To make higher education more accessible, the U.S. Department of Education offers Federal Student Loans, providing a lifeline of financial assistance to millions of students across the country. In this article, we will explore Federal Student Loans in detail, delving into their types, features, benefits, and how they empower students to turn their educational dreams into a reality.
Understanding Federal Student Loans
Federal Student Loans are loans offered by the federal government to help students and their families pay for college or career school. These loans are part of the federal financial aid program and are available to both undergraduate and graduate students. They differ from private loans in that they are funded and regulated by the U.S. Department of Education, with certain benefits and protections that are not typically available in private loans..
Key Features and Benefits
Federal Student Loans come with several advantages that make them a popular choice for students seeking financial assistance:
- Fixed Interest Rates: Federal Student Loans typically offer fixed interest rates, providing borrowers with predictable monthly payments throughout the life of the loan.
- Income-Driven Repayment Plans: Federal Student Loans offer income-driven repayment plans that base monthly payments on the borrower’s income and family size. This ensures that borrowers can manage their loan payments based on their financial situation.
- Loan Forgiveness Programs: Some federal loan programs offer loan forgiveness options for borrowers who work in certain public service jobs or participate in specific repayment plans.
- Deferment and Forbearance Options: Federal Student Loans provide deferment and forbearance options, allowing borrowers to temporarily postpone loan payments in case of financial hardships or other qualifying circumstances.
- No Credit Check (for most loans): Most federal student loans do not require a credit check, making them accessible to students without an established credit history or those with limited credit.
- Grace Period: Federal Student Loans offer a grace period, typically six months after graduation or when the borrower leaves school, during which loan payments are not required.
Types of Federal Student Loans
The U.S. Department of Education offers various types of Federal Student Loans to cater to different financial needs and circumstances:
- Direct Subsidized Loans: These loans are available to undergraduate students with demonstrated financial need. The government pays the interest on these loans while the student is in school, during the grace period, and during authorized deferment periods.
- Direct Unsubsidized Loans: These loans are available to both undergraduate and graduate students and do not require demonstrated financial need. Unlike subsidized loans, the borrower is responsible for paying all the interest, even while in school.
- Direct PLUS Loans: These loans are available to graduate or professional students, as well as parents of dependent undergraduate students. PLUS loans help cover costs not met by other financial aid, but the borrower’s credit history is considered.
- Direct Consolidation Loans: These loans allow students to combine multiple federal student loans into a single loan, making it easier to manage their loan repayment
- Direct Parent PLUS Loans
- Direct Graduate PLUS Loans
- Federal Stafford Loans
- Federal Perkins Loans
Each of these types of federal student loans has its own eligibility requirements, borrowing limits, interest rates, and other factors, as established by Congress.
Read Also Private Student Loans
Federal Student Loans vs. Private Student Loans
Student loans can be issued to a borrower either by the federal government or by a private lender. There are a number of important differences between federal and private student loans that you should be aware of, as these differences can severely impact your ability to borrow and repay your loans.
Some of the most important differences to keep in mind are:
- The Lender: With federal student loans, your lender is the U.S. Department of Education, and your loan will be managed by your federal loan servicer; with private student loans, your lender is a private corporation.
- The Interest Rate: With federal student loans, your interest rate is set by Congress; with private student loans, lenders can charge whatever interest rate they wish.
- Borrowing Limits: Federal and private student loans have different maximum borrowing limits.
- Availability of Subsidies: Some federal student loans carry subsidies that will save you hundreds or even thousands of dollars in interest over the life of the loan. Private loans do not typically offer subsidies.
- Eligibility: Eligibility for federal student loans is set by Congress. Private lenders are able to choose whatever requirements they wish.
- Repayment Options: While private lenders may offer a handful of repayment options, federal student loans typically come with many more options, including income-based repayment.
- Forgiveness: Under certain circumstances, certain types of federal student loans may be forgiven outright.
- Ability to Postpone Payments: Federal student loans come with a sixth-month grace period after you leave school, during which time you are not required to make payments. You can also choose to place your loans in deferment or forbearance during periods of economic hardship. Private student loans typically do not offer such generous benefits.
- Consolidation Options: You can consolidate all of your federal student loans into a single new federal loan if you wish to do so. To consolidate private student loans, you will need to refinance your debt with a private lender.
- Prepayment Penalties: Some private lenders may charge you a penalty for repaying your student loans early. Federal student loans will never charge such penalties.
Pros and Cons of Federal Student Loans
- Low interest rates, set by Congress
- Low fees, set by Congress
- No required credit score to qualify
- No cosigner is required to borrow
- Availability of subsidies for needy borrowers
- Options to pause payments
- Flexible repayment options
- Availability of forgiveness options
- Borrowing limits may not cover total educational costs
- Borrowing limits are lower for dependent students
- Interest rates are higher for parent and graduate/professional borrowers
- No federal refinancing program
- No bankruptcy option
Applying for Federal Student Loans
To apply for Federal Student Loans, students must complete the Free Application for Federal Student Aid (FAFSA®). The FAFSA gathers information about the student’s financial situation, which is used to determine eligibility for federal student aid programs, including grants, scholarships, and loans.
