The Complete Guide to Federal Student Loans

The cost of college continues to rise. If you’re planning to attend school in the fall, you can expect high bills. A year of school at a private university costs $32,405 on average. Since most students don’t have that much money stashed in savings, many will turn to financial aid.

There are many different types of financial aid, from grants to private student loans. But when it comes to student debt, federal loans offer more flexibility and lower costs to students.

Find out what federal loans are available to you and what makes them so beneficial.

Student loan options

You might have to take out student loans to pay for college, even if you receive scholarships or grants. You have two choices: federal and private loans.

Federal student loans

Issued by the government, federal student loans should be your first choice to pay for school. They tend to have lower interest rates and more generous repayment terms than private ones, and the government will issue loans to borrowers even if they have poor credit. Federal student loans do not require a cosigner or guarantor for your debt.

If you qualify for a subsidized loan, the government will even help you pay for interest charges. While you’re in school, your loans will build in interest. But the government covers the fees on subsidized loans while you study, which can cut down on the amount you owe.

Private student loans

Private student loans are issued by a bank, credit union, or private company. They’re not linked to the government, and often have different interest rates, repayment terms, and rules.

To get a private loan, you need to have an established credit history and good credit score. If your credit score isn’t high enough, a lender may require you to have a cosigner.

With federal loans, the interest rates are fixed for the length of your loan. But if you opted for a variable interest rate with a private lender, the interest can fluctuate. That means your payment can increase along with higher interest charges.

Private loans are also ineligible for federal loan benefits, such as access to income-driven repayment plans or Public Service Loan Forgiveness.

Benefits of federal loans

Federal loans have more benefits than most private lenders. Their terms can make it easier to manage your loans in case of a financial hardship or medical emergency.

Income-driven repayment plans

If you can’t afford the minimum payment on your loan, you could be eligible for an income-driven repayment (IDR) plan. Under IDR, the government extends your repayment term. Rather than a Standard Repayment Term of 10 years, they extend it to 20 or even 25 years. That can dramatically reduce your payment, helping your budget.

There are four kinds of IDR plans:

  • Income-Based Repayment
  • Income-Contingent Repayment
  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)

While each plan varies slightly, the basic structure is the same for all four.

Under IDR, the lender sets your payment as a percentage of your discretionary income. If you experience big life changes, such as a cut in salary or you have a child, your payment will go down, too. After 20 to 25 years of making qualifying payments, the government forgives the remaining balance of your loan.

The discharged balance is taxable as income, but having your loans eliminated can be worth it in some instances. An IDR plan can be a short-term solution if you’re struggling with an entry-level salary or a long-term approach to managing your debt.

Deferment and forbearance

If you can’t keep up with your payments, you might qualify for deferment or forbearance. Either option allows you to pause making payments on your loan without becoming delinquent or going into default. If you lost your job or became seriously ill, you can delay making payments while you recover.

While deferment or forbearance are not ideal, they can be useful when facing an emergency that makes managing your loan payments difficult.

Student loan forgiveness programs

Some student loan forgiveness options are only available for those with federal student debt. If you work in a career serving others, the government offers programs that allow your loans to be forgiven.

Those that work for nonprofits or the federal or state government may be eligible for the Public Service Loan Forgiveness (PSLF) program. If you hold a qualifying job for 10 years, you could have the remaining balance of your debt forgiven.

Similarly, various federal loan forgiveness programs for teachers could mean big savings on student debt. Depending on your eligibility, you could have part or all of your loans forgiven after teaching for one to five years in a qualifying role.

Types of federal loans

There are two categories of federal student loans: the Federal Direct Loan Program and Federal Perkins Loans.

1. William D. Ford Federal Direct Loan Program

The William D. Ford Direct Loan Program is the largest federal student loan program. It’s made up of four different loan types:

  • Direct Subsidized Loans: Designed for undergraduate students that can prove a financial need, you can take out up to $5,500 each year to pay for school. Unlike other loans, you are not charged interest on the loans while you’re in school.
  • Direct Unsubsidized Loans: Unsubsidized loans can be used by undergraduate, graduate, and professional degree students. You can take out a maximum of $20,500 each year to pay for school, and interest accrues on your account.
  • Direct PLUS Loans: A federal Direct PLUS Loan is for parents of undergraduate students to pay for their child’s education or for graduate or professional degree students to pay for their own education. You can use a federal Direct PLUS loan to cover the total cost of attendance.
  • Direct Consolidation Loan: If you have other forms of federal loans, you can consolidate them into one loan and one easy payment with a Direct Consolidation Loan.

2. Federal Perkins Loan Program

Federal Perkins Loans can be used by undergraduate, graduate, and professional degree students. Perkins Loans are an excellent choice because they have lower interest rates than other loans. If you’re eligible, you can get a Perkins Loan at 5% interest.

However, not everyone qualifies for a Perkins Loan. It is dependent on your financial need and the availability of funds at your chosen university. In addition, there’s a cap on the amount you can borrow. Undergraduate students can borrow up to $27,500 in their lifetime; graduate students cannot exceed $60,000.

Under the Perkins Loan program, the school you attend is the lender of the loan. You will make payments directly to the school or a servicer they appoint.

Not all schools participate in the Perkins Loan Program, so it’s a good idea to check with your intended college’s financial aid office to learn what options are available.

Federal loan interest rates

The United States Congress decides the interest rates for federal student loans. They determine the rates based on legislation linked to the financial markets. Interest rates can vary from year to year, but your interest rate is locked when the lender disburses the loan. It cannot be changed unless you pursue student loan refinancing.

The interest rates for federal loans disbursed on or after July 1, 2016, and before July 1, 2017, are as follows:

  • Direct Subsidized: 3.76%
  • Direct Unsubsidized: 3.76%
  • Direct Unsubsidized (graduate or professional degree): 5.31%
  • Direct PLUS Loans: 6.31%
  • Perkins Loans: 5%

Eligibility requirements

To get a federal student loan, borrowers need to complete the Free Application For Federal Student Aid (FAFSA). The FAFSA is what schools and states use to determine the aid you receive, including grants and loans. You cannot get a federal loan without completing FAFSA. That means you’d have to use private loans, which can be more expensive.

The FAFSA has to be completed and submitted every year for you to remain eligible for federal aid. Even if nothing about your situation has changed, you still need to submit it again.

You can complete the FAFSA online. For the 2016-2017 school year, the federal government’s deadline is June 30, 2017. However, schools sometimes have much earlier deadlines, so it’s a good idea to complete it as soon as possible if you have not done it yet.

Taking out loans for school

While college can be expensive, federal student loans offer lower interest rates and more flexible repayment terms than other options. You can get loans to cover the full cost of attendance and even be eligible for reduced payments or forgiveness options.

Federal loans are a good place to start funding your education. For more information about why federal loans are a smart choice, check out the difference between private and federal loans.

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