For most students, attending college is impossible without borrowing money. In fall 2024, more than 19 million students were enrolled in colleges and universities. By the time they graduate, about 70% of them will have taken out student loans, and nearly 93% of those loans are federal student loans.
Below, we’ll explain the different types of federal student loans, their requirements, and their benefits. We’ll also look at alternative options in case federal loans don’t cover the full cost of your education.
Key Points
• Types of federal student loans include subsidized loans and unsubsidized loans.
• Subsidized loans are need-based loans available to undergraduate students. The U.S. Department of Education pays the interest while you’re enrolled at least half-time, during the six-month grace period after graduation, and during periods of deferment.
• Unsubsidized loans are available to both undergraduate and graduate students, and these loans are not based on financial need.
• Direct PLUS Loans are designed for graduate or professional students and parents of dependent undergraduates; they require a credit check and are not based on financial need.
• In addition to federal student loans, students can rely on private student loans once all federal options have been exhausted.
What Types of Federal Student Loans Are Available?
The two major categories of federal loans are subsidized student loans and unsubsidized student loans.
Subsidized Federal Student Loans
Subsidized loans are awarded on the basis of financial need. They are called “subsidized” because the government subsidizes, or absorbs the cost of, some interest payments on the loan. This makes subsidized loans a better deal for student borrowers.
For example, interest on subsidized loans is paid by the government while the student is enrolled (half-time or more). Student borrowers also don’t pay interest during the six-month grace period after graduation or during periods of deferment.
Unsubsidized Federal Student Loans
Unsubsidized loans aren’t given out based on need, and borrowers don’t get a break on interest. Some borrowers will make interest-only payments during school, even though they’re not required to, to “keep up” with the interest.
If a borrower chooses not to make interest payments, the interest that accrues can be capitalized. This means that the interest is added to the balance of the loan. This new value is then used to calculate the amount of interest you owe. In effect, borrowers are paying interest on their interest.
Currently, there is only one type of subsidized federal loan offered, and several types of unsubsidized loans. Next, we’ll discuss the different subcategories of federal loans and who typically qualifies for each.
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The Direct Loan Program
The Department of Education’s federal student loan program is called the Direct Loan Program. The DOE is the lender, but it works with a few different student loan servicers who manage the loan.
Direct Subsidized Loan
Direct Subsidized Loans are for undergraduate students who have financial need. The maximum amount offered per year is between $3,500 and $5,500 for dependent students, based on your academic year. Because of these limits, some students may not be able to cover their entire tuition with Direct Subsidized Loans.
There is also a loan fee of just over 1% for all Direct Subsidized Loans that is deducted from each loan sum the borrower receives.
Direct Unsubsidized Loan
Direct Unsubsidized Loans are offered to undergraduate, graduate, and professional degree students, and financial need is not required. These are the most common types of federal student loans.
Undergraduate dependent students can take out between $5,500 and $7,500 per year in unsubsidized and subsidized loans combined. That means if a freshman student receives the maximum $3,500 in subsidized loans, they may accept no more than $2,000 in unsubsidized loans.
The interest rate for Direct Subsidized and Unsubsidized Loans for the 2024-25 academic year is 6.53%, up from 5.50% for the 2023-24 academic year.
The interest rate is higher for loans made to graduates and professional degree students, and the maximum amount offered is higher, too. Grad students can take up to $20,500 in unsubsidized federal student loans each school year.
The interest rates for the 2024-25 school year for unsubsidized loans offered to graduate or professional students is 8.08%, up from 7.05% during the 2023-24 school year.
Direct PLUS Loan
Direct PLUS Loans are offered to parents paying for their dependent child’s undergraduate education and to graduate or professional degree students. Financial need is not a requirement to receive a Direct PLUS Loan.
The maximum amount that the government awards in each school year is the total cost of attendance (which is determined by the school) minus all other financial aid that the student receives. The interest rates on PLUS Loans offered to parents and graduate/professional students is 9.08% for the 2024-25 school year, up from 8.05% for the 2023-24. Plus, there is a fee for all Direct PLUS Loans of 4.228% that is deducted from each loan sum the borrower receives.
As you can see, the federal loans that a parent can take out on behalf of a student have worse terms than a loan made directly to the student through the Direct Subsidized or Direct Unsubsidized Loan programs.
Depending on your family’s financial situation, you’ll likely want to take this into consideration when choosing loans.
Direct Consolidation Loan
A Direct Consolidation Loan is different from the previously mentioned loans. It allows the borrower to combine multiple federal loans into one loan, enabling you to make one payment toward one loan for easier management.
With a Direct Consolidation Loan, the weighted average of each individual loan is calculated to determine the new interest rate, rounded up to the nearest one-eighth of a percent.
There is never any cost to apply for a Direct Consolidation Loan. If you are contacted by a company offering to help you consolidate for a fee, beware. The service is offered for free by the DOE.
