The Complete Guide to Federal Student Loans

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It’s no secret that the cost of college has skyrocketed to all-time highs. But when you’re planning your university career, those numbers become much more personal. Now, it’s up to you to create a strategy to pay for tuition, books, and room and board.

To afford your education, you’ll likely need student loans to cover at least some of the cost. There are many different forms of loans, but when it comes to paying for college, federal student loans usually offer the most flexibility and lowest costs to students.

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

Types of federal student loans

Currently, there’s only one federal loan category that’s distributing new loans: the William D. Ford Federal Direct Loan Program. Within that program, there are different loans designed for specific school levels and incomes.

1. William D. Ford Federal Direct Loan Program (Stafford loans)

The William D. Ford Federal Direct Loan Program is the largest federal student loan program. It’s made up of four different loan types (the first two of which are sometimes referred to as Stafford loans):

  1. Direct subsidized loans: These loans are designed for undergraduate students with financial need. You can borrow up to a certain amount each year to pay for school. Unlike the other loans in this program, you’re not charged interest on the loans while you’re in school.
  2. Direct unsubsidized loans: Unsubsidized loans can be used by undergraduate, graduate and professional degree students. Like subsidized loans, they also come with borrowing limits. But unlike their subsidized counterparts, interest accrues on these loans while you’re in school.
  3. Direct PLUS loans: A federal direct PLUS loan is for parents of undergraduate students paying for their child’s education, or for graduate or professional degree students paying for their own education. You can use a federal direct PLUS loan to cover your school’s total cost of attendance.
  4. Direct consolidation loans: If you have other forms of federal loans, you can consolidate them into one loan (and one monthly payment) with a direct consolidation loan. Also, if your federal loans are ineligible for Public Service Loan Forgiveness (PSLF), you can consolidate them with a direct consolidation loan to qualify.

2. Federal Perkins Loan Program

In the past, federal Perkins loans could be used by undergraduate, graduate and professional degree students with financial need. But the program expired in September 2017, so the government will no longer issue new Perkins loans.

Previously, Perkins loans were a smart choice because they had lower interest rates than other loans. Eligible borrowers could get a Perkins loan at 5.00% interest.

But not everyone qualified for the Perkins loan, as eligibility was dependent on your financial need and the availability of funds at your chosen university. Also, there was a cap on the amount you could borrow. Undergraduate students could borrow up to $27,500 in their lifetime, while graduate students couldn’t borrow more than $60,000.

For those who took out Perkins loans in the past, the school you attended is the lender of the loan, so you make your payments to the school (or to a servicer the school appointed).

Federal loan interest rates

While private loan interest rates are determined by market conditions, the U.S. Congress sets the interest rates for federal student loans. But it determines the rates based on legislation linked to the financial markets.

Interest rates can vary from year to year, but your rate is locked once the lender disburses the loan. It cannot be changed unless you pursue student loan refinancing.

The interest rates for federal loans disbursed between July 1, 2018, and June 30, 2019, are as follows:

  • Direct subsidized: 5.05%
  • Direct unsubsidized (undergraduate degree): 5.05%
  • Direct unsubsidized (graduate or professional degree): 6.60%
  • Direct PLUS: 7.60%

Eligibility requirements

To get a federal student loan, borrowers must complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is what schools and states use to determine the aid you receive, including federal grants and loans. You cannot get a federal loan without completing the FAFSA.

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. The application opens on Oct. 1 each year, and submission deadlines vary based on your school and state. It’s a good idea to complete it as soon as possible each year.

Federal student loans don’t require a cosigner or guarantor for your debt, and you can qualify for most federal loans even if you have poor credit. The main requirement to borrow is that you’re attending an eligible college or university.

Benefits of federal loans

federal student loans guide

Federal student loans have certain perks that can make it easier to manage your debt if you’re struggling to afford your payments or if you lose your job.

1. Income-driven repayment plans

If you can’t afford the minimum payment on your loan, you might be eligible for an income-driven repayment (IDR) plan.

There are four kinds of IDR plans:

Under IDR, the lender sets your payment as a percentage of your discretionary income. If you experience big life changes, such as a pay decrease or the birth of a child, your payment will go down, too. Some people can even qualify for a “payment” of $0 with an IDR plan.

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 good short-term solution if you’re struggling with an entry-level salary or have a long-term approach to managing your debt. But because you’re stretching your repayment period over two decades or more, you’ll likely pay more in interest over the life of your loan.

2. Deferment and forbearance

If you can’t keep up with your payments, you might qualify for deferment or forbearance. These options allow you to pause payments on your loan without penalty. If you lose your job or became seriously ill, you can delay making payments while you recover.

