As you embark on your financial aid journey, you'll find that there are many types of student loans, but they can be broken up into two general categories: federal and private. The William D. Ford Federal Direct Loan Program offers federally funded loans, which are commonly referred to by various names, including direct loans, unsubsidized loans, and Stafford loans.
Before you agree to any loans in your financial aid package, it's best to understand them.
The U.S. Department of Education funds federal student loans, which offer various benefits and repayment options. Unlike private loans, which are issued by banks or other financial institutions, federal student loans have terms and conditions established by law.
Federal student loan interest rates are set by Congress each year, typically in the spring. Updated interest rates become effective for all NEW federal student loans disbursed from July 1 of that year through June 30 of the following year. For example, interest rates for the 2025-2026 academic year (which starts July 1, 2025) are based on the May 2025 Treasury auction results.
Subsidized and unsubsidized loans sound very similar, but there are differences in how these loans function. They are the same, though, in that they are both low-interest loans.
The current fixed interest rate for Direct Subsidized Loans disbursed as of July 1, 2024, to June 30, 2025, is 6.53%.
The fixed Interest Rate for Direct Subsidized Loans disbursed as of July 1, 2025, to June 30, 2026, is 6.39%.
To qualify for a Direct Subsidized Loan, you must:
Be an undergraduate student enrolled as a half-time student: You must be enrolled in an eligible program at a school that participates in the Direct Loan Program, and generally, you need to be enrolled at least half-time. Graduate and professional students are not eligible for this type of loan.
Demonstrate Financial Need: This is the most crucial requirement. Financial need is determined by your Free Application for Federal Student Aid, or FAFSA form, and your school's financial aid office will calculate it based on your Student Aid Index (SAI) and the Cost of Attendance (COA) at your institution.
Meet General Federal Student Aid Eligibility Terms:Other general eligibility requirements for federal student aid include being a U.S. citizen or eligible non-citizen, having a high school diploma or GED, and not being in default on any existing federal student loans.
Repayment for Direct Subsidized Loans typically begins after a six-month grace period once you graduate, leave school, or drop below half-time enrollment.
What are Federal Student Loans?
Federally funded loans help students bridge the gap between what they can afford to pay for college and the actual costs of attendance at their institution.Subsidized vs. Unsubsidized Loans
What is a Subsidized Student Loan?
Subsidized loans are subsidized by the government while you are in school, which means the interest is paid for you while you're enrolled. It is also covered for the six-month grace period after graduation, as well as during periods of deferment if needed. Direct Subsidized Loans are generally the best type of federal student loan because the government pays the interest under certain conditions.What is an Unsubsidized Student Loan?
Unsubsidized loans are available to all students, regardless of their financial needs. Unsubsidized loans accrue interest while you are in school. You can either pay this interest during college or start afterward. Interest also accrues during the six-month grace period as well as during any student loan deferment period. Studentaid.gov provides updated federal student loan interest rates. The Current fixed Interest Rate for Direct Unsubsidized Loans disbursed as of July 1, 2024, to June 30, 2025, is 6.53%. The fixed Interest Rate for Direct Unsubsidized Loans disbursed as of July 1, 2025, to June 30, 2026, is 6.39%. To qualify for a Direct Subsidized Loan, you must: Be an undergraduate, graduate, or professional student enrolled as a half-time student: You must be enrolled in an eligible program at a school that participates in the Direct Loan Program, and generally, you need to be enrolled at least half-time. Meet General Federal Student Aid Eligibility Terms:Other general eligibility requirements for federal student aid include being a U.S. citizen or eligible non-citizen, having a high school diploma or GED, and not being in default on any existing federal student loans. Repayment for Direct Subsidized Loans typically begins after a six-month grace period once you graduate, leave school, or drop below half-time enrollment.Comparing Federal Student Loans
Subsidized loans are "better" if you qualify because the government helps you by paying the interest during specific periods, saving you money in the long run. They are specifically designed for students with demonstrated financial need. Unsubsidized loans are more widely available and don't require financial need. However, you'll be responsible for all accrued interest, so it's wise to make interest payments while in school to avoid capitalization and a larger total of student loan debt.| Subsidized Student Loan | Unsubsidized Student Loan | |
|---|---|---|
| Eligibility | Demonstrate financial need Be an undergraduate student enrolled as a half-time student Be a U.S. citizen or eligible non-citizen Have a high school diploma or GED Be in good standing with any existing federal student loans | Be an undergraduate student enrolled as a half-time student Be a U.S. citizen or eligible non-citizen, Have a high school diploma or GED Be in good standing with any existing federal student loans |
| Interest Rates | 6.53% (July 2024-June 2025) 6.39% (July 2025-June 2026) | 6.53% (July 2024-June 2025) 6.39% (July 2025-June 2026) |
| Loan Amounts | 1st-Year: $3,500 2nd-Year: $4,500 3rd-Year+: $5,500 $23,000 Lifetime Loan Limit | 1st-Year: $2,000 2nd-Year: $2,000 3rd-Year+: $2,000 $31,000 Lifetime Loan Limit |
| Repayment | Subsidized Repayment Details | Unsubsidized Repayment Details |
| Pros | No credit check or cosigner required Fixed interest rate No interest while in school Loan payments are not mandatory until post-graduation Flexible repayment options Lower overall cost | No credit check or cosigner required More students qualify (not based upon financial need) Fixed interest rate Various repayment options |
| Cons | Limited to undergraduate students only Lower borrowing limits Financial need required Eligibility time limit Yearly FAFSA submission required | Interest starts immediately More expensive over time Must be paid regardless of financial need Capitalized interest adds to the balance |
Should I Choose Subsidized or Unsubsidized?