A Direct Consolidation Loan can only be used to consolidate federal student loans. Borrowers aren’t able to consolidate private loans, which are issued by private lenders rather than the government. (Refinancing is a different process that is able to consolidate both federal and private loans.)
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What Federal Loans May I Qualify For?
Not all students may qualify for all types of federal loans. First, it’s helpful to understand that loans are considered either need-based or non-need-based. Here’s how these calculations are made:
Need-Based Loans
Direct Subsidized Loans are need-based federal student loans. To determine who qualifies, the DOE first determines a family’s Student Aid Index (SAI). The SAI takes into consideration a family’s assets and income, and spits out a number. That number is used to determine need-based aid.
To calculate financial need, a college will subtract the SAI from the cost of attendance (COA), which the school determines. COA – SAI = A student’s “financial need.”
For example, if the COA is $30,000 and the SAI is $25,000, then the student is eligible for no more than $5,000 in need-based aid, including Direct Subsidized Loans. (Need-based aid may also include federal grants and work-study programs, which is money that does not need to be repaid.)
If you do not qualify for need-based financial aid, or if need-based loans will not cover the full cost of attending college, you can access the next “tier” of student loan borrowing: non-need-based loans.
Non-Need-Based Loans
Direct Unsubsidized Loans and Federal PLUS Loans are non-need-based loans. To determine how much non-need-based loans a student qualifies for, their school has a separate formula. Take the cost of attendance and subtract the total financial aid awarded to the student so far, including scholarships and grants from the state or school.
For example, if the COA is $30,000 and a student has $20,000 in financial aid from other sources, then they are eligible for $10,000 in non-need-based financial aid, including Direct Unsubsidized and PLUS Loans.
Because there are annual limits to the amount of need-based and non-need-based federal loans for which a student qualifies, some students may not be able to cover the cost of their education via federal loans alone. What are students who find themselves without enough federal aid supposed to do?
Other Funding Options
The first alternative you’ll want to consider is “free money” available through additional scholarships and grants. Although the Free Application for Federal Student Aid (FAFSA) connects students with some free money, there are many other awards available through charities, private foundations, businesses, and even individuals. Online tools, like SoFi’s Scholarship Search, can connect you to scholarships you might qualify for.
Next, students can consider private student loans, which are loans offered through banks, credit unions, and online lenders. Generally, private student loans offer higher interest rates and less flexible repayment terms than federal student loans. (For example, they don’t necessarily offer things like income-driven repayment plans, and they aren’t eligible for federal forgiveness programs.)
The interest rates on private loans are generally tied to the borrower’s credit score and income, whether the borrower is the student, parent, or another family member.
If you think you may need to use private loans, make sure to shop around. Lender terms can vary widely, so get multiple quotes and ask the following questions:
• What is the interest rate?
• Is the interest rate fixed or variable?
• What are the repayment terms?
• What happens if you cannot make a payment?
Also, keep in mind that you may be eligible to refinance student loans — both federal and private — once you’ve graduated and have an established income and improved credit score. Refinancing is the process of paying off one loan with another loan with new terms and a new — and hopefully lower — interest rate.
Refinancing might not be the right option for those planning on using their federal loans’ unique benefits, such as forgiveness for work in public-service professions or an income-driven repayment plan. Access to federal benefits is forfeited when federal loans are refinanced.
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The Takeaway
Federal loans can be either subsidized or unsubsidized. Subsidized student loans are based on financial need and do not accrue interest while the borrower is enrolled in school (half time or more). Unsubsidized loans do accrue interest while student borrowers are enrolled in school. Only undergraduate students are eligible for subsidized student loans. Unsubsidized options are available to undergraduate, graduate/professional students, and parents.
Families tend to prioritize financial aid this way: scholarships, grants, and subsidized federal loans first; unsubsidized federal loans second; and private student loans last.
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.
FAQ
How do Direct Subsidized Loans and Direct Unsubsidized Loans differ?
Direct Subsidized Loans are offered to undergraduates with demonstrated financial need. The government covers interest payments while you’re in school at least half-time, during the six-month grace period, and during deferment. Direct Unsubsidized Loans are available to both undergraduates and graduate students, regardless of financial need. Interest accrues during all periods, including while you’re in school and during grace and deferment periods.
What is a Direct Consolidation Loan, and when may it be beneficial?
A Direct Consolidation Loan allows borrowers to combine multiple federal student loans into a single loan with a fixed interest rate, which is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth percent. Benefits include simplified repayment, access to alternative repayment plans, and eligibility for loan forgiveness programs.
How does financial need affect eligibility for federal student loans?
Financial need is a determining factor for certain federal loans. Direct Subsidized Loans require demonstration of financial need, calculated by subtracting the Student Aid Index (SAI) from the school’s cost of attendance (COA). Direct Unsubsidized and PLUS Loans do not require proof of financial need, as eligibility is not based on income or financial status.
SoFi Private Student Loans
Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi Loan Products
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FOREFEIT YOUR EILIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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