Federal Student Loan Guide

September 21, 2021

Federal Student Loan Guide

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Every year, millions of undergraduates, grad students, and parents take out federal student loans to pay for college. Colleges' financial aid offices disburse this loan funding. Federal loans offer lower interest rates and more flexible repayment options than most private loans. As a result, federal loans are a better option for most students.

Before taking out federal student loans, borrowers should understand the different types of loans, the terms and conditions, and the repayment options. This guide also covers how to get federal student loans and student loan forgiveness options.

Types of Federal Student Loans

The Federal Student Aid office distributes several types of loans. Options include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. While the office no longer offers Perkins Loans or Family Federal Education Loans, both remain eligible for consolidation and many repayment plans.

Each loan features different terms and interest rates. Borrowers should research loan options to choose the best type for their needs.

Direct Subsidized Loans

Undergraduate students who meet financial need requirements can qualify for Direct Subsidized Loans. With this loan program, the U.S. Department of Education pays interest on the loan while the borrower attends school. The department also covers the interest during any deferments and during a six-month grace period after graduation.

Borrowers can take out a maximum of $23,000 in subsidized loans to pay for an undergraduate degree. Students with a higher cost of attendance can take out other types of federal student loans.

Direct Unsubsidized Loans

Undergraduate and graduate students can take out Direct Unsubsidized Loans. Borrowers do not need to meet financial need requirements to qualify for this loan program. Unlike subsidized loans, unsubsidized loans require borrowers to pay interest from the first disbursement and during the grace period. As a result, borrowers should prioritize subsidized loans.

The Federal Student Aid office sets total unsubsidized loan limits for undergraduate, graduate, and professional students. Learners who need more funding can consider Direct PLUS Loans.

Direct PLUS Loans

Graduate students and parents can take out Direct PLUS Loans. These loans feature higher interest rates than Direct Subsidized and Unsubsidized Loans. Students should consider Direct PLUS Loans after exhausting other options.

The maximum Direct PLUS Loan amount equals the total cost of attendance minus other forms of financial aid. These loans accrue interest while students earn their degree. Borrowers begin making payments six months after leaving school.

What Is a Direct Consolidation Loan?

Borrowers with multiple federal student loans can combine their loans through a Direct Consolidation Loan. Consolidation lets borrowers make one monthly payment and potentially lock in a lower interest rate. Consolidated loans also offer longer repayment periods, which can mean lower monthly payments. However, borrowers may pay more in interest. Borrowers may also lose progress toward loan forgiveness if they consolidate. Most federal loans qualify for consolidation.

Federal Student Loan Interest Rates

Borrowers of federal loans pay fixed interest rates. Each borrower's rate is based on when they take out or consolidate the loan. For the 2021-2022 academic year, federal student loan interest rates are 3.73% for Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduate students. Graduate students pay 5.28% interest on Direct Unsubsidized Loans. Direct PLUS Loans have a 6.28% interest rate. Federal law sets these interest rates.

In addition to interest rates, borrowers also pay loan fees. The Federal Student Aid office deducts the fee while making disbursements. Direct Subsidized Loans and Direct Unsubsidized Loans require a 1.057% loan fee. Direct PLUS Loans come with a 4.228% loan fee.

As of 2021, borrowers benefit from COVID-19 emergency relief. These relief policies temporarily suspended monthly loan payments. Borrowers pay a temporary 0% interest rate on student loans. The policy also stops collections on defaulted loans.

While borrowers can choose to make payments, the U.S. Department of Education will not require payments until after January 31, 2022.

How Do I Apply for Federal Student Loans?

Students might not know how to get federal student loans. Fortunately, the process is quick and easy. Applying for loans can also qualify students for grants, work-study programs, and scholarships.

Step 1: Fill Out the FAFSA

Students begin by filling out the FAFSA. The process typically takes about an hour. Applicants provide financial information on the form. Dependent students must also submit their parents' financial information. The FAFSA can qualify students for loans, grants, and work-study opportunities.

Step 2: Compare Financial Aid Offers

After receiving an applicant's FAFSA, the Federal Student Aid office calculates the student's expected family contribution (EFC). The applicant's prospective schools also receive this information. Schools use each learner's EFC and cost of attendance to determine their financial aid amount. Each school sends the student a financial aid award letter, which lists available loans.

