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Most of us simply don’t have the cash on hand to pay for college or graduate school out of our pockets. For the 2023-24 school year, the College Board estimates it costs $41,540 on average annually to attend a private non-profit four year university and $11,260 for in-state students at a public four-year school.

That means you might need to take out student loans to fund your education.To make sure you’re not in danger of defaulting on your loans or paying too much, you might want to understand some basics of student loans.

When you take out student loans, they’re either private or federal — meaning they either come from a private lender, like a bank, or are backed by the federal government.

Federal student loans are either subsidized or unsubsidized Direct Loans. There are also Federal Direct PLUS loans for parents or graduate and professional students. Interest rates for federal loans are set by Congress and stay fixed for the life of the loan. Federal student loans come with certain protections for repayment.

But what are the differences in the types of federal loans? When you’re weighing your options, you might want to understand some of the differences between a Federal Direct Unsubsidized Loan vs. a Direct Subsidized Loan vs. a private student loan, so you can evaluate all of your options.

What Is a Federal Direct Unsubsidized Loan?

The federal government offers two umbrellas of Direct Loans: unsubsidized and subsidized. When you take out a loan, the principal amount of the loan begins to accrue interest as soon as the loan is disbursed (when the loan is paid out to you). That interest has to be paid or it is added onto the loan amount.

Subsidized Federal Student Loans

On a Federal Direct Subsidized Loan, the federal government (specifically, the US Department of Education) pays the interest while you’re in school, during the six-month grace period after you graduate, and if you temporarily defer the loans. On a Federal Direct Unsubsidized Loan, you are responsible for paying all of the interest on the loan from the moment it starts accruing.

Since the interest is paid for you while you are in school on a subsidized loan, it doesn’t accrue. So the amount you owe after the post-graduation grace period is the same as the amount you originally borrowed.

Unsubsidized Federal Student Loans

On a Federal Direct Unsubsidized Loan, the interest accumulates even while you’re in school and during the grace period — even though you aren’t required to make any payments while in school.

The interest is then capitalized, meaning it gets added to the total principal amount of your loan. That amount in turn accrues interest, and you end up owing more when you graduate than you originally borrowed.

Of course, you can make interest payments on your unsubsidized loan while you’re in school to save yourself money in the long run. However, you’re not required to start paying off the loan (principal plus interest) until six months after leaving school.

For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized Loans for undergraduates is 5.50%, the rate on Direct Unsubsidized Loans for graduate and professional students is 7.05%, and the rate on Direct PLUS Loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.

Origination fees for unsubsidized and subsidized loans is set at 5.50% for the 2023-2024 academic year.

How Do You Apply for a Federal Direct Unsubsidized Loan?

The first step to finding out what kind of financial aid you qualify for, including Federal Direct Unsubsidized Loans and Subsidized Loans, is to fill out the Free Application for Federal Student Aid (FAFSA®).

Your school will then use your FAFSA to present you with a financial aid package, which may include Federal Direct Unsubsidized and Subsidized Loans and other forms of financial aid like scholarships, grants, or eligibility for the work-study program.

The financial aid and loans you’re eligible for is determined by your financial need, the cost of school, and things like your year in school and if you’re a dependent or not.

Who Qualifies for Federal Direct Unsubsidized Loans?

Federal Direct Subsidized Loans are awarded based on financial need. However, Federal Direct Unsubsidized Loans are not based on financial need.

To receive either type of loan, you must be enrolled in school at least half-time and enrolled at a school that participates in the Federal Direct Loan program. And while subsidized loans are only available to undergraduates, unsubsidized loans are available to undergrads, grad students, and professional degree students.

Pros and Cons of a Federal Unsubsidized Direct Loan

There are pros and cons to taking out federal unsubsidized direct loans.

Pros

•   Both undergraduates and graduate students qualify for Federal Direct Unsubsidized Loans.

•   Borrowers don’t have to prove financial need to receive an unsubsidized loan.

•   The loan limit is higher than on subsidized loans.

•   Federal Direct Loans, compared to private loans, come with income-based repayment plan options and certain protections in case of default.