The two are very similar, with the main difference being eligibility and the length of time involved. (Deferment can run up to three years, while forbearance is usually for a year or less.) While deferment and forbearance are not ideal, they can be useful when facing an emergency that makes managing your loan payments difficult.

3. Student loan forgiveness programs

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

Those who work for nonprofit organizations or the federal or state government may be eligible for the PSLF program. If you hold a qualifying job for 10 years and make qualifying payments, 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.

4. Student loan discharge programs

With private loans, if your school lied to you about your chances of a successful career, the university closed or you became disabled, you still have to make payments on your loan. They are not eligible for discharge, so you’re usually stuck with them no matter what.

Federal loans are different. There are several discharge programs that the government designed to protect borrowers. For example, if you become permanently disabled, the government might forgive your loans through total and permanent disability discharge. If your school closes while you’re still pursuing your degree, you could be eligible for a closed school discharge.

Hopefully, you’ll never have to rely on one of these discharge programs. But if something awful happens, it’s good to know about the safety nets available for federal student loans.

Private student loans

If you’ve exhausted your federal aid options and still need more money to pay for school, private student loans are another option. Private student loans are issued by a bank, credit union or private company, instead of by the government. The interest rates, repayment terms and rules of your loans will depend on the lender.

To get a private student loan, you need to have an established credit history, a solid income and a good credit score. If your income or credit score isn’t high enough, a lender may require you to have a cosigner — someone who will be responsible for payments if you fall behind.

With federal loans, the interest rates are fixed for the length of your loan. But some private loans can have variable interest rates, which can fluctuate over time. That means your payment can increase if interest rates rise.

Private loans are also ineligible for federal loan benefits, such as access to IDR plans or PSLF. If you run into financial hardship while you’re repaying your loan, speak to your loan servicer about your options.

Because of the wide variety of private student loans out there, it’s important to shop around to find the best lender for your situation.

Taking out loans for school

Trying to figure out how to pay for school can be overwhelming, but federal student loans can be a useful tool to finance your education. Thanks to lower interest rates and more repayment benefits than with private loans, you can better manage your student loan debt going forward.

To reduce your need for federal or private loans, research and apply for scholarships and grants to help limit your education costs.

Kat Tretina contributed to this article.

Need a student loan?

Here are our top student loan lenders of 2019!
LenderVariable APREligibility 
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.

1 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

2 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


3 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 7/1/2019. Variable interest rates may increase after consummation.


4 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. The interest rate ranges represent the lowest and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.50% as of July 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please click https://www.discover.com/student-loans/interest-rates.html
    for more information about interest rates

5 Important Disclosures for CommonBond.

CommonBond Disclosures

A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.

Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.

Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
If you are unable to pay your government loan, the government can refer your loan to a collection agency or sue you for the unpaid amount. In addition, the government has special powers to collect the loan, such as taking your tax refund and applying it to your loan balance.

A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If you refinance your government loan, your new lender will use the proceeds of your new loan to pay off your government loan. Private student loan lenders do not have to honor any of the benefits that apply to government loans. Because your government loan will be gone after refinancing, you will lose any benefits that apply to that loan. If you are an active-duty service member, your new loan will not be eligible for service member benefits. Most importantly, once you refinance your government loan, you will not able to reinstate your government loan if you become dissatisfied with the terms of your private student loan.

If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you are a borrower with a secure job, emergency savings, strong credit and are unlikely to need any of the options available to distressed borrowers of government loans, a refinance of your government loans into a private student loan may be attractive to you. You should consider the costs and benefits of refinancing carefully before you refinance.

If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.

Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.


6 Important Disclosures for PNC.

PNC Disclosures

  1. Annual Percentage Rates (APRs): APRs from 4.52% to 11.11% are for the fully deferred repayment option, include the 0.50% interest rate discount for automatic payment and encompass the full range of APRs for the three repayment term options (5, 10 and 15 year). APRs within this range may vary based on the repayment term chosen. See break down of APR ranges by repayment terms below.
  2.  

  3. Fixed Annual Percentage Rates (APRs): APRs range from 4.52% to 9.58% for a 5-year term. APRs range from 5.05% to 10.26% for a 10-year term. APRs range from 5.55% to 10.84% for a 15-year term. Fixed rates are based on the creditworthiness of the borrower and co-signer, if any. Loan Payment Example: The monthly payment per $10,000 borrowed at a fixed rate range of 5.05% APR to 10.26% APR for 10 years means you would make 120 payments which may range from $131.94 to $207.24. For the fixed rate loan, the monthly payment will remain fixed for the term of the loan. Payments may vary for other repayment term options.

