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With the cost of higher education at an all-time high, many students need financial assistance to pay for tuition, room and board, books, and more. In fact, in the U.S. alone, 43 million borrowers are carrying over $1.7 trillion in student loan debt.

Taking out student loans may be the first major financial commitment you make. And it’s a decision that has the potential to affect your financial situation for years to come. So it’s crucial to understand the terms you’re signing up for, and all the options available.

To help you get started, here’s a quick guide to student loans. We’ll break down the basics of how loans work, how to apply for both federal and private student loans, and what to expect after you graduate.

What Is a Student Loan?

Student loans let young people borrow the money they need to pay for their education. Like other types of loans, this money must be repaid in the future, with interest.

Student loans can be borrowed by the student or, in some cases, by their parents. When a student loan is borrowed by a parent to pay for their child’s education, it may be called a parent loan.

The way student loans work is similar to other loans, but the application process is different, especially when it comes to federal student loans (more on that below). Federal student loans are funded by the federal government.

With private student loans, the application process is similar to other types of loans. Potential borrowers will file an application directly with the bank of their choice.

What Can Student Loans Be Used For?

Student loans can be used to pay for a student’s qualified educational expenses. These include things like tuition, books and supplies for classes, and fees charged by the school.

They can also be used to pay for room and board, living expenses, commuting to school, and a laptop or computer used for school.

Private student loans can even be used to pay off an outstanding tuition balance. Each lender determines how far in the past a loan can be used to pay an overdue balance, but many will allow loans to cover past-due balances that are 6-12 months outstanding. Also, keep in mind that you can apply for a private student loan at any time, and paying before the bill is due is preferable so you don’t have any interruptions in enrollment or class scheduling.

Graduate students are also eligible for federal aid and are encouraged to complete a grad school FAFSA.

Recommended: What Can You Use Student Loans For?

The Two Main Student Loan Categories

Student loans fall into two main categories, federal and private. Federal loans, which are funded by the federal government, offer some advantages and protections for borrowers. These special features, which are not common with regular loans, include:

•   Lower, fixed interest rates (what you pay the lender for loaning you the money) that offer a better deal than private student loans.

•   Income-driven repayment plans, which base your monthly payment after graduation on your salary.

•   Temporary relief programs for graduates who are facing unemployment or other hardship.

Federal Student Loans

Federal student loans are provided by the government. However, your payments and loan management are usually handled through an independent company called a student loan servicer.

To see if you qualify for a federal loan and other federal student aid, you need to fill out the Free Application for Federal Student Aid, commonly referred to as FAFSA®. The application must be filled out every year you want to apply for federal student aid.

There are a few different types of federal student loans. The main federal student loans are:

•   Direct Subsidized Loans, available to eligible undergraduates with financial need. The interest that accrues while students are enrolled in school and during the grace period is covered by the U.S. Department of Education.

•   Direct Unsubsidized Loans, available to eligible undergraduates and graduate students regardless of financial need.

•   Direct PLUS Loans, available to parents of undergraduate students and to graduate or professional students for expenses not covered by financial aid.

Check out our breakdown of the different types of federal student loans for details on how these loans work and the distinctions between them.

Private Student Loans

Private student loans are issued by non-government lenders, such as banks, credit unions, or other financial service companies. A potential borrower’s eligibility and terms will depend on their credit history (their financial track record) and other factors.

Parents or even family friends can cosign with a student who may not be able to qualify for a private student loan on their own. Unlike federal loans, repayment on private student loans may start while the borrower is still enrolled in school.

Unlike their federal counterpart, private student loan lenders may not offer the same safety-net protections in cases of financial hardship or unemployment. So be sure to understand the terms before taking a private student loan. Private loans tend to be the last option for paying for college after all other methods of financial aid have been exhausted.

Recommended: Guide to Private Student Loans

Understanding How Student Loans Work

Understanding the difference between federal and private student loans is the first step in navigating how college loans work. Here is other essential information:

Student Loan Application Process

Applying for federal student loans requires students to complete the FAFSA every year they attend college. Some people assume they won’t meet the requirements for FAFSA federal aid because of their parents’ income or a low GPA, but that’s usually not the case.

