Federal Student Loan Guide

The Consumer Finance Protection Bureau, as reported by American Student Assistance, has reported that out of the roughly $1 trillion in outstanding student loan debt, unpaid federal loans account for about $864 billion of that figure. Unpaid private student loans, on the other hand, total $150 billion.

Financial Aid

Why Go Federal?

Interest rates on federal loans are set by the federal government, but private loan rates are often dependent on a student’s credit score, or the credit score of the borrower’s co-signer. Since students often have a very short or nonexistent credit history, private lenders will generally offer loans with very high interest rates to these students, if their applications are approved at all. Additionally, if a student applies with a credit-worthy co-signer, private lenders are more likely to approve the application, and the loan will likely have a lower interest rate than if the borrower did not have a co-signer.

Federal loans, however, do not require a co-signer, and the interest rate of a federal loan is not determined based on the borrower’s credit score.

federal vs private student loan rates

Perkins Loans

Perkins Loans traditionally have low interest rates. However, these loans aren’t available to everyone. In fact, Perkins Loans are only available to students who:

  • Can demonstrate exceptional financial need
  • Attend a school that participates in the Perkins Loan program
  • Attend school at least part-time
Students in dire financial straits might be thrilled to qualify for a Perkins Loan. However, it’s important to remember that these are loans, and they must be paid back. Unfortunately, not all recipients of these loans are able to repay them.
Some students go into default on their loans because they can’t find jobs after graduation, but others might take out loans that are just too difficult for them to manage when they finish school.

Source: https://ifap.ed.gov/perkinscdrguide/attachments/1213PerkinsCDR.pdf

default rates perkins loans

Stafford Loan

The majority of loans provided by federal sources come through the Stafford Loan Program.
new student loans
Source: https://www.newamerica.org/education-policy/policy-explainers/higher-ed-workforce/federal-student-aid/federal-student-loans/
The Stafford Loan program is so big because it contains the most popular federal loan options. However, the precise type of loan a student might get is dependent on a student’s demonstrated financial need, and needy students might get loans with slightly more favorable terms.

A student enrolled in a 4-year program would only be eligible for a Subsidized Stafford loan for 6 years. If the student took longer than 6 years to graduate, the loans would not be available to cover the tab for the additional years.There are also limitations concerning the amount of money a student can borrow over his/her lifetime. First-year undergraduate students who are dependents, for example, may not borrow more than $5,500 in Stafford Loans, according to the U.S. Department of Education. Some students may need to borrow more than their limits would allow.

PLUS Loans

For graduate students who bump up against limits, or who don’t qualify for Perkins Loans, federal GradPLUS Loans can be good options.

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who utilizes parent PLUS loans

Some undergraduate students ask their parents to take out Parent PLUS Loans to help with tuition expenses, and statistics from FastWeb suggest that many parents comply.

A Parent PLUS Loan allows a parent to continue to contribute to a child’s education, without sacrificing important resources like retirement accounts or home equity. However, the interest rate on PLUS Loans is often higher than the rate set for Stafford Loans, so students really should maximize those programs before asking their parents to take out a PLUS loan.

Reducing the Burden

As mentioned, any assistance that comes from these federal programs comes in the form of a loan that students or their parents are required to repay. Students who want to graduate with the smallest loan burden possible have a few important steps to take in order to reach this goal.

The first step involves choosing the least expensive school available, as the loan amounts students take on are heavily dependent on the institutions they attend.

By exploring their options, and accessing free sources of money whenever possible, students can ensure they don’t borrow too much and run into financial difficulties down the line.

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