Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 6, 2012

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The Federal government offers several lending options for higher education in the form of federal student loans.

For federal loans, the U.S. Department of Education is the lender. In some cases, as with Direct Subsidized loans, the government will pay for a student’s interest during their education. The government is also able to offer extremely low interest rates, such as with Perkins lending.

Any student should exacerbate all federal scholarships, grants and loans before turning to higher interest private funding. If a student or parent looks to private funding before federal student loans, they will likely pay more than needed for a college education.

There are several types of federal student loans to choose from:

  • FFEL
  • Perkins
  • Direct Subsidized
  • Direct Unsubsidized
  • Direct PLUS
  • Consolidation


The Federal Family Education Loan Program (FFEL Program or FFELP) is often referred to as the federally-guaranteed student loan program.

Unfortunately, FFEL loans are no longer available.

In this program, private lenders such as Sallie Mae made federal student loans to both parents and students. The lenders received subsidies from the government, which were used to maintain low federally-mandated interest rates. The government guaranteed a large portion of the loans, giving private lenders further assurance against default. [[{“type”:”media”,”view_mode”:”media_original”,”fid”:”2185″,”attributes”:{“alt”:”The Student Loan Map Infographic”,”class”:”media-image”,”style”:”padding: 5px; margin-left: 5px; border-width: 0px; border-style: solid; float: right; height: 1156px; width: 170px;”,”title”:”The Student Loan Map Infographic”,”typeof”:”foaf:Image”}}]]

The Health Care and Education Reconciliation Act of 2010 ended the FFEL program. The program was costing taxpayers billions of dollars a year to pay banks a premium. Other types of lending, such as Perkins, Direct, and Direct PLUS loans, took over.

Before FFEL met its end, it was the second largest U.S. college lending program.


The Perkins loan is given to undergraduate and graduate students who show great financial need. A Perkins federal student loan is granted through the school’s financial aid office and the student must repay his or her school.

Although Perkins funding is difficult to attain, it is the preferred federal student loan. It is subsidized, so all interest payments are covered by the government until after graduation. Additionally, there are no origination and default fees. Finally, the interest rate is set at a low 5 percent with a 10-year repayment period.

The amount received is determined by the individual school’s financial aid office. The Perkins loan sets limits of $5,500 a year for undergraduate study and $8,000 a year for graduate study. It is cumulatively capped at $27,500 for undergraduate programs and $60,000 for undergraduate and graduate programs combined.

Direct: Subsidized and Unsubsidized

The Direct program provides low interest federal student loans and was implemented after Stafford loans were stopped under the FFEL program.

Direct loans can be subsidized or unsubsidized which makes them one of the lowest cost options for schooling.

Subsidized lending, which requires a demonstrated need for financial aid, does not accrue interest while the student is enrolled in college. During this time, the government pays the interest. About two-thirds of Subsidized loans are given to students whose family adjusted gross income (AGI) is under $50,000.

Unsubsidized lending is open to all levels of financial need, but it accrues interest from the first outgoing payment.

The amount of money available is based upon the school level and the student’s status of dependent or independent. Students with legal guardians and no living parents can qualify for increased Direct loans due to their independent status.

For example, a first-year undergraduate student who is a dependent can access up to $3,500 in subsidized federal student loans. The student can also access an additional $2,000 in unsubsidized lending, totaling a maximum of $5,500 in Direct Loans yearly.

In contrast, an independent first-year undergraduate student can access even more funding. Independent students can access a similar amount, $3,500, in subsidized loans, but their cap for unsubsidized loans reaches to $6,000. This creates a lending limit of $9,500 yearly.

Repayment on Direct loans begins six months after the student graduates or drops below half-time enrollment. The standard repayment period is 10 years.

Direct PLUS

Direct PLUS loans can help pay for educational expenses not covered by other financial aid programs. Direct PLUS is a necessity for many students because it can finance more than simply tuition — it can be used for purchasing equipment, school supplies, transportation, books and miscellaneous personal expenses. 

There are two outlets for Direct PLUS: parents and graduate students.

Parent PLUS loans are borrowed by a parent on behalf of a child to pay for college tuition and school expenses. In this case, the funding is taken out in the parent’s name, not the students. These federal student loans are restricted to the biological parents, adoptive parents, stepparents, or legal guardians of a dependent student. Although co-signed loans have come under fire lately for causing an epidemic in increased parent and grandparent debt, Parent PLUS loans are tied to parents from the beginning. This can cause family tension if the student lacks dedication or drops out of college.

Another use for this type of loan is for graduate and professional students to finance their own education. It works the same as the Parent PLUS version and is often called Grad PLUS.

The interest rate for all Direct PLUS loans is fixed at 7.9 percent. Interest begins accruing when this financing is transferred to a student’s school.

A positive feature for this loan is the lack of pre-payment penalties. If it is paid off in full before it is due, the borrower will not be responsible for any future interest and will not be charged penalties. 

PLUS loans are a viable option for parents due to the interest rate available. Young students with little credit are unable to attain a reasonable interest rate for some federal student loans. This method allows for the loan to link directly to a parent’s (possibly higher) credit ranking. Additionally, students do not need to demonstrate financial need to qualify since a performed credit check acts as financial collateral.


Consolidation loans combine several forms of student or parent lending into a larger loan from one lender, which is then used to pay off the balances from multiple lenders. Often times, these tools provide students with a single monthly payment made to one company, rather than several payments to multiple companies.

Consolidating federal student loans can lower a student’s monthly payment and allow them to access lower interest rates. In order to do that, however, consolidating can extend the repayment period by up to 30 years in length. Unlike other forms of borrowing, there is no added cost to consolidate debt through federally-backed means.

The potential downside to consolidating is a higher cost in total. Since the repayment periods are extended, the total cost of interest will be greater over time. A borrower could lose interest subsidy, loan discharge or deferment benefits if he or she consolidates a Federal Perkins loan. Additionally, a grace period could be lost. Once the loan is disbursed, payments will need to be made within 60 days. Given these downsides, it’s important for prospective applicants to meet with a financial advisor before attempting to consolidate their debt.