Federal student loans can feel like both a blessing and a curse. For a lot of people, college would not be affordable without the help of federal student loans. After all, how many people really have an extra $20,770 lying around — the average annual cost to attend a four-year public college in your own state?
Federal student loans, also known as government loans, provide students with the money they need to pay their educational expenses upfront.
If you are planning to take out loans to pay for your college education, federal student loans should be the first type of loan that you consider, after you max out all your scholarship and grant options.
Here’s everything you should know:
Federal student loans vs private student loans
There are two basic types of student loans:
While either option could provide you with the money that you need, there are key differences between federal loans and private loans.
|Federal student loans||Private student loans|
|Interest rates, which are set by Congress, are typically lower than private student loans|
Fixed interest rate, meaning rate won’t change during the repayment period
|Interest rates vary based on your credit
|Fixed interest rate, meaning rate won’t change during the repayment period||Fixed or variable interest rate. Variable interest rates can go up or down during repayment period|
|Approval typically does not depend upon credit history, with the exception of PLUS loans||Approval depends upon credit history|
|Flexible repayment terms, such as income-driven repayment plans||Typically less-flexible repayment terms than federal student loans|
|Consumer benefits such as the ability to temporarily stop payments through deferment and forbearance, and support for the Public Service Loan Forgiveness program||May or may not have consumer benefits such as the ability to temporarily stop payments
Who can get federal student loans?
There are certain requirements necessary to be eligible for federal student loans. Among them:
How to apply for federal student loans
In order to qualify for federal student loans, you must fill out the Free Application for Federal Student Aid (FAFSA). This form helps the U.S. Department of Education and the colleges you apply to determine your family’s financial need.
If you are classified as a dependent, you’ll need information about your parents’ or guardians’ assets and it could be helpful to have them sit down with you to fill out the form.
Make sure you have the following information at hand before you sit down to fill out the FAFSA:
Once you’re ready to fill out the form, go to www.FAFSA.gov and click on ‘Start a New FAFSA.’
When filling out the FAFSA you’ll need to:
Once you’ve filled out the FAFSA, you will receive what’s known as a Student Aid Report, or SAR. The SAR will include an Expected Family Contribution, which is a calculation that colleges use to determine how much financial aid a student is eligible for.
Filling out the FAFSA not only makes you eligible for federal student loans but it also makes you eligible for scholarships and grants, as well. Unlike student loans, scholarships and grants do not have to be paid back.
Ideally, you want to get as much free money as you can before you start taking out loans — so you should try to max out your scholarship and grants options first. Once you’ve exhausted your search for those, federal student loans should be the next option that you explore.
Types of federal student loans
The U.S. Department of Education administers the William D. Ford Federal Direct Loan Program, in which the government serves as a direct lender.
The government used to provide backing for the Federal Perkins Loan Program, in which the individual school served as the lender. Students who received loans under this program were required to show extreme financial need. Congress let the Perkins Loan Program expire, and no new Perkins loans have been made since September, 2017.
Under the Direct Loan program, there are a further four types of loans. Some are geared toward undergraduate students only, while others are geared toward graduate students and even the parents of students.
*Direct Subsidized Loans and Direct Unsubsidized Loans are often referred to as Stafford Loans or Direct Stafford Loans.
Just remember, there are limits to how much money you can borrow in federal student loans. Undergraduate students can receive up to $5,500 per year in Perkins Loans and between $5,500 and $12,500 per year in Direct Subsidized and Direct Unsubsidized Loans.
So if it turns out that you’ll need to borrow more money to pay for your education, you might have to look into other options.
Federal Loan Interest Rates
The interest rates for federal student loans are set by Congress.
Rates for new borrowers are recalibrated each year to match ups and downs in the government’s cost of borrowing, as reflected by yields on 10-year Treasury notes. In July, 2018, rates on federal student loans increased for the second year in a row.
Interest rates for federal loans taken out between July 1, 2018 and June 30, 2019 are:
The interest rate for Perkins Loans was 5 percent, regardless of when the loan was taken out.
College financial aid counselors typically advise students to take out all of the low-cost federal loans they’re entitled to. But once students hit their limits on those loans, the higher interest rates on federal loans to graduate students and parent PLUS loans make private student loans worth considering.
What can I use federal student loans for?
Students loans are not just used for tuition. Rather, the money can be used for any qualified education expenses at the college that you attend — that includes room and board, fees, books, supplies, computer equipment and even transportation to and from school.
However, you should not use money from your student loans for other miscellaneous expenses such as entertainment, a new wardrobe, or a trip to Miami for spring break.
Whenever you take out a loan, it is wise to borrow only what you need. The same advice holds true for federal student loans.
Remember, this is not free money; you will have to pay it back with interest, and you may be paying it back for many years.
The less money you borrow, the easier it will be when it is time to pay the loans back. Before taking out federal student loans, it’s a good idea to use a student loan calculator to find out how much they will cost you over the life of the loan.
Tips for repaying your federal student loans
The best part about federal student loans is that they help you to get your education. Once you’ve received your degree, however, you must begin the business of paying the loans back.
That requires persistence and dedication, so it can be helpful to have a repayment strategy in place before you even start borrowing.
Here’s what you need to know to pay back your federal student loans as quickly and effectively as possible:
Is federal student loan consolidation right for you?