Everyone who might need help paying for college should fill out the FAFSA. Aside from federal student loans, there are state and school-based scholarships, grants, and work-study programs that you may qualify for. The FAFSA form is generally available on October 1 for the following school year and can be completed online. Note that the form for the 2024-2025 academic year is delayed until December; find out more about the FAFSA delay here.

If you’re opting for private student loans, find a reputable lender and make sure your school and program are eligible for their offerings. The application process may or may not have a fee, depending on the lender.

Private lenders typically want applicants to provide basic personal and financial details, and may also consider credit history.

As mentioned above, lenders may allow potential borrowers to apply for a private student loan with a cosigner, such as a parent. Because college students tend not to have much of a credit history yet, adding a cosigner can potentially improve an applicant’s chance of getting approved with a competitive interest rate.

Recommended: High-Income Financial Aid

Student Loan Interest Rates and Fees

Interest is a percentage of the unpaid principal loan amount that is paid to the lender in exchange for borrowing money. Federal student loans have fixed interest rates, and interest is accrued on a daily basis.

The interest rate on federal direct subsidized and unsubsidized loans for undergraduates for the 2023-2024 school year is 5.50%. Interest rates on federal student loans are set annually by Congress.

Fixed-rate student loans have an interest rate that stays the same over the life of the loan. Although the rate might start off higher than on variable-rate loans, it won’t change as general interest rates fluctuate.

The way interest on private student loans works is different. Private student loans may have either fixed or variable interest rates. Variable-rate loans, also called floating-rate loans, have an interest rate that can vary every month, quarter, or year. Rates usually start off lower than a fixed-rate loan, but can fluctuate dramatically over the life of the loan.

If you expect to pay off your student loans quickly, you may consider a variable-rate loan. But if you’re not sure how much you’ll be making after you graduate, or you don’t think you’ll be able to pay your student loans off fast, or you’re just not a risk taker, a fixed-rate loan might be a better choice.

Private student loans will have different interest rates depending on the lender and the borrower’s credit history.

Repaying Your Loan

As long as you’re still in school at least part-time, students aren’t required to make payments on federal loans. The exception for federal student loans is PLUS Loans, which require borrowers to start making payments as soon as they receive the entire loan amount. By the way, if you have an unsubsidized loan, interest starts accruing while you’re enrolled in school.

Your federal loan servicer should give you a student loan repayment schedule that tells you when your first payment is due and how much you owe. There are a few different repayment plans available for federal student loans. Borrowers can change their repayment plan at any time without incurring fees.

Most federal student loans have a six-month grace period, which gives you a break after you leave school before you have to start paying your loans back. Some private lenders also offer grace periods, but it’s not a guarantee. Unless the loan is a federal unsubsidized loan, it will likely accrue interest during the grace period.

PLUS Loans work a little differently. While PLUS Loans for undergraduate studies do not have a grace period, graduate and professional students who receive PLUS Loans receive an automatic six-month deferment that is activated when the student graduates, leaves school, or their enrollment drops below half-time. Also, parent borrowers who’ve received PLUS Loans can request a six-month deferment after their child graduates, leaves school, or enrolls less than half-time.

Private lenders determine when repayment begins on a private student loan, so review your student loan agreement closely before signing.

Many lenders offer interest rate reductions if you have your student loan payments automatically deducted from your checking account.

The Takeaway

Student loans can make it possible for young people to attend college, but just like other types of loans, student-borrowers are charged interest. Federal loans have fixed interest rates and generally have a six-month grace period following a student’s departure from school. They also come with borrower protections and benefits like income-driven repayment plans. Private student loans can be helpful if a student did not receive enough federal aid in the form of federal student loans, scholarships, grants, and work-study, to pay for college. Lenders determine the interest rate and terms partly based on the borrower’s credit history. Interest rates may be either fixed or variable. Private student loans do not carry the same federal borrower benefits.

Students interested in borrowing private student loans should shop around to find the best interest rate and terms they qualify for. SoFi’s private student loans have absolutely no fees, and the application process is entirely online.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

How are student loans paid out?

