you work for a government agency or nonprofit. Private loans have no forgiveness programs. Federal loans can also be discharged if the school closes while you're enrolled or shortly after you withdraw.
How to get a federal student loan
Start by completing the FAFSA (Free Application for Federal Student Aid) at fafsa.gov. This form determines your Expected Family Contribution — the amount the government thinks you and your family can pay toward education. The FAFSA opens October 1 each year and remains open through June 30, though schools may have earlier deadlines.
After you submit the FAFSA, your school receives your results and creates a financial aid package. This package lists all aid you're offered: grants, work-study, and loans. The school will tell you how much in federal loans you're offered and what type (subsidized, unsubsidized, or PLUS). You then choose whether to accept or decline each loan.
Before your first loan disburses, you must complete entrance counseling, an online tutorial explaining your rights and responsibilities as a borrower. For PLUS loans, you'll also sign a Master Promissory Note, a legal document promising to repay. Your school handles the paperwork — you don't contact the Department of Education directly to borrow.
Interest rates and how they're calculated
Federal student loan interest rates are set by Congress and change each year. The rate for loans disbursed in a given academic year stays the same for the life of that loan. For example, a Direct Unsubsidized Loan disbursed in 2024 keeps the 2024 rate even if rates change in 2025.
Interest accrues daily on unsubsidized and PLUS loans. The formula is: (Loan Balance × Interest Rate) ÷ 365 = Daily Interest. On a $10,000 unsubsidized loan at 6 percent, you owe about $1.64 per day in interest. If you don't pay that interest while in school, it gets added to your principal when repayment begins, increasing the total you owe.
Subsidized loans accrue no interest while you're in school or during the grace period. Interest only begins accruing after the grace period ends and you enter repayment.
Repayment plans and what happens after graduation
After your grace period ends (usually six months after graduation), you must begin repaying. The standard plan is 10 years of fixed monthly payments. If that payment is too high, you can switch to an income-driven plan, which stretches repayment to 20 or 25 years and bases your payment on your current income.
Income-driven plans recalculate your payment each year based on your tax return. If you're unemployed or earning very little, your payment can be as low as $0, though interest still accrues on unsubsidized loans. After 20 or 25 years of payments (depending on the plan), any remaining balance is forgiven, though you may owe income tax on the forgiven amount.
You can change repayment plans at any time by logging into your account at studentaid.gov. Your loan servicer (the company that collects your payments) will help you understand which plan makes sense for your situation. If you're struggling to pay, contact your servicer before you miss a payment — they can offer temporary relief through deferment or forbearance.
Frequently Asked Questions
Do I have to repay a federal student loan if I don't finish school?
Yes. The loan is based on enrollment status at the time it was disbursed, not on whether you graduate. If you withdraw or drop below half-time enrollment, your grace period may start sooner. Contact your school's financial aid office immediately if you leave — they can explain how it affects your loans and when repayment begins.
What's the difference between a federal loan and a grant?
A grant is money you don't repay. Federal grants (Pell Grants) are based on financial need and go to undergraduate students. Loans must be repaid with interest. Most students receive some combination of both — grants cover part of the cost, and loans cover the rest.
Can I get a federal student loan if my parents make too much money?
Yes. There is no income limit for Direct Unsubsidized Loans or PLUS Loans. Subsidized Loans are limited to students with financial need, which the FAFSA determines. Even if your parents earn a high income, you may still may have access to for unsubsidized loans. Complete the FAFSA to find out what you're offered.
What happens if I can't pay my federal student loan?
Contact your loan servicer before you miss a payment. You can request deferment (pause payments for up to three years) or forbearance (temporary reduction or pause). If you work in public service, you may eventually may have access to for Public Service Loan Forgiveness. If you default (stop paying for 270 days), the government can garnish your wages and tax refunds.
Can I pay off a federal student loan early without penalty?
Yes. Federal student loans have no prepayment penalty. You can pay extra toward principal at any time without owing a fee. Paying extra reduces the total interest you'll owe over the life of the loan.