How to Apply for a Federal Student Loan
In order to apply for federal student loans, all you need to do is submit your Free Application for Federal Student Aid (FAFSA). Upon doing so, you will automatically apply for all forms of available student aid, including federal and state aid—and that includes federal student loans.
You will be notified of any aid you are eligible for in your financial aid package, typically sent to you by your school, at which point you can accept or reject aid as you wish.
You can submit a FAFSA application here.
Federal Student Loan Eligibility
In order to qualify for federal financial aid, including student loans, you must meet certain basic eligibility requirements. To qualify, you must:
- Be a U.S. Citizen (or eligible non-citizen)
- If male, be registered with the Selective Service
- Be enrolled in an eligible degree- or certificate-awarding program
- Be enrolled under at least half-time status
- Maintain adequate grades and academic progress while enrolled
- And a few other requirements
Additionally, certain federal student loans (such as Direct Subsidized Loans) are only made available to students with financial need, as demonstrated in their FAFSA application.
Federal Student Loan Interest Rates
The interest rate on federal student loans are set by Congress and typically varies from year to year based on a number of factors including the general condition of the market.
That being said, the interest rate for different types of federal student loans will vary depending on the type of loan you borrow. Direct Loans borrowed by undergraduates will typically carry lower interest rates than those borrowed by graduate or professional students, which in turn will typically carry lower interest rates than Direct PLUS Loans borrowed by graduate students and parents.
Federal Student Loan Fees
In addition to interest charges, borrowers will be required to pay a loan origination fee for most student loans. This is a percentage of the total loan amount. Loan origination fees vary by year and type of loan borrowed, typically ranging between 1% and 5%.
Federal Student Loan Servicers
When you borrow a federal student loan, your lender is the U.S. Department of Education. But your individual loan will ultimately be managed by one of 11 federal student loan servicers. This service will collect your monthly payments, help you understand your repayment options, guide you through forgiveness, and more.
Currently, the list of federal services includes:
- FedLoan Servicing (PHEAA)
- Granite State (GSMR)
- Great Lakes Educational Loan Services
- Edfinancial (HESC)
- Navient (formerly Sallie Mae)
- OSLA Servicing
- Default Resolution Group (Maximus Federal Services)
On June 24, the U.S. Department of Education announced that it had signed contracts with five companies that would act as student loan servicers after the department’s current contracts expire. This list includes some familiar names, such as Edfinancial, MOHELA, and Maximus Federal Services. But it also includes two new companies: F.H. Cann & Associates and Texas Guaranteed Student Loan Corporation (Trellis Company).
These contracts are scheduled to go into effect between December 14, 2020 and December 14, 2021, but are very likely to see legal challenges from current servicers, including Nelnet/Great Lakes. We will continue to update this information as more becomes available.
Read Also: Discover Student Loans
Federal Student Loan Repayment Plans
One of the benefits of federal student loans is that they typically come with many more options for repayment than private loans. While the exact repayment plans available to you will depend on the type of loan you have borrowed, the list includes:
- Standard Repayment
- Graduated Repayment
- Extended Repayment
- Revised Pay as You Earn Repayment Plan (REPAYE)
- Pay as You Earn Repayment Plan (PAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Income-Sensitive Repayment
Your student loan servicer can help you understand the differences between each of these repayment plans, including whether or not you qualify. Enrolling in different repayment plans may cause the total amount of debt you repay to increase, sometimes substantially.
This is because different repayment plans may include a longer payback period, or require substantially smaller monthly payments which lower your principal more slowly than others
Should you borrow a federal student loan?
Ultimately, the answer to this question is a personal one that you will need to make for yourself. That being said, if you need to borrow money to go to college, federal student loans will likely be the safer, cheaper option compared to private student loans, due to their lower interest rates, lower fees, more flexible repayment options, and minimal eligibility requirements.
Generally speaking, it is wise to exhaust your federal options before turning to private loans.
Alternatives to Federal Student Loans
If you do not qualify for federal student loans, or the federal loans you do qualify for won’t cover the total cost of your education, you do have other options available. Private student loans, while typically more expensive and less flexible than federal loans, can help you cover any gaps.
Federal Student Loans play a vital role in enabling aspiring scholars to pursue higher education without the burden of exorbitant upfront costs. With their fixed interest rates, income-driven repayment plans, and various forgiveness and deferment options, these loans provide essential financial support to millions of students each year.
By understanding the different types of federal student loans and borrowing responsibly, students can make informed decisions about their educational financing. Thanks to Federal Student Loans, countless students can focus on their studies, cultivate their potential, and transform their aspirations into a reality, laying the foundation for a brighter and more promising future.