According to the Federal Student Aid website (StudentAid.gov), your school will give out your loan and grant money in at least two payments, called disbursements. Usually, you’ll receive a payment once per term (semester, quarter, etc.). If you accept a work-study job, you’ll be paid at least once a month.

How much money do student loans give you?

Undergraduates may receive between $5,500 and $12,500 per academic year in direct subsidized and unsubsidized student loans. The amount is determined by your year in school and your dependency status. Your total financial aid is calculated as the difference between the cost of attendance for your school and your family’s expected contribution.

How much is a student loan monthly?

The average monthly student loan payment is $461. Your monthly payment will depend on how much you borrow, your interest rate, and the length of your repayment term.

Can you use a student loan to pay a tuition bill that is past due?

Yes, you can use a private student loan to pay off an outstanding tuition balance. Each lender determines how far in the past a loan can be used to pay an overdue balance, but many will allow loans to cover past-due balances that are 6-12 months outstanding.

Can a SoFi Private Student Loan be used for past-due balances? How long?

Yes. As long as the student is enrolled the next semester or has recently graduated, the student may apply a SoFi Private Student Loan to a past-due balance up to 12 months after term. The school must certify the loan and the dates the funds cover.

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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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

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If you need financial aid to help pay for college, you’ll fill out the Free Application for Federal Student Aid (FAFSA®), which allows you to apply for federal unsubsidized student loans, subsidized student loans, work-study, and grants.

When your FAFSA has been processed, you’ll receive an aid offer that explains the types and amount of aid that a college is offering to you. If you’ve applied to multiple schools, you’ll receive an aid offer from each. You’ll be asked to tell them which forms of financial aid you would like to accept before they apply it to the amount you owe your school.

But you don’t have to accept all the aid on offer, including student loans, so consider your options carefully.

What Are Subsidized and Unsubsidized Loans?

There are two basic types of federal student loans: Direct Subsidized Loans and Direct Unsubsidized Loans. They help eligible students cover the cost of four-years colleges, community colleges, and trade, career, and technical schooling. Here are the major differences between unsubsidized versus subsidized student loans.

Direct Subsidized Loans are student loans for undergraduates with financial need. Your school will determine how much you can borrow, and that amount cannot be more than your financial need.

The government pays all interest on Direct Subsidized loans while you’re in school at least half-time, during the six month grace period after you leave school, and during periods of deferment.

Direct Unsubsidized Loans are available to undergraduates and graduate students. They are not awarded based on financial need.

Again, your school will determine how much you are able to borrow, and you are responsible for paying all interest on the loan amount at all times. If you choose not to pay interest while you’re in school, during the grace period, or if your loan is in deferment or forbearance, the interest will still accrue. At the end of the deferment period, the interest will be added to the principal of the loan.

Interest rates for each type of loan are fixed. For example, for the 2023-2024 academic year, the interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans is 5.50% for undergraduate borrowers. The interest rate for Direct Unsubsidized Loans is 7.05% for graduate or professional borrowers.

There are also limits to the amount of money that you can borrow, and the loan amount that you receive may be less than this limit. For dependent students, except those whose parents can’t receive PLUS loans, the aggregate loan limit is $31,000, of which no more than $23,000 can be in subsidized loans.

For dependent undergraduates whose parents can’t obtain PLUS loans, the limit is $57,500, of which no more than $23,000 can be in subsidized loans. For independent graduate students or professionals, the limit is $138,500, of which no more than $65,500 can be in subsidized loans.

When Might You Be Offered More Loans Than You Need?

You don’t have to accept all of the federal loans that are offered to you. To figure out if you’ve been offered more loans than you actually need, you’ll need to do a bit of budgeting.

Federal loans can only be applied to tuition, fees, housing and meal plans. These won’t be the only expenses you’ll need to cover, however. Consider other costs like transportation, travel, eating outside the dining hall, etc. Add up the costs to which your federal loan would apply and any extra expenses to get a sense of the total cost of going to school.

Now figure out your total funding sources, excluding the sources in your offer letter. This might include money from your parents, scholarships, grants, and any money you may have saved on your own. If your total expenses exceed your sources of funding, you may need to accept the federal loans on offer. However, if they don’t, you might not need to accept all the funding.

