If you've started looking at a financial aid offer or a lender's website, you've probably run into a wall of terms that all sound similar but mean very different things: federal, private, subsidized, unsubsidized, Direct, PLUS. Before you sign anything, it's worth knowing exactly what you're borrowing and what it will cost you later.
There are two questions that matter most when you're sorting through student loan options:
- Who's lending the money — the federal government, or a private bank/lender?
- Who pays the interest while you're in school — you, or (for a limited group of borrowers) the government?
Everything else is a variation on those two questions. Here's how it breaks down.
Federal vs. Private Student Loans
Federal Student Loans
Federal loans come from the U.S. Department of Education and are the starting point for almost every student, because they come with protections you won't get from a private lender:
- Fixed interest rates, set annually by Congress — your rate won't change over the life of the loan
- Income-driven repayment plans that cap your monthly payment based on what you earn
- Deferment and forbearance options if you're unemployed, in school, or facing financial hardship
- Loan forgiveness programs, including Public Service Loan Forgiveness (PSLF), for borrowers who qualify
- No credit check required for most federal loans (Direct Subsidized and Unsubsidized), which means eligibility isn't tied to your credit history or a co-signer
To access federal loans, you have to file the FAFSA every year you're in school. The types of federal loans you're offered depend on your year in school, your financial need, and — for PLUS loans — your credit history.
Private Student Loans
Private loans come from banks, credit unions, and online lenders (Sallie Mae and Discover Student Loans are two of the most common). They fill the gap when federal loans, grants, and scholarships don't cover the full cost of attendance.
Private loans work more like a typical consumer loan:
- Interest rates can be fixed or variable, and are based on your (or your co-signer's) credit
- Most undergraduates need a co-signer — usually a parent — since they don't have enough credit history to qualify alone
- Repayment terms, deferment options, and forgiveness programs vary by lender and are almost never as flexible as federal protections
- No FAFSA required, though many lenders ask for it anyway to see what federal aid you've already been offered
The general rule of thumb: exhaust your federal loan options, scholarships, and grants first, and use private loans only to cover what's left.
Subsidized vs. Unsubsidized Loans
This distinction only applies to federal Direct Loans, and it comes down to one thing: who pays the interest while you're in school.
Direct Subsidized Loans
- Available to undergraduate students who demonstrate financial need (determined by your FAFSA)
- The U.S. Department of Education pays the interest while you're enrolled at least half-time, during your six-month grace period after leaving school, and during any deferment periods
- Because of this, subsidized loans cost less over time than unsubsidized loans of the same amount
- Subject to annual and lifetime borrowing limits
Direct Unsubsidized Loans
- Available to both undergraduate and graduate students, regardless of financial need
- Interest starts accruing the moment the loan is disbursed — including while you're still in school
- If you don't pay the interest as it accrues, it gets added to your principal balance when repayment begins (capitalization), meaning you end up paying interest on top of interest
- Also subject to annual and lifetime borrowing limits, which are higher than subsidized limits for graduate and independent students
In short: if you qualify for both, subsidized loans are always the better deal — the government is covering interest costs you'd otherwise owe. Unsubsidized loans aren't bad, they're just more expensive the longer you wait to start paying down the interest.
Other Types of Loans You Might See
- Direct PLUS Loans — available to parents of undergraduates (Parent PLUS) or to graduate/professional students (Grad PLUS). These require a credit check and generally carry higher interest rates than Direct Subsidized or Unsubsidized loans.
- Federal Perkins Loans — a need-based federal loan program discontinued in 2017. Existing Perkins Loans are still federal and still carry federal protections, but no new ones are being issued.
- State-based loan programs — some states run their own low-interest loan programs for residents attending in-state schools. These vary widely, so check with your state's higher education agency.
How to Tell Which Loans You're Being Offered
Your school's financial aid award letter will usually list loans by name (e.g., "Direct Subsidized Loan," "Direct Unsubsidized Loan," "Direct PLUS Loan"). If a loan isn't labeled as federal or doesn't show up on your FAFSA-generated aid offer, it's private — worth shopping around, since terms and rates vary significantly by lender.
Quick Reference
Federal SubsidizedFederal UnsubsidizedFederal PLUSPrivateBased on financial need?YesNoNoNoCredit check required?NoNoYesYes (or co-signer)Interest paid while in school?By the governmentBy you (accrues)By you (accrues)Varies by lenderFixed interest rate?YesYesYesVariesIncome-driven repayment eligible?YesYesYes (Grad PLUS)Rarely
Choosing the Right Mix
- Apply for scholarships and grants first — this is money you never repay.
- File the FAFSA and accept any Direct Subsidized Loans you're offered.
- Accept Direct Unsubsidized Loans next, since they still carry federal protections even though interest accrues immediately.
- Look at Direct PLUS Loans (parent or grad) if you still have a gap.
- Turn to private loans only for whatever's left, and compare at least two or three lenders before signing.
For a full breakdown of federal loan programs, repayment plans, and how to apply, visit our student loans resource hub.
