If you've started researching colleges, you'll notice that all schools have one thing in common: they're expensive. A single year at a public college averages $21,337, while private schools average $46,313 per year.

Few families have enough money saved to cover that cost, which is why so many students end up taking out student loans. In fact, four in 10 families borrowed money to pay for college for the 2021-22 academic year.

If you have to borrow money, federal student loans are an excellent starting point due to their relatively low rates and borrower protections. Continue reading to learn about the different types of student loans available and how to apply for federal student loans.

What are federal student loans?

Federal student loans are the most common type of student loan. Nearly 93% of outstanding student loans are federal loans, with private student loans making up just 7% of the market.

The U.S. Department of Education is the lender behind federal loans, and it's the largest provider of education loans in the country. Currently, federal loans are issued under the William D. Ford Federal Direct Loan Program (Direct Loans).

With most federal loans, you don't have to make payments while you're in school, and they usually have grace periods. The grace period lasts for six months after you graduate or drop below half-time status; payments aren't required during this time, so it gives you a chance to get a job and start earning money before payments are due.

Types of student loans issued by the federal government

Within the federal Direct Loan program, there are four different types of student loans:

• Direct Subsidized: Direct Subsidized loans are a type of loan designed specifically for undergraduate students that need substantial financial assistance. These are one of the most beneficial types of loans since the government waives the interest that accrues on the loan while you're in school, during the loan grace period and any periods of deferment.

• Direct Unsubsidized: Direct Unsubsidized loans are for undergraduate and graduate students. Unlike Subsidized Loans, the borrower is responsible for all interest that accrues.

• Direct PLUS: PLUS Loans are split into two categories:

  • Grad PLUS: Grad PLUS loans are for graduate and professional students.

  • Parent PLUS: Parent PLUS loans are for parents who want to borrow money to help a dependent child pay for their undergraduate education. The loans are solely in the parent borrower's name.

• Direct Consolidation: Direct Consolidation loans are typically used after a student has graduated and their loans have entered repayment. It allows borrowers to combine their federal loans into one, simplifying their payments and potentially giving the borrower access to other payment plans.

Federal loan borrowing limits, rates, and fees

The federal government sets strict limits on how much students can borrow with most federal loans, and the maximum allowed is based on your year in school and whether you qualify as a dependent or independent student. Most undergraduate students, with rare exceptions, are classified as dependent students for financial aid purposes.

Loan rates and fees vary by loan type. Federal loan interest rates are set by Congress and they're fixed, so the rates stay the same for your entire loan term. Federal student loans also have disbursement fees, which are deducted from the loan amount when it's issued.

Below are the borrowing limits, rates, and fees for the different types of student loans:

Benefits of federal student loans

Federal student loans are the first choice for most students that need help paying for college for the following reasons:

There is no minimum credit score or income requirement

For students from low-income households or those with no credit histories, federal student loans provide financing they couldn't otherwise get from other sources.

Unlike other types of loans, federal loans have no minimum income requirement. Nor do they require a certain credit score. For Direct Subsidized and Direct Unsubsidized Loans, there is no credit check at all.

For PLUS Loans, there is a credit check, but the U.S. Department of Education is only looking to see if you have an adverse credit history — recent serious credit issues like foreclosure or repossession — rather than a specific credit score.

You don't have to make payments while you're in school

With federal student loans, students don't have to make payments while they're in school or for six months after they graduate or leave college. Without payments due, you can focus on your education and get yourself financially secure before you have to worry about your monthly payments.

Federal PLUS loans do require payments while in school, but borrowers have the option of deferring payments until after graduation.

There are multiple repayment plans available

Federal student loans have a default 10-year repayment plan. But if you can't afford your payments, federal loans are eligible for other plans.

By enrolling in income-driven repayment (IDR) plans, you can significantly reduce your payments. IDR plans determine your payments using a percentage of your discretionary income. Depending on how much you make and your family size, you could qualify for a payment as low as $0.

Plus, if you have a loan balance at the end of the IDR term, the government will forgive the remaining account balance.

Federal borrowers may qualify for loan forgiveness

One of the major perks of federal student loans is that they are eligible for loan forgiveness programs. The best known program is Public Service Loan Forgiveness. Under PSLF, nonprofit workers and employees of government agencies that work full-time for at least 10 years and make 120 qualifying monthly payments are eligible for forgiveness of 100% of their outstanding federal loans.

The interest rates are fixed

Federal student loans have fixed rates that stay the same for the entirety of your repayment term. That's quite different from some private student loans that have variable rates that change over time.

Depending on the economy and market conditions, the rates on variable-rate loans can start low, but dramatically increase. We found that variable-rate student loans can have rates as high as 18%.

How to apply for federal student loans

To apply for federal student loans (and other financial aid, including grants), you must complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is a form that asks questions about your household income, family size, and assets to determine your financial need. It's what colleges use to create your financial aid package, which may include federal student loans. You can complete the FAFSA online at FAFSA.gov.

The federal FAFSA deadline is June 30, but states and schools may have different deadlines. You can see what deadlines apply at studentaid.gov.

Important: Many families don't fill out the FAFSA because they think they make too much money. However, there's no income maximum for the FAFSA. Even if you don't qualify for grants, you may be eligible for federal student loans, so it's worth taking the time to fill it out.

FAQs

Who is eligible for federal student loans?

To qualify for federal student loans, you must meet the following criteria:

• You must be a US citizen or qualifying permanent resident.

• You must have a valid Social Security number (Students from the Republic of the Marshall Islands, Federated States of Micronesia or the Republic of Palau are exempt from this requirement).

• You must have earned a high school diploma, General Educational Development (GED) or an approved homeschooled equivalent.

Are undocumented or DACA students eligible for federal student loans?

Undocumented students, including those with Deferred Action for Childhood Arrivals (DACA) status, aren't eligible for federal student loans. To complete the FAFSA and apply for federal loans, you must have a valid Social Security number; undocumented and DACA students do not meet that requirement.

However, undocumented students may be eligible for other financial aid, including grants and scholarships issued by their state of residence, nonprofit organizations, and private companies.

Paying for college

Now that you know about the types of student loans available and how to apply for federal student loans, you can come up with a plan to pay for college. Most families will need to borrow some money to cover education costs, and federal student loans provide a lower-interest way to finance a degree.

To get all the financial aid you're entitled to, make sure you fill out the FAFSA by the federal, state and school deadlines. If you aren't sure when it's due, reach out to your college's financial aid office.