Which Loans Should You Accept?

If you don’t anticipate needing the amount of money offered to you through loans, you do not need to accept them. Schools will allow you to decline a loan, accept it, or even accept a portion of it.

That said, if you do decide to take on federal loans, it’s generally wise to accept subsidized loans first because they offer more benefits in the form of government interest payments.

Unsubsidized loans, on the other hand, put you on the hook for all of the interest that accrues on the loan. These loans however are still eligible for other federal benefits and borrower protections.

Can Your Return Unused Student Loans?

If you accept a loan and realize that you don’t need it, the good news is you can cancel the loan, or a portion of it, within 120 days of disbursement. By canceling the loan, you’ll return the money you received, and you won’t owe any interest or be charged any fees.

Alternatives to Federal Student Loans

Federal student loans aren’t the only way to help pay for schooling. Here’s a look at three alternatives:

Private Loans

Students can apply for private student loans which are offered by private institutions, such as banks and credit unions. These lenders will determine the amount you can borrow, interest rates, and terms largely based on financial factors such as your income and your credit score, or that of a cosigner if you need to have one.

Private student loans are not subject to the same loan limits imposed on federal loans, so students can potentially borrow more to cover costs. Though, this also means that private loans aren’t afforded the same borrower protections (like income-driven repayment plans) as federal student loans. For this reason, they are generally considered only after a student has thoroughly reviewed all of their other options.

Personal Loans

Personal loans are also provided by private lenders who, again, set the loan amount, interest rates and terms, based on a person’s financial history. The terms of the loan do not dictate how the money must be used, so they may be a way to cover expenses outside of tuition, fees, room, and board.

Financial Aid

There are a variety of types of financial aid available from public and private sources that can help you pay for school.

Grants and scholarships are money given to you that you don’t need to repay. Scholarships are often given based on academic merit or talent, or they’re given to students wishing to pursue a particular area of study.

The Federal Work-Study Program allows students to work part-time to earn money to pay for schooling.

The Takeaway

When you’re offered a student aid package by the federal government, it may include federal subsidized and unsubsidized student loans. You can accept or decline these loans, or even accept a small portion of them. Consider declining if your sources of funding exceed your expenses. Doing so may be cheaper in the long run, as it allows you to avoid making interest payments.

Private student loans are another potential source of funds to help you pay for school. To learn more about the options available to you to meet your student loan needs, visit SoFi.

FAQ

Is it better to accept subsidized or unsubsidized loans?

When choosing between subsidized and unsubsidized loans, consider accepting subsidized loans first, since the federal government will pay your interest while you are in school at least half-time, during the six month grace period after you leave school, and during periods of loan deferment.

Can you accept student loans and not use them?

You can accept student loans and not use them, but you’ll still be responsible for paying them back with interest. If you find you don’t need the loans, you can cancel them within 120 days of loan disbursement.

How are subsidized and unsubsidized loans different?

Subsidized and unsubsidized loans differ mainly in who they are available to and who must make interest payments. Subsidized loans are available to undergraduate students, and the government makes interest payments while you are in school at least half-time, during the six month grace period after you leave school, and during periods of loan deferment. Unsubsidized loans are available to undergraduate, graduate, and professional students, who are responsible for all loan payments.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

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.

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.

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The Free Application for Federal Student Aid (FAFSA®) is the first step in the process of obtaining government-provided student aid while a Pell Grant is a type of federal aid.

Although the Pell Grant vs. FAFSA serve different functions, they both have a role under the broader federal student aid program. A FAFSA provides students access to the Pell Grant, and Pell Grant eligibility is determined by the FAFSA.

What Is FAFSA?

The Free Application for Federal Student Aid is an all-in-one formal application to see if you’re eligible for federal financial aid. Through the FAFSA, students are able to apply for federal grants for college, like the Pell Grant, as well as scholarships, work-study opportunities, and federal student loans from the Department of Education.

As the name indicates, there is no cost to submit a FAFSA. Students will need to complete and submit a new FAFSA for every academic year they are requesting federal aid.