Many people graduate from college with more than one student loan and multiple loan servicers. That can be confusing since you may have to juggle different due dates and procedures for making payments. Some people find it helpful to simplify the process.
One way to do that is through federal loan consolidation, which allows you to combine all of your federal loans into one Federal Direct Consolidation Loan with one monthly payment.
The interest rate of the consolidated loan would be the weighted average of the rates of the individual loans. However, if you make this choice, be aware that you might lose benefits associated with the loan prior to the consolidation.
For example, if you have already made qualifying payments toward Public Service Loan Forgiveness through one of the loans you are consolidating, you would lose credit for them.
It’s important to note that federal loan consolidation is different from private loan consolidation.
Can you refinance federal student loans?
Another repayment strategy that might be worth considering is refinancing, particularly if you have good credit.
Federal student loans are not based on your credit. That means if you have a great credit score, you’ll pay the same interest rate as someone who has a terrible score.
While that can be a good thing if your credit needs improving, you can miss out on lower interest rates if you have stellar credit.
Refinancing your federal student loans into a private loan may allow you to get a lower interest rate if you have good credit. Another advantage is that you can consolidate multiple loans into one single payment.
However, there is a potential downside. Private loans don’t have many of the benefits that federal student loans have. As a result, you may lose federal benefits such as income-driven repayment or student loan forgiveness.
When are my federal student loans due?
Most federal student loans don’t have to start being repaid until after you’ve left school or are no longer enrolled in college at least half-time. Although parents who take out PLUS loans are generally expected to begin repayment immediately, they may request a deferment until after their child leaves school.
For those loans that aren’t due until you’ve left school, you typically get a six-month grace period before you have to make the first payment. So if you graduated in May, you might not have to make your first payment until November.
That gives you a few months to get settled into life after college and get a job. You’ll also have some time to put a budget together that allows you to make your student loan payments easily.
However, just because your student loans aren’t due until after you finish college doesn’t mean you should wait until you complete your education to start paying them off. In fact, it can be a smart strategy to start paying your student loans off earlier if you can, since the sooner you pay them off, the less interest you will pay over time.
While you are in college, some of your federal student loans may continue to accrue interest. One of the benefits of Direct Subsidized Loans is that the federal government pays the interest on them while you are in school.
So if you have $5,000 in Direct Subsidized Loans, the balance will be $5,000 when you’ve finished school and have to start making payments.
However, Direct Unsubsidized Loans accrue interest while you are in school. That means if you don’t make any payments while you are in school your student loan balance will be higher when you finish school than it was when you started.
For that reason, it is a good idea to at least pay the interest on your Direct Unsubsidized Loans while you are in school if you can afford to do that.
Choosing a repayment program
Although private lenders typically offer a menu of repayment plans, one of the biggest benefits of federal student loans are the flexible repayment terms they offer. The federal government offers a number of options to help students to repay their student loan debt no matter what their financial circumstances are.
Whichever repayment plan you choose, keep in mind that your goal should be to spend as little money as possible. In other words, you want to pay off your debts sooner rather than later, so you should choose the most affordable repayment plan that will get you there.
That might require you to tighten up your budget so you can afford to put more money toward your student loans.
If you get a windfall, such as a tax refund or a bonus, consider using some of the money to pay down your student loans. You might also get a part-time job or do some freelance work to make extra money that can help you to pay off your federal student loans faster.
Federal student loan benefits
There are a number of federal student loan benefits that you can take advantage of. How happy would you be if you found out that you did not have to finish paying off your student loans? That dream could become a reality if you qualify for a student loan forgiveness program.
What if I can’t repay my federal student loans?
Unfortunately, many people run into difficulties when it comes to paying off their student loans. In fact, 11.5% of students who started repaying their student loans between 2013 and 2014 defaulted on their student loans, according to the U.S. Department of Education.
Becoming delinquent or defaulting on your student loans can do a lot of damage to your financial future. Your credit score can take a hit, which could make it more difficult for you to qualify for loans in the future.
A low credit score can also lead to higher interest rates on credit cards and other loans. You may even be turned down for certain jobs because of a low credit score.
To avoid becoming delinquent on your student loans, consider the following tips:
Be proactive: If you are having difficulties making your student loan payments, contact your student loan servicer immediately because they may have options that can help you. For example, if it’s a matter of cash flow, your servicer might be able to change your payment due date so that it comes at a different time of the month, such as after you receive your paycheck
Look for new sources of income: In today’s gig economy, there are many options for cultivating multiple streams of income. For example, you might sell items on an online auction site or offer freelance services on an online platform. By working part-time, you can raise extra money to put toward your student loans
Trim the fat off your budget: In order to pay off your student loans, you may need to make a financial sacrifice for a few years. Perhaps you can get a roommate to save money on housing expenses or get rid of pricey cable services and stream your favorite television shows instead. Use the money you free up to go toward your student loans
Stop the payments temporarily: Two possible options for taking a break from payments are deferment and forbearance. This might come in handy, for example, if you lost a job and needed to stop making payments while you searched for a new one During deferment, the interest on some student loans may not accrue while you’re not making payments. However, during forbearance, interest will continue to accrue during the time that you are not making payments. In either case, the temporary reprieve from making payments could be just what you need to get back on your feet and back to making your loan payments again.
When you are in the midst of making payments on your federal student loans, it can seem like you’ll never get to the day when you will be debt free. However, with time and dedication, you can pay off your federal student loans and build a thriving financial life.