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Government Student Loans

About two-thirds of undergraduate and graduate students borrow to help pay for their college education. The majority of these students borrow from government student loan programs. Many of these loans have low interest rates and do not require credit checks. Government student loans loans also provide a variety of flexible deferment and repayment options.

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What are Government Student Loans?

There are two main types of government student loans: federal student loans and state student loans.

Federal student loans include loans for students, such as the Direct Loan, Grad PLUS Loan, and Perkins Loan, and loans for parents, such as the Parent PLUS Loan. These loans are available to students who are enrolled at a school that participates in the Title IV federal student aid programs. There are also federal consolidation loans which borrowers can use to combine two or more federal student loans into a single loan to streamline repayment.

All federal student loans made on or after July 1, 2010 are made through the Federal Direct Student Loan Program (FDLP). These loans are funded by the federal government, disbursed through the colleges and universities, and serviced by contractors to the U.S. Department of Education. Previously, federal student loans could also be made by banks and other financial institutions through the Federal Family Education Loan (FFEL) program.

Some state agencies offer their own student loan programs. State student loans are similar to private student loans. The names and terms of these loans vary from state to state. Eligibility for these loans may be restricted to students with a tie to the state, such as students who are state residents or students who are enrolled at a college located in the state. Some of these loans are credit-underwritten and may require a creditworthy cosigner. Some state loans provide the same interest rate to all borrowers, regardless of credit, while others may tier the rates, with lower interest rates available to borrowers with better credit. Some state loans require the borrower to make payments of at least the interest while they are in school.

Both federal and state government student loans tend to have higher loan limits for graduate and professional students than for undergraduate students.

What is a Direct Loan?

Direct Loans are federal student loans available to undergraduate and graduate college and university students. Direct Loans are the most popular type of student loan.

There are two types of Direct Loans, subsidized and unsubsidized. Direct Subsidized Loans are awarded to undergraduate students with demonstrated financial need, while Direct Unsubsidized Loans are available to all students, regardless of financial circumstances. The federal government pays the interest on subsidized loans while the student is enrolled in school on at least a half-time basis and during periods of authorized deferment. The federal government does not pay the interest on unsubsidized loans. If the borrower does not pay the interest on an unsubsidized loan as it accrues, the interest will be capitalized (added to the loan balance).

As this table illustrates, more than a third of Direct Subsidized Loans to undergraduate students in 2011-2012 were made to students with family adjusted gross income (AGI) less than $50,000 and about a fifth to students with AGI between $50,000 and $100,000.

Distribution of Loans by AGI

Family Adjusted Gross Income (AGI)
Loan Program < $50,000 $50,000 to $100,000 $100,000 or more
Direct Subsidized Loan 71.7% 21.2% 7.2%
Direct Unsubsidized Loan 63.5% 22.3% 14.2%

The next table shows the percentage of undergraduate students borrowing each type of loan. While subsidized government loans are more likely to be received by low-income students, unsubsidized government loans are just as likely to be received by low-, middle- and high-income students. Regardless of income, about a third of all undergraduate students and almost half of undergraduate students in Bachelor’s degree programs receive Direct Unsubsidized Loans.

Percentage Borrowing by AGI

Family Adjusted Gross Income (AGI)
Loan Program < $50,000 $50,000 to $100,000 $100,000 or more
All Undergraduate Students
   Direct Subsidized Loans 39.6% 35.8% 18.4%
   Direct Unsubsidized Loans
32.8% 35.2% 34.4%
Bachelor’s Degree Programs
   Direct Subsidized Loans
56.9% 49.8% 24.6%
   Direct Unsubsidized Loans
48.3% 48.7% 43.7%

What is a Perkins Loan?

A Perkins Loan is a subsidized loan made by colleges and universities to graduate and undergraduate students. Perkins Loans have a fixed 5% interest rate and are awarded based on demonstrated “exceptional financial need,” as defined by the school.

Annual Perkins Loan limits are $5,500 for an undergraduate student and $8,000 for a graduate or professional degree student. Aggregate loan limits are $27,500 for an undergraduate student and $60,000 for a graduate or professional degree student (including amounts borrowed as an undergraduate). Annual and aggregate loan limits may be exceeded by as much as 20% for study abroad.

The money for Perkins Loans comes from a revolving loan fund. The revolving loan fund is established with contributions from the federal government with matching contributions from the colleges and universities. There have been no new capital contributions from the federal government since October 1, 2009.

What is a Parent PLUS Loan?

The Parent PLUS Loan is available to parents of undergraduate students who are enrolled at least half time at a college or university that participates in the Title IV federal student aid programs. The PLUS Loan is an unsubsidized loan. This type of government student loan differs from Direct Loans and Perkins Loans because it can cover up to the full college costs (minus other aid received), has a higher interest rate, and the loan is borrowed by the parent, instead of the student.

What is a Grad PLUS Loan?

PLUS Loans are also available for students attending graduate school and professional school. These loans are known as the Grad PLUS Loan. The terms of these government loans are the same as with the Parent PLUS Loan, but these loans are borrowed by graduate students instead of parents. Just like the Parent PLUS Loan, these loans are also unsubsidized.

The Grad PLUS Loan has the same federal loan deferment and forbearance options as the Direct Loan, so graduate students can postpone repaying their government student loans while enrolled at least half-time in a degree or certificate program.

What is a Federal Consolidation Loan?

A student may accumulate as much as a dozen or more government student loans throughout his or her college career. Repaying multiple federal student loans can be challenging to manage. The federal government offers a Direct Consolidation Loan that can be used to consolidate several federal government student loans into a single loan with a single monthly payment. This not only streamlines the repayment process, but allows the borrower to reduce the monthly payment through a longer repayment term. Borrowers should keep in mind that increasing the term of the loan, however, will increase the total interest paid over the life of the loan.

Some state loan agencies offer their own state consolidation loans for refinancing and combining multiple state government student loans. State government student loans cannot be consolidated into a federal consolidation loan.