The FAFSA is generally available as early as October 1 for the upcoming academic year. The federal deadline to file the FAFSA is June 30 following the academic year. (Note that the form for the 2024-2025 academic year is delayed until December; find out more about the FAFSA delay here.) However, schools and states might have their own FAFSA deadlines to qualify for non-federal aid. Ask your school about its FAFSA deadline and be aware of your state’s deadline on StudentAid.gov.

Recommended: FAFSA Guide

How FAFSA Works

Each FAFSA is applicable to the upcoming academic year. To receive federal financial aid for multiple years of college, as mentioned, you’ll need to complete the FAFSA each year by the deadline.

A Federal Student Aid (FSA) ID is required to manage your federal student aid account, which includes signing your FAFSA digitally. You can create your FSA ID on StudentAid.gov.

Shortly after submitting the FAFSA, either digitally or a paper application, you’ll receive a Student Aid Report. This report is an overview of all the information you’ve provided on your FAFSA (e.g. your and your parents’ personal and financial information), and includes your Student Aid Index number (SAI; formerly called your Expected Family Contribution). At this stage, you’ll need to make any necessary corrections to your FAFSA by the deadline, which is for the 2022-23 academic year is September 10, 2023.

Your selected schools will then process your FAFSA and provide you with its financial aid offer. This notice will outline the types of aid you’re eligible for and the amount. It will also provide instructions on how to accept the aid offers you want. The accepted aid will then be sent automatically to your school.

What Is the Pell Grant?

A Pell Grant is a federal grant program that offers aid to students who show financial need on their FAFSA. Students are typically not required to repay money awarded in the form of the Pell Grant.

It’s generally available to undergraduate students who have not yet earned a bachelors, graduate, or professional degree. This grant program is not available to students who have been incarcerated in a federal or state institution.

When used for qualified educational expenses, Pell Grants are generally not considered taxable income.

How Pell Grants Work

The maximum Pell Grant award a student can receive may vary from year to year, and the amount you qualify to receive depends on your SAI. For the 2023-24 academic year, the maximum award is $7,395 and the SAI limit is $6,656 for Pell Grant eligibility.

Pell Grant awards are also limited to 12 semesters (or the equivalent of six years) per student. For example, if you received a Pell Grant award for four years of your undergraduate degree, and return to school to complete a graduate program, you’ll only have two years of lifetime eligibility left to receive Pell Grant funding.

In certain situations, students may be required to repay all or a portion of their Pell Grant. Some circumstances that may require repayment include a change in enrollment that may impact your eligibility such as withdrawing from school. If you are required to repay all or a portion of your Pell Grant, you will be notified by your school.

Pell Grant vs FAFSA

When comparing the differences and similarities between the federal pell grant vs. FAFSA, you’ll find they share some broad attributes, but have significant differences.

The first notable difference is that the FAFSA isn’t a type of financial aid; instead, it’s a general application for multiple federal aid programs. A Pell Grant, on the other hand, is a type of federal aid program that uses the FAFSA to determine if a student is eligible.

Neither the Pell Grant or FAFSA have defined income limits for eligibility. Anyone can submit a FAFSA, regardless of their household income. However, only students who demonstrate financial need are eligible for certain federal aid programs, like the Pell Grant.

The government uses students’ SAI — which is calculated based on a number of factors — to decide Pell Grant eligibility. For the 2023-24 academic year, the maximum SAI for Pell Grant eligibility is $6,656.

Also, both undergraduate- and graduate-level students can submit a FAFSA, but Pell Grants are typically restricted to undergraduate students only.

FAFSA	Pell Grant
Application for various types of federal aid programs.	One grant option among a handful of federal grant programs.
No income limits for eligibility.	Eligibility is determined based on a student’s SAI.
Financial need isn’t required to apply.	Must demonstrate exceptional financial need.
Undergraduate and graduate students can apply.	Generally offered to undergraduate students.

Which Forms of Financial Aid Should You Prioritize?

If your financial aid award includes a Pell Grant and other types of aid offers, carefully decide which aid you want to accept, and how much.

To avoid graduating school with excessive student debt, consider prioritizing financial aid as follows:

•   Scholarships and grants, like the Pell Grant, which don’t need to be repaid after you graduate.

