Types of Federal Student Loans: Everything You Need to Know

All students can apply for one of three types of federal student loans, and they will each have their own benefits and drawbacks. The first type is the Direct Subsidized Loan, which is only available to undergraduate students who demonstrate financial need. This loan does not accrue interest while the student is in school at least half time, but must be paid back in full six months after graduation or when they leave college.

The second type is the Direct Unsubsidized Loan, which is available to any student regardless of their financial needs-at a higher interest rate than the subsidized loan.

The final type is the Direct PLUS Loans, which covers all education costs whether it’s a four-year college or a two-year community college. These loans can be borrowed for as many years as you want, but the total amount of money you borrow from all loan sources cannot exceed your cost of attendance minus any other financial aid received.

Make sure to research each type before applying—even if you don’t think it’s possible that you’ll need these loans—and look at the pros and cons of each. Some students are eligible to apply for both types, while others can only choose one. For example, if you’re not demonstrating need in order to get subsidized loans but have high grades and good credit history, then choosing an unsubsidized loan may make sense for you.

Direct Subsidized Loan

Direct Subsidized Loans are a type of loan given by the government to students with financial needs. These loans generally don’t charge interest while you’re in school, during the grace periods and deferment periods.

Details For Direct Subsidized Loans

  • For undergraduate students with financial needs.
  • The interest rate for loans disbursed between July 1, 2020, and June 30, 2021, is 2.75%.
  • While you’re in school (at least half time), interest is NOT being accrued.
  • Interest starts being charged once you have completed school or drop below half-time. The US Dept of Education is the lender; payments will be made to the US Dept of Education.

Award Limits For Direct Subsidized Loans

  • Up to $5,500 annually; subject to change.

Read More: How to get FSA ID

Types of Federal Student Loans
Types of Federal Student Loans

Direct Unsubsidized Loans

These are federally-funded student loans that do not require you to have good credit, and the amount of interest accrued is based on the length of time when it was taken out. The payment for these loans accrues in monthly payments rather than one lump sum payment at the end of their duration. They also come with a six-month grace period before repayment begins, which can be used for finding employment or wrapping up studies.

The direct subsidized loan is an unsecured form of financial aid which does not require credit approval but has more limited eligibility requirements than a direct unsubsidized loan program in order for them to be considered for the assistance.

For example, if someone applies they must show proof or expected family contribution verification on their FAFSA application (Free Application for Federal Student Aid) each year while applying before any other forms will need completing such as a personal statement letter explaining why he/she deserves this type of funding from the government.

Details For Direct Unsubsidized Loans

  • For undergraduate students, graduate students, and professional degree students; there is No need to show financial need.
  • The interest rate varies based on your level of education:
    • 2.75% for loans to undergraduate students.
    • 4.30% for loans made to graduate and professional degree students.
  • Interest begins to accrue from the time the loan is disbursed.
  • The US Dept of Education is the lender; payments will be made to the US Dept of Education.

Award Limits For Direct Unsubsidized Loans

  • Up to $20,500 annually (minus any subsidized amounts you may have received over the same time period).
  • Depends on grade level and dependency status.
  • subject to change.

Read More: What is need-based financial aid

Direct PLUS Loans

PLUS loans are federal loans that can help you pay for the costs of education not covered by other financial aid. PLUS is available to graduate and professional students as well as parents with dependent undergraduate children, so it’s easy to apply!

Details For Direct PLUS Loans

  • For parents who are borrowing money to pay for their dependent undergraduate child’s education and/or for graduate and professional degree students; there is NO need to show financial need.
  • The interest rate for loans disbursed between July 1, 2020, and June 30, 2021, is 5.30%.
  • The credit score is considered.
  • The US Dept of Education is the lender; payments will be made to the US Dept of Education.

Award Limits For Direct PLUS Loans

  • The maximum amount is the cost of attendance (determine by the school) minus any other financial aid received.

Read More: How to get more financial aid for college

What Is The Difference Between Subsidized And Unsubsidized Loans?

A Subsidized Loan is a loan in which the government pays the interest on your behalf while you are still in school. An Unsubsidized Loan, on the other hand, will accrue interest from when it is first disbursed until it is paid in full. The interest on these loans will be paid (and accrued) during school and after graduation.

Subsidized and Unsubsidized Loans are identical in all ways except for one: Subsidized Loans do not accrue interest while the student is still in school, whereas Unsubsidized Loans do accrue interest while you are still in school.

If your loans are subsidized, then the government is paying the interest while you are in school so that it does not accrue on top of your other college expenses. If your loans are unsubsidized, they will accrue interest as soon as they are disbursed (you will incur some expense getting an unsubsidized loan) while you are in school until they are paid in full. Interest does not stop accruing just because you have received a Subsidized Loan.

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