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The average cost of undergraduate tuition and fees at a four-year public college is $9,400 per year, according to the National Center for Education Statistics (NCES). It can be a lot of debt to manage as a student.
But fortunately, on average, undergraduates receive $6,617 in federal student loan assistance. Federal loans provide assistance to students who need help covering the cost of their college education. It is therefore essential to understand how these loans work, before deciding to contract this debt.
Read more: Student Loan Debt Statistics
What is a Federal Student Loan?
Federal student loans are meant to help you pay for your college education. The federal government provides student loans through the Federal William D. Ford Direct Loan Program of the Department of Education. This type of federal aid offers fixed interest rates and the loans must be repaid once you leave school or fall below half-time.
There are four types of direct loans available, including a loan option specifically for parents of dependent students. The Federal Loan Program also offers subsidized and unsubsidized loan options, depending on your enrollment level.
How Federal Student Loans Work
If you qualify for federal student loans, your school will provide you with a financial aid award letter. It describes the loans you are eligible for, if any, and the amount you can receive for the academic year.
You will need to select the loans you wish to accept and the amount. If this is your first time taking out a federal loan, you’ll need to follow entry tips, which explain how the loans work and how to repay them. You will also sign a principal promissory note agreeing to the terms of your loan.
The school will then apply the federal loan funds to your outstanding account charges, such as tuition and fees. The remaining amount will be returned to you.
Once your enrollment drops below half-time or you graduate, a six-month grace period begins during which you don’t have to make any payments. Once the grace period has passed, you will begin making monthly payments based on the terms of your loan agreement.
Types of Federal Student Loans
There are four types of student loans offered under the Direct Loans Program.
Subsidized direct loans
Subsidized direct loans are one of two direct loans available to undergraduate students. One of the main advantages of subsidized loans is that they don’t require a credit check and the federal government pays some accrued interest on the loan. You must demonstrate financial need to qualify for this type of loan.
Typically, interest charges on this loan are subsidized when you are enrolled at least half-time, for the first six months after leaving school (grace period), and when the loan is deferred.
Direct unsubsidized loans
Unsubsidized loans are also part of the direct lending program, so a credit check is also not required for these loans. Unsubsidized loans are available for undergraduate, graduate and professional students. No financial need is required to qualify.
The caveat, however, is that you are responsible for repaying all accrued interest on the loan as soon as the funds are disbursed. However, if you are enrolled in school or your loan is on deferral or forbearance, you can choose to defer interest payments.
Interest deferral will result in capitalized interest: the interest will be added to your loan balance and you will eventually have to pay additional interest on the higher balance when you start making payments.
Learn more: Guide to Subsidized and Unsubsidized Federal Student Loans
Direct Loans PLUS
Graduate and professional students, as well as parents of dependent undergraduate students, are eligible for Federal Direct PLUS loans.
The PLUS loan application involves a separate application as it requires a credit check. There is no minimum credit score to qualify for a Direct PLUS loan, but the primary borrower must not have adverse credit, such as a poor repayment history. If you have bad credit, you may still be able to get a PLUS loan, but you will need to meet other requirements.
Direct Consolidation Loans
A direct consolidation loan allows you to simplify your loan repayment by combining two or more federal student loans into one. Direct Consolidation offers a fixed interest rate based on the weighted average interest on your original loans.
A federal consolidation loan can also help borrowers access certain repayment options, such as income-contingent repayment plans (IDR) or public service loan forgiveness (PSLF).
How to Apply for a Federal Student Loan
To apply for a federal student loan, you will need to submit a Free Application for Federal Student Aid (FAFSA) each academic year. The FAFSA is used by your school to determine if you qualify for federal loans and how much you can borrow. Here’s what you need to do:
1. Create a Federal Student Aid ID
If you are a first-time student or have not submitted a FAFSA in the past, you will need to create a Federal Student Aid (FSA) ID. This ID helps you sign your FAFSA and loan agreements, and manage your federal loan account on StudentAid.gov. Parents of dependent students will also need to create their own FSA ID.
2. Complete your FAFSA
The FAFSA can be completed online at fafsa.gov or by using the form on the myStudentAid app. If you prefer a paper application, you can download and print a FAFSA and mail it.
To prepare, gather your financial documents: income tax return, bank statements, investment statements and other income and wealth records. If you are a dependent student, you will need to use your parent’s information.
3. Submit your FAFSA before the deadline
The Department of Education begins accepting FAFSA applications for the upcoming academic year from October 1 and the FAFSA deadline is June 30 annually. But keep in mind that assistance is given on a first-come, first-served basis. So, the sooner you file your application, the better.
Point: States and schools often have their own FAFSA deadlines, so it’s best to submit as soon as possible.
Federal vs Private Student Loans
Federal student loans have many benefits, including:
- Fixed interest rates that aren’t based on your credit score
- Extended adjournment and abstention
- Access to Student Loan Forgiveness Programs
- The ability to use IDR plans to make reimbursement manageable
IDR plans can be requested by eligible borrowers who need a lower monthly payment, and IDR payments are generally limited to 10% to 20% of your Discretionary Income. People with very low incomes may be eligible for $0 monthly payments.
Private student loans, on the other hand, do not follow the same rules as federal loans. Here are some differences between private loans:
- Interest rate: Rates can be fixed or variable. But the interest on private loans is not subsidized, so you are responsible for paying it to the school (although some private lenders offer a deferral).
- Subscription criteria: Lenders set their own loan eligibility requirements, which are generally more restrictive than federal loans.
- Credit check: Private student loans also require a credit check. If you don’t have established credit or have bad credit, you’ll likely need a creditworthy co-signer to qualify.
- No IDR option: Private loans are not eligible for federal IDR plans, and not all lenders offer flexible repayment terms. But some private lenders may offer other options.
- No student loan forgiveness: Private loans are not eligible for Ministry of Education loan forgiveness programs. This means that even if you meet all of the other conditions for loan cancellation, but you have a private loan, that private loan debt cannot be cancelled.
Although private student loans are sometimes necessary, you should explore other options for help first. Take advantage of all scholarships and grants, as these do not need to be repaid. Next, if you need student loans, prioritize federal government student loans before exploring private loan options.
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