Federal Student Loans: Complete Guide [Review]

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Federal Student Loans: Complete Guide [Review]

According to the National Center for Education Statistics, for the academic year 2016 to 2017, 85% of all first-time, full-time undergraduate students in the United States took advantage of some form of financial aid, including both private and federal student loans.

So if you want to complete higher education, chances are very high you are going to be in need as well. To assist you, this article will focus on different types of federal student loans and how to apply for them.

The whole process of preparing for college can be more overwhelming than college itself, in some cases. Getting hit with sticker shock when you find out just how much getting your undergraduate or graduate degree is going to cost is just the beginning.

Numbers published by CollegeBoard.org show the following for the 2018-19 school year.

Tuition and Fees and Room
and Board 2018 - 2019
Public Two-Year In-District
Public Four-Year In-State Public Four-Year Out-of-State Private Nonprofit Four-Year
$12,320.00 $21,370.00 $37,430.00 $48,510.00

The question is: How to afford these annual loan payments?

Many will turn to federal aid to cover their education expenses. Let’s look at student loan options.

Federal Student Loans: The Different Types

The federal student loan landscape has changed over the years. Today only one category of these loans continues to lend new money. This is the William D. Ford Federal Direct Loan Program.

However, depending on your circumstances—your income, whether you are an undergraduate or graduate student and so forth—there are different William D. Ford loan amounts and types to apply for.

Here is a list of federal student loans still available:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans (also commonly referred to as a Parent PLUS Loan)
  • Direct Consolidation Loans

Note there are other types of federal student loans still in circulation but no longer available for new applicants, such as the Federal Perkins Loan.

The William D. Ford Federal Direct Loan Program

The William D. Ford Federal Direct Loan Program is currently the largest federally assisted student loan program in the United States–sometimes also called Stafford Loans. The program includes:

Direct Subsidized Loans

This type of loan is only available to undergraduate students who can prove financial need.  And unlike Unsubsidized Student Loans, students aren’t charged any interest while in school; they get grace period. The federal government picks up the tab for that.

Financial need or “demonstrated need” for financial aid is calculated by determining what your school’s Cost of Attendance (COA) is going to be each year. From that, you deduct your Expected Family Contribution (EFC). The answer to that equation is how much need-based financial help you are eligible for.

Note that personal and family income (for a dependent undergraduate) plays a large role here as well.

Direct Unsubsidized Loans

Unlike Subsidized Loans, these loans are not only available to undergraduates.  Graduate and professional degree students can take advantage of unsubsidized loans as well.

However, like unsubsidized loans, they do have a borrowing loan limit per year.

The most significant difference between unsubsidized and subsidized loans is that with the former, loan borrowers do not get the financial relief of the U.S. Department of Education paying the interest while in school. So that adds a noteworthy amount of money to what you ultimately need to pay back.

Direct PLUS Loans

Many people also refer to this loan as the Parent PLUS loan since this federal student loan is available to students and their parents.

Eligibility requirements are:

  • Parents must be paying for the education of dependent undergraduate students
  • Graduate or professional degree students must be paying for their own education

If taking out this loan, you can request the full amount your school charges for attendance, unlike the above Direct Loans that are capped with a borrowing limit.

Direct Consolidation Loans

As the name suggests, a Direct Consolidation Loan allows you to consolidate your federal loans into one loan, leaving you with a single monthly payment.

Here is a list of all federal loans that can be consolidated:

  • Auxiliary Loans to Assist Students
  • Direct PLUS Loans
  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Federal Insured Student Loans
  • Federal Perkins Loans
  • FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
  • Guaranteed Student Loans
  • Health Education Assistance Loans
  • Health Professions Student Loans
  • Loans for Disadvantaged Students
  • National Defense Student Loans
  • National Direct Student Loans
  • Nurse Faculty Loans
  • Nursing Student Loans
  • Parent Loans for Undergraduate Students
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Subsidized Federal Stafford Loans
  • Supplemental Loans for Students
  • Unsubsidized and Subsidized Federal Stafford Loans

Also, anyone eligible for Public  Loan Forgiveness (PSLF), can consolidate them with a direct consolidation loan to qualify.

