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.

Why Go Federal?

Students are often advised to utilize all of the federal loan options available to them before they even consider taking out a private student loan. Loan forgiveness plans play a big part in the advice to choose federal loans over private, as this is a benefit only available through federal loans.

Private Loans

large-lblue-bulletNo outstanding loan balance forgiveness

Federal Loans

large-lblue-bulletLoan forgiveness if the borrower dies

large-lblue-bulletForgiveness for public service workers

large-lblue-bulletRepayment plans can be tied to income

In a Wall Street Journal article, Mark Kantrowitz, publisher of Edvisors.com states that student loan interest rates range from 2.75% to 9.3%.interest rate ranges for student loans

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
Monthly Repayment Amounts
This sample repayment chart from Pepperdine University demonstrates how much students might be required to pay for their Perkins Loans each month, and it’s easy to see how some of these payments might be difficult to make for the unemployed.

Amount Borrowed Monthly Payment
$7,000 $74.24
$8,500 $90.15
$10,000 $106.06
$12,000 $127.27
$14,000 $148.49

Source: https://seaver.pepperdine.edu/admission/financial-aid/undergraduate/types/loans/perkins-repayment.htm

These are large monthly payments, but the other benefits of Perkins Loans⎯such as the low interest rates and the extended grace period⎯make these loans very borrower-friendly.

Direct Loans

The majority of loans provided by federal sources come through the Direct Loan Program.
new student loans
Source: https://www.newamerica.org/education-policy/policy-explainers/higher-ed-workforce/federal-student-aid/federal-student-loans/

The Direct 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.


large-lblue-bulletA Subsidized Direct loan is for a student that has demonstrated a financial need

large-lblue-bulletThe federal government pays the interest on the loan while the student is in school, as well as a 6 month grace period after the student graduates from school


large-lblue-bulletAn Unsubsidized Direct loan is available to any student who completes the FAFSA, regardless of demonstrating a financial need

large-lblue-bulletThe student is obligated to pay all the interest, even interest accumulated while in school

While these loans are designed to help any student at any income level pay for school, they do come with some restrictions. For example, Subsidized Direct loans come with eligibility period limits.
Borrowing limits of Direct subsidized loans
A student enrolled in a 4-year program would only be eligible for a Subsidized Direct 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 Direct 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.

These loans are designed to help students who:
  • Are enrolled at least part-time in a graduate or professional program
  • Meet general eligibility requirements
  • Do not have an adverse credit history
  • Can get an endorser, if the student’s credit history is problematic
<div class="col-8 first">
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 Direct 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.

Students can also explore their options for “free money” aid, including:

  • Grants
  • Scholarships
  • Work-study programs
  • Part-time work

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.

Frequently Asked Questions

What are federal school loans?

Federal school loans, otherwise known as federal student loans, are loans offered by the federal government through the Department of Education. Federal school loans are disbursed to students who demonstrate financial aid, but certain forms of aid, such as the Unsubsidized Direct loan, can be obtained by students who do not have any demonstrated financial need. All federal school loans require students to submit the Free Application for Federal Student Aid (FAFSA) along with their applications. Federal student loans offer the cheapest interest rates and flexible payment schedules.

What are the benefits of student federal loans?

Student federal loans offer a number of benefits over any other form of financial assistance to students. Student federal loans offer the lowest interest rates and have the most flexible borrower terms of any loans available to college students. They allow students to defer their loan payments until after graduation, which makes repayment less stressful. Additionally, student federal loans provide students with a grace period after graduation to find a job and then begin loan repayment. Student federal loans are disbursed according to the applicant’s financial need, though certain student federal loans, such as Unsubsidized Direct loans, can be taken out without demonstrated financial need. Student federal loans do not require students to have a good credit history or a co-signer.

When do I have to pay federal student loans back?

Federal student loans offer borrowers a number of advantages, and one of these is the allowance for students to defer repayment and to let them pay federal student loans back after they have completed their education. Students can defer their loan repayments and begin repaying the loan after graduation. Most federal student loans have a grace period, which allows them to find employment and then start repaying the loan.

How do I know what I can receive in federal government student loans?

Taking out federal students loans is one of the easiest and least expensive ways of financing your education. Federal student loans are awarded to students who demonstrate financial need, and are also given out at a low, fixed interest rate. In order to determine how much you will receive in financial aid, you need to calculate the estimated family contribution (EFC). Once you determine what your EFC is, you may get a better sense of what you will be awarded in federal government student loans.

How can I apply for federal student loans for college?

Federal student loans for college include Direct loans (Subsidized and Unsubsidized), Perkins loans, Parent PLUS loans, and GradPLUS loans. These loans are federally funded and come with low interest rates. They are aimed at making higher education a possibility for every student in the nation. To apply for Federal student loans, you must submit a FAFSA, which is available at fafsa.ed.gov.

What if I have already exhausted my federal loans for college and am in need of more funding?

It’s not unusual for students to reach the federal borrowing limit before their degree program is completed. In such a scenario, the best thing to do is approach your school’s financial aid office and ask for emergency funds. Another option is to apply for a private student loan. Remember that private student loans are easier to obtain if you have a good credit score.

What are the advantages of federal college loans?

There are a number of benefits associated with federal college loans. The federal government offers Direct, Perkins, Parent PLUS and GradPLUS loans. All of these options offer relatively low fixed interest rates with terms and conditions favoring the borrower. Students may apply for these loans by filling out the FAFSA application and submitting it at fafsa.ed.gov before the deadline date.

Why should I opt for federal student loans without a co-signer?

Federal student loans are based on need, as their key purpose is to make funding available to every student in need. There are a number of advantages of federal loans: the interest rates are low and there are no strict eligibility requirements. Furthermore, federal loans come with flexible repayment options.

Should I estimate the cost of attendance before applying for federal student loans?

Students are encouraged to estimate the cost of their college education before applying for federal loans. In fact before applying for any sort of financial aid, students are advised to estimate the cost of their attendance. There are number of benefits associated with this, as it provides students with an idea as to how much money is required to attend college. It also helps students avoid over borrowing, which can be extremely useful in the long run.

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