It’s important to know how student loans work so you can determine the best way to pay for your education. You can borrow federal or private student loans to pay for college, though federal loans are the more popular option — only an estimated 7.2% of the nation’s outstanding student loans is private debt, according to 2022 data from Enterval Analytics.  

Learn more about federal student loans before you decide if this type of funding is right for you. 

While private loans are offered by online lenders, banks, and credit unions, federal student loans are issued by the Department of Education. Because these loans come from a government agency, they generally have more favorable terms for borrowers. They can also be easier to qualify for since most types of federal loans don’t require a credit check.

When you apply for federal loans, there are different programs you may be eligible for, depending on factors such as your family’s income and the degree you are pursuing. Each comes with similar benefits, including the ability to cap payments at a percentage of your discretionary income and a chance to qualify for loan forgiveness. 

However, you must meet certain eligibility requirements to borrow any kind of federal student loan. Specifically, you must:

There are several different kinds of federal loans, each of which carries its own eligibility and repayment policies. 

Direct Subsidized Loans are the most affordable type of federal debt because you’re not responsible for interest fees while you’re in school and during any eligible period when payments are paused. This means your balance won’t increase due to unpaid interest during these times. 

Your interest rate is a standard, fixed interest rate, and no credit check is required. However, not everyone will qualify for these loans. 

Direct Unsubsidized Loans are available to undergraduate and graduate students, regardless of their income or credit history. You don’t need to demonstrate financial need to be eligible. 

These loans can be more affordable than Direct PLUS Loans (more on those below). But you’re responsible for all interest costs, which will begin accruing as soon as the money is distributed. If you don’t pay interest while in school, that cost will be added to your loan balance. 

Direct PLUS Loans are available to graduate students and parents of undergrads. They’re more expensive than other federal loans, and they’re the only type that requires a credit check. 

However, your credit score isn’t a factor — instead, your financial history is checked for “adverse credit.” You might have adverse credit if you’ve had delinquent debt in the past two years or a default, bankruptcy, repossession, foreclosure, or wage garnishment in the past five years.

Even with adverse credit, you could still qualify for a PLUS loan by adding an endorser (similar to a cosigner) to the loan or by documenting extenuating circumstances related to your credit history. 

Direct Consolidation Loans allow you to combine your existing federal debt into one new loan. Doing so can simplify your monthly payments — and potentially lower them — as well as grant access to certain repayment and forgiveness plans. 

However, consolidation can also lead to a longer repayment period (meaning more interest may accrue) and a potential loss of some benefits, such as rate discounts or loan cancellation opportunities. 

While federal loans have a lot of perks, the application process is more complicated than it is for private student loans. Here are the steps involved. 

Your first step is to create a Federal Student Aid (FSA) ID at StudentAid.gov. You’ll need this username and password to fill out your application for federal student aid, sign required forms, and access your account later. If you’re a dependent undergraduate, one of your parents should also create their own FSA ID. 

The Free Application for Federal Student Aid (FAFSA) is your ticket to all types of federal student aid, including loans, grants, and work-study programs. You must submit it for each year you attend school, and can complete the form online by signing into your account using your FSA ID. It’s wise to complete the FAFSA soon after it becomes available on Oct. 1 annually.

You (and your parent, if you’re a dependent student) will need to provide: 

You will also need to list the college(s) that you attend or are applying to. Schools use your information to put together a financial aid package for the upcoming year.

After your FAFSA is submitted, you will receive a Student Aid Report within three weeks. This is a summary of the data you provided — carefully review it for mistakes. 

In some cases, your report will include a request for additional verification. If this happens, the schools to which you’ve applied will contact you with details about the extra documentation they need.

You’ll receive a student aid award letter from each school you’re accepted into. This will detail the types of federal aid you qualify for, along with other sources of funding, such as school-sponsored scholarships. 

Review this letter to see what financial support you can get and how much you’ll have to pay out of pocket. Determine which aid you want to accept and alert your school by the deadline it has set.

Typically, you’ll want to first accept awards that don’t have to be repaid, such as grants and scholarships. Then, compare the costs and benefits of borrowing federal and private loans.

Federal student loans have important borrower benefits that generally aren’t offered by private lenders, including:

There are many federal repayment plans to choose from, including several income-driven options. These plans base your monthly payments on a percentage of your discretionary income and forgive any remaining balance after you make 20 or 25 years of payments. 

You can also change your payment plan as needed, free of charge, simply by contacting your loan servicer. This can help you manage fluctuations in your income. (However, keep in mind that lowering your monthly dues and lengthening your loan term can increase the total cost of your repayment.)

Deferment and forbearance both allow you to pause loan payments for a set period. While private lenders typically offer some form of deferment or forbearance, federal options are generally longer and more flexible. Plus, federal loans are the only debts eligible for the COVID-19 student loan pause slated to last 60 days after June 30, 2023, pending Supreme Court action on the Biden administration’s proposal for mass debt relief. 

Loan forgiveness is another major benefit of federal loans. While there are several programs available, two of the most popular are:

There are important differences between federal and private student loans, including the following:

Related: Learn more about getting a private student loan