•   Earned financial aid, like participating in work-study opportunities. You can also consider taking on a part-time job while you’re enrolled in school.

•   Borrowed financial aid, like federal student loans. Federal student loans offer low, fixed rates and protections, like income-driven repayment plans and extended deferment and forbearance. Prioritize federal loans before borrowing private student loans which don’t guarantee the same benefits.

Recommended: FAFSA Grants & Other Types of Financial Aid

What If You Don’t Qualify for Financial Aid?

Students who don’t qualify for federal financial aid still have options to help finance their college education.

Scholarships

Scholarships are a type of financial aid that doesn’t need to be repaid. They can be need- or merit-based, and are sponsored by nonprofit and private organizations, businesses, professional associations, and more.

Other Grants

Like scholarships, non-federal grants are provided to students, based on need or merit. They don’t have to be repaid after graduation making them a good financial aid choice.

Recommended: The Differences Between Grants, Scholarships, and Loans

Private Student Loans

Students can also apply for private student loans. This form of aid must be repaid in full, plus interest. You can find them from private financial institutions, like online lenders, banks, and credit unions. Your school or state might also offer private student loan options. One thing to know about private student loans, as mentioned is that they lack borrower benefits afforded to federal student loans, and are therefore generally only considered as a last resort option.

Recommended: Guide To Private Student Loans 

The Takeaway

As previously mentioned, the FAFSA is an application that students must fill out if they are interested in applying for any federal student aid including scholarships, work-study, grants, and federal student loans. A Pell grant is a type of aid, awarded to students who demonstrate exceptional financial need.

If you find that you’re not eligible for a Pell Grant, or qualify for financial aid, but not enough, SoFi’s private student loan could help. The online application process is fast and easy, and you can check your rate in just a few minutes. Plus, SoFi student loans have no fees and qualifying borrowers can secure competitive interest rates.

Find out if you pre-qualify and at what rates.

FAQ

Can you get a Pell Grant without FAFSA?

No. Completing and submitting a FAFSA is a requirement to apply for a federal Pell Grant. The FAFSA is used by your school to determine your eligibility for Pell Grant aid, and the amount you can receive under this grant program.

Can you get a Pell Grant and other forms of financial aid?

Students who are eligible for a Pell Grant might also be offered other types of financial aid. If you’re eligible, you’ll receive the full Pell Grant amount you’re eligible for, regardless of other existing financial aid.

Do you have to repay a Pell Grant if you don’t graduate?

You might have to repay a portion of your “unearned” Pell Grant, if you withdraw from school during the same academic year. Your school will calculate how much of your Pell Grant award you’ve earned based on your scheduled attendance, and tell you the amount you owe.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

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.

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For most students, attending college is impossible without borrowing money. In spring 2022, nearly 16 million students were enrolled in colleges and universities. By the time they graduate, about 64% of them will have taken out student loans. And 93% of those loans are federal student loans.

Below, we’ll explain the different types of federal loans, their requirements, and benefits. We’ll also look at alternative options in case federal loans don’t cover the full cost of your education.

What Types of Federal Student Loans Are Available?

There’s a lot of terminology thrown around related to student loans. To simplify things, we’ll look at the two major categories of federal loans: subsidized and unsubsidized.

Subsidized Federal Student Loans

Subsidized loans are awarded on the basis of financial need. They are called “subsidized” because the government subsidizes — 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, and 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.

Recommended: 11 Common Types of Scholarships for College

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 is between $3,500 and $5,500, based on your academic year. Because of these limits, some students may not be able to cover their entire tuition with Direct Subsidized Loans.

FYI, there is a loan fee of about 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 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 2023-24 academic year is 5.05%, up from 4.99% for the 2022-23 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 2023-24 school year for unsubsidized loans offered to graduate or professional students is 7.05%, up from 6.54% during the 2022-23 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.

Unlike with Direct Subsidized and Unsubsidized Loans, however, the borrower’s credit will be taken into consideration. A borrower may not have “adverse” credit history. Here’s what that means:

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. There is a fee for all Direct PLUS loans of 4.228% that is deducted from each loan sum the borrower receives.

