Review of subsidized and unsubsidized loans

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Federal student loans are a popular way to pay for college education, mainly because of their low interest rates prescribed by the government. Undergraduate student loans issued before July 1, 2021 have a fixed interest rate of 2.75%, which is hard to beat.

Here’s what you’ll learn in this review of federal student loans:

Federal student loans at a glance

Federal student loans are a type of student loan guaranteed by the US government. There are three main types of federal student loans:

  1. Direct subsidized loans: These loans are only available for undergraduates with financial need. One of the biggest advantages of subsidized loans is that the government covers the interest while you are in school and during your grace period.
  2. Direct unsubsidized loans: Undergraduates, graduates and professionals are eligible for unsubsidized loans regardless of their financial need. Unlike subsidized loans, you will have to pay all interest on unsubsidized loans, even while you are in school.
  3. Direct PLUS Loans: PLUS loans are available to parents, graduate students and professional students. Keep in mind that these loans carry a higher interest rate than other federal student loans.
Type of loan Who is eligible?
Interest rate
Loan limits
Direct subsidized loans Undergraduate students with financial needs 2.75% * $ 3,500 to $ 5,500 per year
Direct unsubsidized loans Undergraduates, Graduates and Professionals First cycle: 2.75% *

Graduated and Professional: 4.30% *

First cycle dependent: $ 5,500 to $ 7,500 per year (Total limit of $ 31,000)

First independent cycle: $ 9,500 to $ 12,500 per school year (Total limit of $ 57,500)

Graduated and professional: $ 20,500 per year
(Total limit of $ 138,500)

Direct PLUS Loans Parents, graduate students and professional students 5.30% * Cost of participation less any other financial assistance received
* Federal student loan rates for the 2020-2021 school year.

Federal student loans can be repaid through the standard repayment plan, which includes 10 years of fixed payments. You also have the option of signing up for a phased repayment with payments that increase over time or a 25-year extended repayment plan.

If you can’t afford to pay off your federal student loans, there are also four income-focused repayment plans.

Learn more: Subsidized and unsubsidized student loans

Subsidized student loans

Subsidized loans are part of the Federal Stafford Loans program and are available to undergraduates with financial need. Your financial need is estimated based on your Expected Family Contribution (CEF), which is the amount your family should pay for your education. To obtain this number, you will need to complete the Free Application for Federal Student Aid (FAFSA). No credit check is required.

Keep in mind that there are limits to the amount you can borrow in the form of soft loans. Here are the limits to be aware of for dependent and independent students:
  • First year: $ 3,500
  • Second year: $ 4,500
  • Third year: $ 5,500
  • Future years: Up to $ 23,000 in total subsidized loans

Unsubsidized student loans

Unlike subsidized student loans, you do not need to demonstrate financial need to qualify for unsubsidized student loans. There is also no credit check required.

Borrowing limits are also different for undergraduate and graduate students. Here are the borrowing limits that come with unsubsidized loans:

Year at school Dependent undergraduates
Independent students
Year 1 $ 5,500 First cycle: $ 9,500

Graduate or professional: $ 20,500

Year 2 $ 6,500 First cycle: $ 10,500

Graduate or professional: $ 20,500

3rd year $ 7,500 First cycle: $ 12,500

Graduate or professional: $ 20,500

Future years
(Total borrowing limits)
Up to $ 31,000 First cycle: Up to $ 57,000

Graduate or professional: Up to $ 138,500

Federal loans PLUS

PLUS loans are available to parents, graduate students and professional students. Although they come with federal protections, PLUS loans cost more than subsidized and non-subsidized loans directly because of their higher interest rates. PLUS loans also have high origination costs.

A credit check is also required to apply for a PLUS loan. Keep in mind that if you have excellent credit, you may be eligible for a private student loan with a lower interest rate.

Because PLUS loans have the highest rates and fees of any federal loan, it may be a good idea to compare PLUS loans with private loans to see which offers the best loan for your situation.

Credible makes it easy to compare private student loans – you can check your rates with multiple private student lenders in two minutes, all without affecting your credit score.

