Understanding Federal Student Loan Types
The cost of college — including tuition, housing, textbooks and other fees — adds up for families. However, students are often eligible for financial aid, including scholarships, grants, work-study or loans to help reduce the overall price of attendance.
To be eligible for federal and some other forms of financial assistance, families must fill out the Free Application for Federal Student Aid, or FAFSA. Many experts say it’s important to take every step possible to limit taking out loans, which students have to pay back with interest. The FAFSA opens the door to work-study and Pell grants for students who are eligible.
However, avoiding borrowing altogether is not always possible. According to the most recent National Postsecondary Student Aid Study, 34% of undergraduate students received federal direct loans in 2019-2020. Students who need to borrow should first do their research on the types of loans available, including federal and private. Information on federal student loans is available on the U.S. Department of Education’s Federal Student Aid website, but it can be tough to sort through and digest. Here is an overview of the different types of federal student loans you can get.
[Read: Best Private Student Loans.]
Types of Federal Student Loans
Four types of federal student loans are available:
— Direct subsidized loans
— Direct unsubsidized loans
— Direct PLUS loans
— Direct consolidation loans
Direct Subsidized Loans
Direct subsidized loans are available to undergraduate students with financial need, which is determined using a formula with the information provided on the FAFSA.
The Department of Education covers the interest on these loans while a borrower is enrolled in school at least part-time, during the first six months after leaving school and during periods of deferment — when loan payments are postponed for any number of reasons.
“There are often better terms on direct subsidized loans (than other options) in an effort to help out these students who have a financial need,” says Amber Miller, a partner experience manager at GreenPath Financial Wellness.
Limits are placed on the amount of subsidized loans borrowers can receive each academic year, which varies based on what year they are in school and if they have dependent or independent status. For instance, the annual maximum for first-year dependent and independent students taking out subsidized loans is $3,500.
The interest rate on direct subsidized loans for the 2025-2026 academic year is 6.39%, fixed for the life of the loan. Under certain circumstances, direct subsidized loans are eligible for loan forgiveness programs such as Public Service Loan Forgiveness. That program aims to incentivize more people to pursue careers in public service by erasing some of their federal loan student debt after a decade of payments.
Direct Unsubsidized Loans
Sometimes a student can receive direct subsidized loan money, but it’s not enough to cover their costs. Other times, a student might not qualify for subsidized loans. The next option to consider is a direct unsubsidized loan, which is not based on financial need.
Unlike direct subsidized loans, unsubsidized loans are available to both undergraduate and graduate or professional degree students. To be eligible, borrowers must be enrolled at least part time at a college that participates in the direct loan program.
Borrowers do not have to make payments while in school, in deferment or forbearance, but are responsible for paying the interest accrued on unsubsidized loans during all periods. The interest for undergraduate borrowers is the same as subsidized loans, but it’s higher for graduate students — 7.94% for the 2025-2026 academic year.
Direct unsubsidized loans also have annual limits: $5,500 for first-year dependent students and $9,500 for first-year independent students.
Direct PLUS Loans
The Direct PLUS loan program will be undergoing significant changes starting on July 1, thanks to the passage of the One Big Beautiful Bill Act in 2025. Previously, Parent PLUS and Graduate PLUS loans were available to eligible parents and graduate or professional degree students, respectively. The maximum loan amount borrowers could take out was the total cost of attendance minus any other financial assistance received.
Beginning in July, Grad PLUS loans will not be available for new graduate student borrowers. Parent PLUS loans will be capped at $20,000 per student per year, with a $65,000 lifetime limit per student.
This type of loan requires a credit check. However, borrowers whose credit score isn’t high enough to qualify may still be able to obtain a PLUS loan either through an endorser — which is like a cosigner — or by providing documentation to the Education Department about extenuating circumstances related to their credit.
The interest rate for PLUS loans is 8.94% for the 2025-2026 school year, in addition to a fee of 4.228% of the loan amount, which is proportionally deducted from the loan each time it is disbursed. Because of this high rate, experts say, many parents struggle to make their payments.
“By setting the rate so high for parents, they’re ignoring the fact that parents already have the most obligations of any group,” says Martin Lynch, president of the Financial Counseling Association of America and compliance manager and director of education at Massachusetts-based Cambridge Credit Counseling. “They have car loans, they have mortgages, are taking care of their kids and they’re probably starting to take care of their parents, too. So, yes, they have the most earning power, but they also have the greatest amount of bills.”
[Read: Best Student Loan Refinance Lenders.]
Direct Consolidations Loans
A direct consolidation loan allows borrowers to combine two or more existing federal student loans to lower monthly payments, have a fixed interest rate and gain access to federal forgiveness programs. Most federal student loans qualify for consolidation as long as they are in repayment or in a grace period.
Borrowers qualify for direct loan consolidation after they graduate, leave school or drop below part-time enrollment — circumstances that also trigger the loan repayment process. Note that consolidation could lead to a longer repayment period, higher interest, loss of certain borrower benefits and possibly higher debt in the long run.
Consolidation doesn’t require a credit check and there’s no application fee. Borrowers can apply directly through the Federal Student Aid website or download and print a paper application to submit via mail to the chosen consolidation servicer.
Borrowing Best Practices
Every college student’s financial situation will be different, and no payment package will be identical. It will likely be a combination of savings, scholarships, grants, work-study programs and federal and private loans. Experts have one overarching piece of advice: borrow as little as you can.
“Try to keep the debt load as low as possible as you finance your college education,” says Bruce McClary, senior vice president of memberships and communications for the nonprofit National Foundation for Credit Counseling. “The more time you spend doing that, and the more success you find in that area, the less of a debt burden you’re going to have when you graduate. Student loan debt is so much of a burden for so many people right now and it’s one less thing you have to worry about after graduation.”
More from U.S. News
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Understanding Federal Student Loan Types originally appeared on usnews.com
Update 02/27/26: This story was previously published at an earlier date and has been updated with new information.