Cons

•   Federal Direct Unsubsidized Loans put all the responsibility for the interest on you (as opposed to subsidized loans). Interest accrues while students are in school and is then capitalized, or added to the total loan amount.

•   There are limits on the loan amounts.

Recommended: Should I Refinance My Federal Loans?

The Takeaway

Federal Direct Unsubsidized Loans are available to undergraduate and graduate students and are not awarded based on financial need. Unlike subsidized loans, the government does not cover the interest that accrues while students are enrolled in school. Unsubsidized federal loans are eligible for federal benefits like income-driven repayment plans or Public Service Loan Forgiveness.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Sometimes, student loan debt can start to feel like it’s slowing you down. Maybe the interest rate is too high, you’re not happy with your loan terms, or you’re frustrated with the lender’s customer service. If so, you have the right to look for a new lender and transfer your debt to a different company.

However, you can’t simply ask a new lender to take on your debt with the same terms. To transfer your student loan, you generally need to take out a new loan with a new lender or servicer. The process of switching will be different depending on whether your student loans are private or federal, and may involve consolidating the loan or refinancing.

If you’re thinking about a loan transfer, keep in mind that there’s no guarantee you’ll end up in a more favorable situation just by switching lenders. Here’s what you need to know about student loan transfers.

How Do I Transfer Student Loans to Another Private Lender?

If you have private student loans, the main way to transfer your debt to another lender is to refinance. This involves taking out a new loan with a different lender and using it to pay off your current student loan(s). Moving forward, you only make payments on your new loan to your new lender.

If you have multiple private student loans, refinancing can simplify repayment by giving you only one monthly payment to manage. And, if your financial picture has improved since you took out your original private student loan(s), you may be able to qualify for a lower interest rate. Another perk of refinancing is the ability to lengthen your repayment timeline to reduce your monthly payment amount. Keep in mind, though, that a longer repayment will generally end up costing you more in the long run.

You’ll need to meet certain criteria to be eligible for private student loan transfer via refinancing. Most lenders have a minimum income threshold as well as a minimum credit score (often in the upper 600s). If you don’t meet the income or credit requirements, you may be able to qualify by adding a cosigner.

Many lenders offer prequalification, which lets you see what type of rates and terms you may be able to qualify for without impacting your credit score. To find the loan with the best rate, it can be a good idea to shop around and compare lenders through prequalifying. Once you find a lender you want to work with, you’ll need to officially apply for the student loan refinance.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Can I Transfer My Sallie Mae Loans to Another Lender?

Currently, Sallie Mae only offers private student loans. Prior to 2014, however, the lender serviced federal student loans. If you want to refinance a Sallie Mae loan you took out before 2014, you’ll need to check whether it’s federal or private before moving forward.

If you took out a Sallie Mae loan after 2014, it’s a private student loan, and you can refinance the loan with another private lender. This might be a good idea if you can qualify for a lower interest rate.

What’s the Difference between a Lender and a Loan Servicer?

While the terms lender and loan servicer are often used interchangeably, they are not the same thing. Here’s a look at how they differ.

Student Loan Lender

A lender is an institution or company that originates and funds the student loan. In other words, they’re the one lending you the money. For example, if you apply for a federal student loan, the federal government is your lender. If you apply for a private student loan, you can choose between a number of private lenders.

A Student Loan Servicer

A federal student loan servicer is the middleman between you and the federal government (the lender). Servicers collect your student loan bills and keep track of whether you pay them on time. They will help you if you’re having trouble with your repayment plan or need to change your address or other personal information. You do not get to pick your servicer.

During the course of your federal student loan, your servicer might change a few times. For example, if you had a loan with Great Lakes, it was likely transferred to Nelnet some time between March 2022 and June 2023. You’ll typically get notified of a student loan transfer two two weeks prior to your transfer date.

If you have a federal student loan and you’re not sure who your servicer is, you can log in to studentaid.gov to find out.

Can I Change My Student Loan Servicer?

You can’t change your federal student loan servicer directly. However, if you’re willing to do some legwork, there are two main ways to move your federal student debt to a new servicer or lender.

If you want to keep your federal loan status but switch to a different loan servicer, you can transfer your loans through consolidation. If your main objective is to save on interest, you may want to look into refinancing your student loans with a private lender. Read below to learn more about each scenario.