Check your private student loan rates

Other federal student loans

Federal Perkins Loans are subsidized loans that were available until September 30, 2017. Students with exceptional financial needs were able to take out a Perkins loan directly from their school.

Learn more: Everything you need to know about the Perkins loan

Federal student loans and private student loans

There is differences between federal and private student loans which is important to remember. For example, federal student loans offer benefits that private student loans do not. Here are a few:

  • Interest subsidies: Some federal student loans come with generous grants that cover interest while you’re in school. With private student loans, interest begins to accrue as soon as the loan is disbursed.
  • Repayment plans: With federal student loans, you have access to income-based repayment plans, which can lower your monthly payment based on your household income. These are not available with private student loans
  • Student loan remission: If you are able to meet the requirements, you may be eligible for federal student loan forgiveness after a certain time (depending on the type of forgiveness). Private student loans are not eligible for federal forgiveness programs.

Although federal student loans provide these protections, they may not fully cover your college costs. In fact, many students end up with a combination of private student loans to cover their tuition and other expenses.

If you decide that a private student loan is right for you, be sure to consider as many lenders as possible to get the best deal. You can do this easily with Credible – and you only have to complete one application instead of multiple forms.

Compare student loan rates from the best lenders
  • Several lenders compete to offer you the best rate
  • Get real rates, not estimates
  • Fund almost all degrees

See your rates

Checking rates will not affect your credit

Federal loans are eligible for repayment plans that private loans are not

With private student loans, you will have to pay according to the agreed terms for the entire term of the loan. Unless you refinance, these terms are unlikely to change. But with federal student loans, you have some flexibility in how to pay off your balance.

Here are some of the federal student loan repayment options:

  • Progressive repayment plan: Payments start small and increase over the 10-year repayment period.
  • Extended repayment plan: Fixed or progressive payments that pay off your loan within 25 years.
  • Review of compensation as you earn (REFUND): Payments are capped at 10% of your discretionary income, and the remaining balance is written off after 20-25 years of one-time payments.
  • Pay as you earn (PAYE): Payments are capped at 10% of your discretionary income and the remaining balance is forfeited after 20 years of one-time payments. You must have a high debt ratio relative to your income to be eligible for this plan.
  • Income Based Reimbursement (IBR): Payments are capped at 10% or 15% of your discretionary income, and the outstanding balance is written off after 20 to 25 years of on-time payments.
  • Income Based Reimbursement (ICR): Payments are capped at 20% of your discretionary income and your balance is canceled after 25 years of on-time payments.

How to Apply for a Federal Student Loan

There are several important steps to apply for federal student loans. Here is an overview of how to apply for federal student loans:

  1. Gather family financial information: Start by collecting your financial information and that of your parents if you are a dependent undergraduate student.
  2. Fill out the FAFSA and review your SAR: Complete the FAFSA online. Within two weeks of its completion, you will receive a Student Aid Report (SAR) that explains your eligibility for financial aid.
  3. Review your financial aid scholarship: You will receive a financial aid award letter from your school, which describes the financial aid for which you are eligible. If you have any questions, contact your school’s financial aid office.
  4. Sign and accept your federal student loans: Once you have reviewed everything and understood your financial aid program, you can sign and accept your federal student loans. You may need to coordinate with your school’s financial aid office for acceptance and disbursement.

If federal student loans still aren’t enough to cover your education costs, private student loans could help close the gap. Remember to compare as many lenders as possible to find the right loan for your situation – which you can easily do with Credible.

Find the student loan that’s right for you

If federal student loans don’t cover your education costs, a private student loan might help. With Credible, you can compare multiple lenders to find the student loan that’s right for you.

  • Several lenders compete to offer you the best rate
  • Get real rates, not estimates
  • Fund almost all degrees

See your rates

Checking rates will not affect your credit

About the Author

Eric Rosenberg

Eric Rosenberg is a credible personal finance expert. His work has been featured on Business Insider, Investopedia, The Balance, The Huffington Post, MSN Money, Yahoo Finance, and more.

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