Yep, 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. The interest rates on PLUS Loans offered to parents and graduate/professional students is 8.05% for the 2023-24 school year, up from 7.54% for the 2022-23.

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 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.)

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, 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 loans, 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.

Recommended: FAFSA 101: How to Complete the FAFSA

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’re considering private student loans to help cover the cost of college attendance, let SoFi help. Applicants without an extensive credit history or with a middling credit score may find that adding a cosigner to their application can help them qualify for a loan or for more-competitive rates and terms.

SoFi private student loans offer competitive interest rates for qualifying borrowers, flexible repayment plans, and no fees.

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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.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

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The thrill of opening college acceptance letters and sitting down to decide where to spend the next four years is undeniably special. After making such an exciting decision, making logistical ones may not seem as appealing, especially when it comes time to choose a student loan to help pay for college.

The expense of attending college can be intimidating, but fortunately student loans can help make financing college more manageable. Broadly, students can borrow federal student loans or private student loans to help pay for their education. For the most part, students will rely on a combination of funding, including loans, scholarships, grants, and work-study to pay their way through college. There are a lot of student loan options that may be accessible to students, and it’s worth considering all viable options before making a decision.

Are You Eligible for Federal Student Loans?

Federal student loans are available for students who meet the general eligibility criteria as outlined by the U.S. Department of Education. In addition to demonstrating financial need (for most programs), students must be a citizen of the U.S. or eligible non-citizen in order to apply. Additionally, students need to be enrolled at least half-time in an eligible degree-granting institution.

Types of Federal Loans You Can Get

The U.S. Department of Education issues loans through the William D. Ford Federal Direct Loan (Direct Loan) Program, and each loan has unique benefits and eligibility requirements. They offer four types of direct loans.

1. Direct Subsidized Loans: For eligible undergraduates who demonstrate financial need to help cover the costs of receiving a higher education at a college or career school.

2. Direct Unsubsidized Loans: For eligible undergraduate, graduate, and professional students. Need is not a determining factor.

3. Direct PLUS Loans: For graduate or professional students and the parents of dependent undergraduate students. These loans help pay for education expenses that other forms of financial aid did not cover. This is not a loan based on financial need but requires a credit check, and certain credit history standards must be met to qualify.

4. Direct Consolidation Loans: These loans allow students to combine all of their eligible federal student loans into just one loan serviced by a single loan servicer.

Students may not be eligible for each of these loan types, but the information provided on the SAR is used by college financial aid offices to determine what financial aid to offer to a student. Researching each option carefully before deciding which loan to choose can be a helpful and responsible step to take.

Recommended: Subsidized vs. Unsubsidized Loans: What is the Difference?

How to Apply for a Federal Loan

In order to qualify for federal student loans, students must complete the Free Application for Federal Student Aid (FAFSA®) form. The process is relatively easy and straightforward.

Filling out the FAFSA form will require personal information about the student and their financial circumstances. The following information or documents may be necessary to help fill out the application.

•   Student’s Social Security number.

•   Parents’ Social Security numbers, for dependent students.

•   Student’s driver’s license number, if applicable.

•   An Alien Registration number for non-US citizens.

•   Information regarding federal taxes and tax returns for the student or, for dependent students, their parents.

•   Records of untaxed income for students or, for dependent students, their parents.

•   Information regarding liquid assets, investments, and business or farm assets of the student or, for dependent students, their parents.

FAFSA forms completed online take three to five days to process, while paper applications require seven to 10 days. Post-processing, the student will receive their Student Aid Report (SAR), which summarizes the information provided on the FAFSA, so it’s important to review this report to ensure its accuracy. If a mistake is found, students should correct their FAFSA as soon as they can.

The SAR includes the Student Aid Index number (SAI), which helps colleges determine eligibility for the Federal Pell Grant and other federal and nonfederal student aid such as gift aid and federal student loans.

The Pell Grant is a federal grant awarded to undergraduate students who demonstrate exceptional financial need.

The colleges the student submitted the FAFSA to are responsible for creating their award package and distributing their financial aid. Contacting the financial aid office at each college a student is considering is advisable, as each college may have a unique process for applying for aid.

Each year, the student can renew their FAFSA form using their FSA ID which will allow them to skip some of the more basic questions on the form.