If you're eligible, always accept subsidized loans first. Subsidized student loans cost less because the government pays the interest while you're in school. Unsubsidized loans are a good second option when or if subsidized funds don't cover all of your expenses. They're easier to qualify for and offer higher borrowing limits, but they accrue interest immediately. Many students will receive a combination of both Subsidized and Unsubsidized Direct Loans as part of their financial aid package. Ideally, borrow only what you truly need from either of the federal loan types.PLUS Loans
PLUS loans are part of the federal direct loan program. Still, they are limited to graduate and professional students (Grad PLUS loan) as well as parents of undergraduate and graduate students (Parent PLUS loan). These loans require an application in addition to filing the FAFSA. The maximum amount that parents and graduate students can borrow with a PLUS loan is the cost of attendance at their institution minus any financial aid they receive. For grad students, interest accrues the entire time they are enrolled as well as during the six-month grace period after graduation. Parent PLUS loan holders must begin making payments on the loan as soon as it is paid out unless they request a deferment. If you request a deferment, you will not need to make payments while your child is enrolled or during the six-month grace period after college; however, interest will accrue during the non-payment period.Consolidated Loans
Finally, you can consolidate all your loans into one if they are all part of the federal direct program. This enables you to make a single monthly loan payment rather than multiple payments. Consolidating your loans has its benefits. It typically lowers your monthly payment amount because the repayment period is extended to 30 years. Variable rates will be converted to fixed interest rates, and you may have access to different repayment plans, like the income-driven repayment plan or Public Service Loan Forgiveness. At the same time, consolidating your loans has its cons. Because the repayment period is extended, you will likely pay more interest over the life of the loan. You could also lose interest rate discounts, rebates, or some loan cancellation benefits associated with your loans. Finally, consolidating your loans could make you lose progress on any plans you're currently participating in, like income-driven repayment or Public Service Loan Forgiveness. Before consolidating, ensure you speak with a loan expert from the U.S. Department of Education.How Federal Direct Loans are Disbursed
Suppose your financial aid package contains federal direct loans; your college or university will tell you how to accept them. You will also be required to complete entrance counseling, which explains how you are obligated to repay the loan once you leave school. Then, you will need to sign a Promissory Note. The school will then pay out your loans for your tuition, fees, room and board, or any other student expenses. If there are any remaining funds, they will be disbursed to you; however, they may only be used for other education expenses. This could include a laptop, textbooks, or other student fees. You will receive regular updates and communication about your loan from your loan servicer. After graduation, you will have a six-month grace period. During this time, you do not have to make monthly payments on your loan. This grace period provides you with time to find a job, allowing you to successfully begin making monthly payments without having to defer them immediately.Private Student Loans
You may find that after qualifying for federal direct loans, the loan limits still do not cover the full cost of attendance at your college. In that case, you will need private student loans to fund the remaining balance. It can feel overwhelming to try to find a private student loan. Fortunately, we provide a private loan lender finder for Fastweb members. Once you find a loan that meets your needs, you can proceed with applying directly to the lender.The Value of Scholarships
Students and parents should prioritize applying for and utilizing scholarships as the primary means of financing their college education. Unlike student loans, scholarships do not require repayment. While the news that federal student loan interest rates have dropped slightly for new federal loans acquired from July 1, 2025, to June 30, 2026, the value of scholarships as a primary way to pay for school remains the very best option. Create a free Fastweb profile to get scholarship matches that fit you. A robust Fastweb profile saves you time and the hassle of trying to find the right scholarships to apply for.You Might Also Like
Kathryn Knight Randolph
Associate Content Editor
Kathryn Knight Randolph covers trends in higher education, changes to admissions and financial aid practices, and the student experience. She is passionate about simplifying the college search and financia...
