There are many types of loans to help students pay for higher education costs. With their usually lower interest rates and more generous terms, federal student loans are the first place families should look for funding not covered by scholarships and grants. See College Loans: Private Vs. Federal.

Federal Perkins Loans and Federal Direct Loans are two types of loans offered through the federal government. 

Their Similarities

Federal Direct and Perkins loans have certain features in common. Both types of loans:

  • Are offered by the U.S. Department of Education to borrowers who have demonstrated sufficient financial need (note that Direct Unsubsidized loans don't require financial need; Direct Subsidized Loans do).
  • Are administered through the financial aid offices of institutions that participate in the federal student loan program.
  • Require completing the FAFSA (Free Application for Federal Student Aid) and submitting a promissory note stating your intention to repay the loan.
  • Must be applied for and approved each academic year – leaving borrowers with a separate loan for each year of education.
  • Must be used for qualified educational expenses, such as tuition and fees, books, room and board, and other necessary expenses related to higher education.
  • Cannot be used to pay for secondary schooling.
  • Are available for qualifying graduate students (Federal Perkins Loans and Direct Unsubsidized Loans only).
  • Are eligible for loan consolidation, as long as the borrower meets all necessary criteria (read Time To Consolidate Your Student Loans?).
  • Are eligible for loan forgiveness, in some cases (see Debt Forgiveness: How To Get Out Of Paying Your Student Loans).
  • Allow taxpayers to deduct interest paid on their loans regardless of whether they itemize their deductions.

How They Differ

Who qualifies. Perkins loans are available only to students with significant financial need, as determined by their answers to the FAFSA and their school's guidelines. Direct Subsidized Loans also require demonstrated need, but a wider range of incomes can qualify.  All three types of loans are open to qualified undergraduates; graduate students can only get Perkins Loans or Direct Unsubsidized Loans.

Loan subsidies. All Federal Perkins Loans are subsidized by the government, which means that the government will pay the interest that accrues while the student is in school at least half-time. The government will also pay interest during school for Direct Subsidized Loans, but not for the unsubsidized variety. Read Federal Direct Loans: Subsidized vs. Unsubsidized for more information.

Fees. Perkins loans charge no fees of any kind for loan origination or default. Federal Direct Loans typically charge a 1.o68 % origination fee, which is deducted from the loan disbursement.

Interest rates. For the 2015-2016 school year, Federal Direct Loan rates were 4.29% for both subsidized and unsubsidized undergraduate loans, and 5.84% for graduate and professional students. Interest rates are now tied to the 10-year Treasury note, plus a set margin. Click here to check current interest rates for Stafford loans. Perkins loans charge a flat rate of 5% for all borrowers.

Availability. The pool of money available to institutions for Perkins loans is more limited than that available for Federal Direct Loans. Although Perkins loans have federal limits on how much a student may borrow – both annually and cumulatively –  institutions typically set a limit that is substantially below these levels in order to preserve their funding pool.

Loan limits. Federal Direct Loans have different limits for graduates vs. undergraduates, and subsidized vs. unsubsidized loans. See Federal Direct Loan Limits. "Independent" students, those who file their own income tax returns, claiming themselves, are eligible to receive larger unsubsidized loans than those who are claimed as dependents on someone else's tax return. Perkins loans have one yearly limit for undergraduates and a larger one for graduate students. Perkins doesn't differentiate by undergraduate status or type of grad school.

The dollar limits for Direct Unsubsidized Loans are broken down as follows:

Direct Unsubsidized Loan – Undergraduate Students

Loan Limits

Dependent

Independent

Annual

   

First-Year (Freshman)

$5,500

$9,500

Second-Year (Sophomore)

$6,500

$10,500

Third-Year and Beyond (Junior, Senior)

$7,500

$12,500

Cumulative

$31,000

$57,500

Graduate and professional school students have higher loan limits. The cumulative loan limits for graduate and professional school students include any undergraduate student loan debt.

Direct Unsubsidized Loan – Graduate and Professional Students

Loan Limits

Graduate and Professional

Medical School

Annual

$20,500

$43,883 – $47,167

Cumulative

$138,500

$224,000

Direct Subsidized Loans are available only to undergraduate students and have lower loan limits than unsubsidized loans. Tax status doesn't make a difference in what they can borrow:

Direct Subsidized Loan – Undergraduate Students

Loan Limits

Dependent

Independent

Annual

   

First-Year (Freshman)

$3,500

$3,500

Second-Year (Sophomore)

$4,500

$4,500

Third-Year and Beyond (Junior, Senior)

$5,500

$5,500

Cumulative

$23,000

$23,000

 Here is a breakdown of the Perkins loan limits:

Federal Perkins Loan

Loan Limits

Undergraduate

Graduate

Annual

$5,500

$8,000

Cumulative

$27,500

$60,000

 

Repayment. The repayment term for Perkins Loans is always 10 years. While this is often the case for Stafford Loans as well, students may apply in some cases to stretch their payments out over a longer period, up to a maximum of 25 years.

The Bottom Line

If you're an undergraduate whose family income makes you eligible for a Perkins loan, you're likely also eligible for a Direct Subsidized Loan. Which should you choose? 

For 2015-2016, the Perkins loan 5% fixed interest rate is higher than the Federal Direct Loan interest rate for undergraduates (4.29%), but Perkins loans don't have an origination fee. If you don't end up needing money from both, do the math to determine which offers the better deal for you. As a freshman and sophomore, you can borrow more from Perkins; in subsequent years, the loan limits are the same.

For grad students, if you meet Perkins loan criteria, you will get a better interest rate than with a Direct Unsubsidized Loan (5% compared to 5.84%). With a Perkins, you won't have to pay interest until after graduation; with a Direct Unsubsidized Loan (since you don't qualify for a subsidized loan), you will. On the other hand, the Direct Unsubsidized Loan has higher loan limits.

If you don't meet the financial criteria for a Perkins, your only choice is a Direct Unsubsidized Loan. Depending on your income, the unsubsidized loan may be your only option.

For more information on each type of loan – and other federal student-loan options – visit the federal student loan website at www.studentloans.gov or consult your college's financial aid officer. Click here for a comparison chart.