What about Consolidating My Student Loans?

One way to switch loan servicers is to consolidate your federal student loan(s). This allows you to transfer the debt to a different servicer but keep your federal student loan status, since the lender will still be the federal government.

The consolidation process lets you combine several federal student loans into a single, easier-to-manage Direct Consolidation Loan. While it does not reduce your interest rate, it can lower your payment by extending the term. The downside is that the extended term will mean you pay more in interest over time.

Since not all federal loans have the same interest rate, the interest rate on a new Direct Consolidation Loan will be a weighted average based on your current loan amounts and interest rates. Any unpaid interest is added to your principal balance. The combined amount will be your new loan’s principal balance. You’ll then pay interest on the new principal balance.

Consolidation can be a good option if you are unhappy with your servicer or have several servicers and want to simplify your student debt by having only one payment.

If you have Federal Family Education Program or parent PLUS loans, you need to consolidate to be eligible for income-driven repayment, public service loan forgiveness, and other relief programs.

You can complete a consolidation loan application at studentaid.gov.

What About Student Loan Refinancing?

Another way to change your federal student loan servicer is to refinance your federal student loans with a private lender. If you also have private student loans, you can refinance them together with federal loans, giving you a single loan payment each month.

Generally, refinancing federal student loans only makes sense if you can qualify for a lower interest rate. If you have higher-interest federal student loans, such as graduate PLUS loans or Direct Unsubsidized Loans, you may be able to get a lower rate by refinancing. To qualify for the best rates on a private student refinance, you generally need to have strong financials (or can recruit a cosigner who does).

It’s important to note that refinancing federal student loans with a private lender means losing federal protections, such as income-driven repayment plans, federal deferment and forbearance programs, and loan forgiveness options like Public Service Loan Forgiveness (PSLF).

If you’re interested in refinancing your federal loans, it’s a good idea to review offers from multiple lenders to find the best deal. Many private lenders will allow you to prequalify via a soft credit check so you can see your likely new interest rate without negatively impacting your credit score.


💡 Quick Tip: It might be beneficial to look for a refinancing lender that offers extras. SoFi members, for instance, can qualify for rate discounts and have access to financial advisors, networking events, and more — at no extra cost.

What About Transferring My Student Loan Balance to a Credit Card?

You generally can’t pay federal student loans with a credit card. If you have private loans, however, another option for student loan transfer is to move the balance onto a credit card and pay your monthly bills there. Some credit card issuers allow student transfers, but not all.

Generally speaking, this tactic only makes sense if you can qualify for a card with a 0% introductory rate and can pay off the entire balance before that promotional period expires (often 15-21 months). Otherwise, you could be left paying even more in interest than you would with the original loan.

To see if you can manage this repayment schedule, simply divide your loan balance by the number of months you would need to pay it off before interest applies. Also check to make sure the credit card offers a high enough credit limit to accommodate your loan, and find out if there are any transfer fees.

If you decide it’s a good deal and are confident you can make it work, you would apply for the credit card and, once approved, give your credit card account details to your loan servicer. Your credit card issuer would then pay off your private student loan debt and move the balance to your credit card account. Moving forward, you only make payments to the credit card issuer.

Is It Possible to Transfer Student Loans From Parent to Student?

The federal government does not offer a way to transfer Parent PLUS loans to the child. However, if you’re looking to have your Parent PLUS loans transferred to your child, refinancing the loans with a private lender allows you to do that.

To make this type of loan transfer, you’ll first need to identify Parent PLUS refinance lenders that allow loan transfers. After that, your child may want to prequalify with a few of these lenders to see where they can get the best rate.

If your child meets the lender’s qualifications on their own, you can fully transfer the loan to them. If they don’t, you can serve as a cosigner on the refinanced loan and work with them to meet the lender’s cosigner release requirements. Many lenders allow cosigner release after a set number of successful payments.

The Takeaway

If you’re interested in transferring your student loans to a new servicer or lender, you have some options. If you have federal student loans, you can consolidate your loans to get a different servicer. If you have federal, private, or a mix of both types of student loans, another option for loan transfer is to refinance your loans with a private lender.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.