    Variable Annual Percentage Rates (APRs): APRs range from 4.90% to 9.92% for a 5-year term. APRs range from 5.38% to 10.57% for a 10-year term. APRs range from 5.85% to 11.11% for a 15-year term. Variable rates are based on the London Interbank Offered Rate (LIBOR) index plus a margin depending on the creditworthiness of the borrower and co-signer, if any. The LIBOR index, adjusted quarterly, is equal to the average of the one-month LIBOR rates as published in the “Money Rates” section of the Wall Street Journal on the first business day of each of the three (3) calendar months immediately preceding each quarterly adjustment date. The LIBOR index is currently 2.47%. If the index increases or decreases, your rate will increase or decrease accordingly. Loan Payment Example: The monthly payment per $10,000 borrowed at a variable rate range of 5.38% APR to 10.57% APR for 10 years means you would make 120 payments which may range from $135.93 to $212.65. For the variable rate loan, the monthly payment may increase or decrease if the interest rate increases or decreases. Payments may vary for other repayment term options.

    APRs and loan payment examples are for the fully deferred repayment option for the Undergraduate & Graduate loan programs and include the 0.50% interest rate discount for automatic payments. The lowest APR is available to well qualified applicants. Your actual APR will be based on your credit qualifications, selection of fixed or variable rate option, loan program, repayment term, repayment option and whether you elect the automatic payment feature. Loan payment examples assume 30 days to first payment after the deferment period (45 months in school and 6 month grace period). Payments vary for other rates, repayment terms and repayment options.

    In addition to Undergraduate and Graduate loans, PNC offers loans for Health & Medical Professions, Health Professions Residency and Bar Study. Rates may vary by loan program and are subject to change at any time. Visit pnconcampus.com for current rates, additional loan payment examples and more details about the Solution loan products.

  4. Automatic Payment Discount: During repayment, an interest rate discount of 0.50% is available for automatic payments. Borrower must be making scheduled payments that include both principal and interest. Interest only payments do not qualify for the 0.50% interest rate discount. Automatic payment can be established through the loan servicer American Education Services (AES). Advertised rates include the 0.50% automatic payment interest rate discount. The rate discount will be applied at the time automatic payment is established. If automatic payment is not established, the available rates will be 0.50% higher than the advertised rates. If automatic payment is established and discontinued at any time during repayment, the borrower will no longer receive an automatic payment discount and the rate will increase by 0.50%. Discount may also be suspended during periods of forbearance or deferment. Payments may be made from a checking or savings account. A federal regulation limits the number of transfers that may be made from a savings or money market account. Please contact your financial institution for more information on transfer limitations on savings accounts.
  5. Repayment Options: Immediate, interest only payments while in school and full deferment of principal and interest options available. Interest will continue to accrue during periods of deferment. You will receive quarterly interest statements during this deferment period. Paying the interest as it accrues each quarter will save you money over the repayment term of the loan because any accrued interest that you do not pay will be added to the principal balance at the end of the deferment.
  6. Co-Signer Release: A request to release a co-signer requires that, as of the date of the request, you have made at least forty-eight (48) consecutive timely payments of principal and interest with no periods of forbearance or deferment within the forty-eight (48) month timeframe. “Timely payment” means each payment is made no later than the 15th day after the scheduled due date of the payment. “Consecutive payment” means the minimum monthly payment must be made for the most recent forty-eight (48) months straight without any interruption. To qualify for a co-signer release, the borrower must submit a request, meet the consecutive, timely payment requirements, provide proof of income and pass a credit check.
  7. Tax Deductibility: Interest may be tax deductible. Consult a tax advisor.

Please note: PNC reserves the right to modify or discontinue the terms of these program at any time without notice. You are encouraged to explore all scholarship, grant and federal borrowing options before applying for a private loan. Private loans are subject to credit approval.

PNC is a registered service mark of The PNC Financial Services Group, Inc.
© 2019 The PNC Financial Services Group, Inc. All rights reserved. PNC Bank, National Association.

3.98% – 11.35%*,1Undergraduate and Graduate

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3.99% – 11.44%2Undergraduate and Graduate

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3.96%
11.98%
3
Undergraduate, Graduate, and Parents

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4.72%
11.87%
4
Undergraduate and Graduate

Visit Discover

3.66% – 9.64%5Undergraduate and Graduate

Visit CommonBond

4.90% – 11.11%6Undergraduate and Graduate

Visit PNC

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

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