The Complete Guide to Federal Student Loans

federal student loans

It’s no secret that the cost of college has skyrocketed to all-time highs. But when you’re planning your college 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.

You’re facing a much more difficult battle than your parents faced. According to the National Center for Education Statistics, the average cost of a year’s tuition and fees at a four-year school was just $1,291 in 1977. Back then, your parents could work a part-time job and pay for school without taking on debt.

Today, a part-time job won’t cut it — $1,291 would only cover the average cost of your textbooks. That difference puts you in a unique and challenging situation.

To pay for 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 student debt, federal loans usually offer more flexibility and lower costs to students.

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

Student loan options

Hopefully, you’re able to qualify for scholarships or grants that you don’t have to repay. Although that aid can be a huge help, you still might need to borrow money to pay for the rest of your expenses. You have two choices: federal loans and private ones.

Federal student loans

Issued by the government, federal student loans are most students’ first choice to pay for school. They tend to have lower interest rates and more generous repayment terms than private ones. Moreover, you can qualify for most federal loans even if you have poor credit. Federal student loans don’t require a cosigner or guarantor for your debt.

If you qualify for a subsidized federal loan, the government will even help cover your interest charges. While you’re in school, your loans grow with interest. However, with a subsidized loan the government covers your fees while you study, which can significantly cut down how much money you’ll owe by the time you graduate.

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 the government. The interest rates, repayment terms, and rules of your loans will depend on the lender.

To get a private 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. However, some private loans can have variable interest rates, which can fluctuate over time. That means your payment can increase if your interest rate rises.

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 student loans guide

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

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

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 qualify for a payment as low as $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 short-term solution if you’re struggling with an entry-level salary or have a long-term approach to managing your debt. However, 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. Either option allows 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.

While deferment or forbearance is not ideal, it 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 that work for nonprofit organizations 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 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 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 suddenly 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.

Types of federal 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

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

  1. Direct Subsidized Loans: These loans are designed for undergraduate students with financial need. You can take out up to $5,500 each year to pay for school. Unlike other loans, 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. You can take out a maximum of $20,500 each year to pay for school, and interest accrues on your account 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 the total cost of attendance.
  4. 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. And, if your current federal loans are ineligible for 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. However, the program expired September 2017. 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% interest.

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

For those who took out Perkins Loans in the past, the school you attend is the lender of the loan. You will make payments directly to the school or a servicer they appoint.

Federal loan interest rates

While private loans’ interest rates are determined by market conditions, the U.S. Congress sets 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 between July 1, 2017 and July 1, 2018 are as follows:

  • Direct Subsidized: 4.45%
  • Direct Unsubsidized: 4.45%
  • Direct Unsubsidized (graduate or professional degree): 6%
  • Direct PLUS Loans: 7%

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. You’d otherwise 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. 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.

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 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 grants to help limit your education costs.

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