Department of Education Student Loans
Prospective college students and parents new to student loan borrowing may find that they have a lot of information to parse through to understand the mechanics of student loan borrowing. Department of Education loans are often referred to simply as federal loans.
At the outset, it is important to note these general points about student loans:
- Department of Education loans originate with the U.S. Department of Education, which federal laws govern.
- Private loans originate with independent banks, which make their own lending and repayment rules.
- Department of Education loans are generally part of college financial aid packages and usually include the loan type and amount.
- Colleges will not require borrowers to work with a specific private lender.
Department of Education Loans
Currently, all U.S. Department of Education loans are administered under the Direct Loan program. Federal Perkins Loans are separate. These loans include:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
According to Federal Student Aid, highlights of the Direct Loan Program include:
- Eligibility is based on information reported in the Free Application for Federal Student Aid (FAFSA).
- Borrowers will be required to sign a Master Promissory Note (MPN) – a contract whereby the borrower agrees to the loan’s terms.
- Repayment plans vary by loan type, usually with the option to switch between plans as necessary.
One of the greatest advantages of Department of Education loans is their comparatively low interest rate. As Federal Student Aid advises, interest rates are calculated each spring for the upcoming award year (July 1st – June 30th) and based on financial market conditions. The calculated interest rate will remain fixed for the life of the loan. For instance, for Direct Loans for undergraduate students made on or after July 1, 2016, and before July 1, 2016, interest rates are:
- 3.76 percent: Direct Subsidized Loans
- 3.76 percent: Direct Unsubsidized Loans
- 6.31 percent: Direct PLUS Loans (for parents of dependent undergraduates)
Graduates in repayment who are considering a Direct Consolidation Loan are best advised to use the federal Online Calculator to determine the applicable interest rate.
How Much to Borrow
Although college financial aid offices will determine the available federal loan amounts, it is ultimately up to students to decide how much to borrow. As U.S. News & World Report discusses, students who are concerned about debt can take the following steps to curb borrowing:
- Borrow modestly, such as limiting student loans to $5,000 per year.
- Work part-time, but not more than approximately 15 hours per week.
- Try to limit student loan types to the Perkins Loan and Direct Subsidized Loan.
- Borrow less than the federal maximum amount offered.
- Line up debt with the income you expect to earn in your intended career.
- As a rule of thumb, limit the total borrowing amount to a number under your expected first-year salary.
While students cannot accurately predict their future, they can always act smartly in the present. Awareness of the perils of excessive borrowing can make students savvy money managers overall. Students are well advised to seek new scholarships and grants for each year of study. In addition, to cut down on living costs, resident assistant programs offer room and board in exchange for working for student life in the residence halls (usually only college juniors and seniors are eligible).
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