How Federal Loans Work

Direct & Unsubsidized

Nowadays, all federal student loans are lent directly by the federal government itself (so-called “Direct” loans). Prior to the financial crisis in 2008, loans were predominately given by private lenders/banks but “guaranteed” by the government under the now-defunct Federal Family Education Loan (FFEL) program. Direct loans are given out to undergraduate and graduates at different interest rates, and some of the undergraduate loans are subsidized so that they do not accrue interest while in school (this used to be true for graduate students as well until 2012).

Even though the loans are made by the government, the government itself has decided to not be directly responsible for managing all of them. They scut this duty of handling payments to several “servicers,” including FedLoan, Nelnet, Navient, Great Lakes (the big four), MOHELA, CornerStone, Granite State, OSLA, and EdFinancial.

Unsubsidized student loans (the only kind of direct loan you can now get for medical school) begin accruing interest from the moment they are disbursed, so graduating students will already have a substantial amount of interest accrued on their original loan amounts. However, this in-school interest hasn’t yet been capitalized (added to the principal loan balance). This interest eventually does capitalize at the end of grace period, unfortunately, so ultimately most residents will be looking at a loan that’s bigger than the sum of the individual loans they took out every year. We’ll talk plenty about this process later.


Loan Fees

Loans fees (often called “origination fees”) are subtracted from the loan disbursements, which means that you get less to spend than the amount you actually owe. The fee for Direct unsubsidized and subsidized loans are around 1%. For PLUS loans, the origination fee is around 4.27% (one reason why PLUS loans are an expensive proposition that should be avoided if possible).

Direct Loan Fees:

Direct Subsidized Loans and Direct Unsubsidized Loans 
2017-2018 (10/1/17 – 9/30/18) 1.066%
2016-2017 (10/1/16 – 9/30/17) 1.069%
2015-2016 (10/1/15 – 9/30/16) 1.068%
2014-2015 (10/1/14 – 9/30/15) 1.073%
2014-2015 (7/1/14 – 9/30/14) 1.072%
2013-2014 (12/1/13 – 6/30/14) 1.072%
2013-2014 (7/1/13 – 11/30/13) 1.051%
2012-2013 and before 1.000%


Direct PLUS Loans
2016-2017 (10/1/16 – 9/30/17) 4.276%
2015-2016 (10/1/15 – 9/30/16) 4.272%


Direct interest rates

Looking at your loans, you may notice that the rates aren’t all the same. While all federal loans have a fixed rate (i.e. they don’t change after you get them like a variable-rate loan will), the rates offered each year have changed annually as of 2013 after several years pegged at 6.8%. The annual rate is tied to the market rate of a 10-year Treasury note + a fixed margin (presumably what the government wants in profit). PLUS rates have recently been the graduate rate “plus” one.

2017-18 4.45% 6.00% 7.00%
2016-17 3.76% 5.31% 6.31%
2015-16 4.29% 5.84% 6.84%
2014-15 4.66% 6.21% 7.21%
2013-14 3.86% 5.41% 6.41%
2012-13 3.40% 6.80% 7.90%
2011-12 4.50% 6.80% 7.90%
2010-11 5.60% 6.80% 7.90%
2009-10 6.00% 6.80% 7.90%
2008-09 6.80% 6.80% 7.90%


While recent medical students have lost the chance of even a dime of subsidized loans outside of the much smaller Perkins program, the interest rates on their debt have decreased significantly. It’s still worth noting that all of these rates are still relatively high compared to the Fed’s interest rate, which had been at the historic low of zero for several years until December 2016. Since overall interest rates have increased, the Direct rates are on the rise again and are back up to 6% for the 2017-2018 school year. Unless the economy nosedives, it would seem unlikely that rates will improve much in the near future.

The rates for undergrads are substantially lower (3.76% in 2016-17; 4.45% in 2017-18).

A Direct Consolidation loan has an interest rate that is a weighted average of its source loans, rounded up to the nearest 1/8 of 1% (0.125).

Also, note that the Direct sticker rate only really accrues when in-school or during forbearance. Once in repayment, you are eligible for a 0.25% reduction if you use autopay to debit your monthly payments. The feds tell you the true rate, but private companies will always show you their rate with the auto-debit discount. Make sure to compare apples to apples.


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Next: Federal Repayment Options