How to Accept a Federal Loan

When the student aid office at your school sends an aid offer, it will include an option for you to select which types of aid you would like to accept or reject. To do this, follow the instructions provided by your financial aid office. If you have any questions, contact the financial aid office at your school.

Generally speaking, aid that does not need to be repaid, such as scholarships or grants, should be prioritized over loans, which will need to be repaid.

What if Your Federal Loans Aren’t Enough?

If your student loans aren’t enough to pay for college, you have a couple of options. One is to explore scholarships and grants from your school or local community. This guide to unclaimed scholarships has information on finding additional free money to help you pay for college.

Another option is to look into borrowing a private student loan. Federal and private student loans have a few important distinctions. Federal student loans are provided by the United States government, whereas private loans come from private lenders.

More specifically, federal student loans have terms and conditions that are pre-determined by law. Federal student loans have benefits that private lenders are not guaranteed to offer, such as having fixed interest rates and offering income-driven repayment plans. For this reason, federal student loans are generally prioritized over private student loans when students are creating a plan to finance their education.

Recommended: I Didn’t Get Enough Financial Aid: Now What?

Understanding Private Student Loans

Private student loans can be found through private organizations like a bank or credit union, as well as certain state-based or state-affiliated organizations. The lender will set the terms and conditions, and these types of loans are typically more expensive than federal ones.

Interested students will apply for private student loans directly with the lender of their choice. When applying for private loans, it’s important to understand any credit requirements. Most federal student loans don’t require a credit check, but private lenders often require a minimum credit score and income, and typically want to see a history of on-time loan repayments.

Using a co-signer with a more established credit history — which most students don’t have — can make qualifying for a private undergraduate loan easier. The co-signer will have to assume responsibility for the loan if the student misses payments. This private student loan guide has even more detailed information.

How to Pick a Private Student Loan Lender

Most private lenders will allow you to find out if you prequalify for a loan and at what terms and interest rates. This can allow you to effectively compare interest rate types (fixed vs variable), the interest rate amounts, repayment options, loan terms, hardship options, and any perks or discounts the lender may offer before making a final decision.

Once you have selected a preferred lender, you can fill out a formal application. At this point, the lender will conduct a hard credit inquiry (which may impact your credit score).

Determining How Much to Borrow

Determining what to look for when picking a student loan will vary greatly by the student’s financial and educational needs, including how much to borrow. When it comes time to choose how much money to borrow through student loans, the amount will depend on what types of loans the student chooses. For example, federal student loan amounts vary greatly.

•   Undergraduate student loans borrowed through Direct Subsidized Loans and Direct Unsubsidized Loans range from $5,500 to $12,500 per year, varying by what year of school the student is in and their dependency status.

•   Graduate and professional students can borrow up to $20,500 annually in Direct Unsubsidized Loans. These funds can also help cover the remainder of college costs not covered by other financial aid.

•   Parents of undergraduate students can utilize a Direct PLUS Loan to cover the remainder of their child’s education costs that financial aid didn’t cover.

Which of these options a student and their family pursues will vary based on how much financial aid they receive and how much of their education costs they want to cover out of pocket.

Typically, students and their families turn to private student loans if their federal financial aid and loan options don’t cover all of their academic expenses. To determine how much in private loans to take out, students should aim to cover the following expenses for the entire school year: tuition, fees, housing, food, textbooks, school supplies, and travel.

To find the final amount required in private student loan funding, students can subtract any money they’ve received from gift aid such as scholarships and grants, financing they will receive from work-study programs, any college savings they or their families have, and whatever federal loans they received.

Private Student Loans With SoFi

In addition to banks and credit unions, students can turn to online lenders for private student loans. SoFi offers private student loans that students can apply for from the comfort of their own homes in a quick and easy online application. Students can choose what type of interest rate they prefer and can add a cosigner, if necessary.

They never have to worry about fees — that means zero origination, late, and insufficient fund fees. SoFi student loans can cover the entire cost of attendance, so students can take a deep breath and focus on hitting the books instead of worrying about paying for school.

Learn more about SoFi’s easy application process and flexible repayment plans.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

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.

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