Step 3: Accept Your Aid

Students accept their aid through the financial aid office at their school. Before signing for student loans, borrowers should compare the terms and conditions, including repayment options. Students should also look at interest rates. Most colleges offer financial aid advising to help students complete the process.

Step 4: Consider Other Options

Students should consider other options before taking out student loans. For example, grants and scholarships do not require repayment. Fellowships and assistantships feature work requirements but also require no repayment. Students may also qualify for work-study programs. If students need funding in addition to federal student loans, they can research private loans.

Should I Accept All of the Federal Student Loans in My Financial Aid Package?

The Federal Student Aid office may offer more loans than a student needs to cover their educational expenses. Rather than taking out multiple loans and accruing more debt, borrowers can decline a loan or reduce the loan size.

Students should limit debt by prioritizing free money, such as scholarships and grants. They can also consider work-study programs to minimize necessary loan amounts. Schools' financial aid offices provide guidance on accepting aid and declining federal loans.

Student Loan Repayment Options

Federal loans feature multiple repayment options. Income-driven repayment plans feature monthly payments and repayment periods based on the borrower's income. Borrowers can change repayment plans while paying back their loan.

Traditional Repayment Plans

Under the Standard Repayment Plan, borrowers make monthly payments for up to 10 years. Those with consolidated loans may have a loan period of up to 30 years. Although the plan typically features higher monthly payments, borrowers save money on interest. Every type of federal student loan qualifies for the standard repayment option. The Graduated Repayment Plan begins with smaller payments that gradually increase every two years. Most borrowers make payments for 10 years. Borrowers with consolidated loans make payments for up to 30 years. The plan appeals to professionals who expect their income to increase over time. The Extended Repayment Plan lets borrowers pay back their loan over 25 years. Borrowers benefit from lower monthly payments but ultimately pay more in interest. The Extended Repayment Plan features fixed and graduated monthly payment options.

Income-Driven Repayment Plans

The Revised Pay as You Earn Repayment Plan sets monthly payments at 10% of the borrower's discretionary income. For undergraduate loans, borrowers make payments for 20 years. Borrowers of graduate and professional loans repay loans over 25 years. All loans except parental loans qualify for REPAYE. The Pay as You Earn Repayment Plan lets borrowers make monthly payments equal to 10% of their discretionary income. After making payments for 20 years, borrowers can qualify for forgiveness on the rest of the loan. Direct Loans and several types of consolidated loans qualify for this repayment plan. Under the Income-Based Repayment Plan, monthly payments equal 10-15% of the borrower's discretionary income. Borrowers make payments for 20-25 years, after which the Federal Student Aid office forgives any remaining debt. Most types of federal student loans qualify for this repayment option. However, borrowers must meet eligibility guidelines based on their annual income. All federal student loans qualify for the Income-Contingent Repayment Plan. Borrowers make monthly payments for 25 years. Monthly payments equal the lower of two options. Borrowers may pay 20% of their discretionary income. Or, they may pay an income-adjusted amount based on 12 years of payments. Low-income borrowers with Federal Family Education Loans qualify for the Income-Sensitive Repayment Plan. The 10-year repayment plan sets monthly payments based on the borrower's annual income. The plan helps borrowers lower their monthly payments. Direct Loans do not qualify for this repayment plan.

Suspending Student Loan Payments

Loans become delinquent if borrowers miss their payment date by a single day. Fortunately, the federal student aid program offers several options for borrowers struggling to repay loans. Deferment temporarily halts monthly payments, while forbearance pauses payments. However, interest typically continues to accrue while payments are paused. Deferment and forbearance do not count toward loan forgiveness requirements.

Both options help borrowers avoid delinquency and keep from defaulting on their loans. These situations can negatively impact the borrower's credit score. Borrowers should contact their loan servicer for information about deferment and forbearance options.

Student Loan Forgiveness

Borrowers may qualify for student loan forgiveness, also known as loan cancellation. These programs eliminate the remaining balance on a borrower's federal loan. The Federal Student Aid office provides several routes to loan forgiveness. People may qualify through public service or teaching. Borrowers should contact their loan servicer to learn about loan forgiveness programs.

Borrowers may qualify for a loan discharge if their school closes or if they experience a permanent disability. The Federal Student Aid office also discharges loans for death. Loan servicers can provide information on discharge options.

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