Federal Student Loan Guide | Affordable College Online

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.

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

Income-Driven Repayment Plans

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.