The Federal Perkins Loan Program

As of September 30, 2017, the Federal Perkins Loan is no longer offered, but there are still many of these loans being managed or serviced. CornerStone Education Loan Services Program is the loan servicer for most of these loans. However, in some cases, student loan payments are also made directly to the school.

This loan was available to undergraduate, graduate, or professional students enrolled half-time or full-time who were in “exceptional” financial need.

However, not all schools were part of this program, and the amount that was disbursed or loaned depended on how much money the school had for the program.

This differed greatly from other federal programs where funds were disbursed by the government.

One of the benefits of the Perkins Loan was low-interest rates.

Speaking of interest rates…

Federal Loan Interest Rates

If you’ve ever taken out a private loan from private lenders for something—perhaps a car loan—you know that interest rates are determined by market conditions. A few times a year federal economists get together and decide if interest rates are going up, down, or staying the same.

Federal student loans are different in that it’s the United States Congress that determines what the interest rate will be for this type of loan. However, this isn’t done in a vacuum, as what’s happening in the financial markets is still a factor in that decision.

Once a loan is agreed upon and your lender has disbursed funds, your interest rate is locked, but rates fluctuate from year to year. So don’t be shocked if things change. The only way for your interest rate to be changed once the loan is disbursed is if you are refinancing your student loan.

Remember how I said rates could change from year to year? Here’s some happy news: interest rates decreased this year for the first time in a while.

Here’s a comparison:

Loans disbursed for the 2018 to 2019 school year:

  • Direct subsidized: 5.05%
  • Direct unsubsidized (undergraduate degree): 5.05%
  • Direct unsubsidized (graduate or professional degree): 6.60%
  • Direct PLUS: 7.60%

Loans disbursed for the 2019 to 2020 school year:

  • Direct subsidized: 4.53%
  • Direct unsubsidized (undergraduate degree): 4.53%
  • Direct unsubsidized (graduate or professional degree): 6.08%
  • Direct PLUS: 7.08%

How to Apply for Federal Student Loans: Eligibility and the FAFSA

When it comes to student loans one of the first things high school grads should do is complete the Free Application for Federal Student Aid (FAFSA). And frankly, all students should fill this out, whether looking for a federal loan or not.

The FAFSA form needs to be completed yearly for you to maintain your eligibility even if none of your circumstances have changed. Deadlines to get your form in vary by state and school so try to get it done as soon as possible.

In some states is a requirement for high school grads to complete this form, so there is a chance you may have done so already.

Here is the status of state requirements for the completion of the FAFSA.

  • Louisiana (already enforced)
  • Illinois (enforcement begins in 2020)
  • Texas (enforcement begins in 2021)
  • Michigan (enforcement under consideration)
  • Indiana (enforcement under consideration)
  • California (enforcement under consideration)
  • District of Columbia (enforcement under consideration)

Both schools and states use the FAFSA form to determine what, if any, aid you are eligible to receive. And this includes federal scholarships, grants, and loans. So it only makes sense to complete this form, since you might be leaving money on the table otherwise.

Without this form, you cannot get a federal loan of any kind.

The best thing about applying for federal student loans for graduate school, undergraduate or professional is:

  • There is no need for a co-signer or guarantor
  • As for your credit check, you can qualify for a federal student loan even if you have a bad credit history or credit score.

Federal Student Loans’ Benefits

When thinking about why or how to apply for federal student loans, consider some of their benefits.

They have some distinct advantages over private student loans since they are eligible for:

  • Income-Driven Repayment Plans
  • Public Service Loan Forgiveness
  • Deferment of Forbearance

Private loans offer none of the above options.

Here’s a brief explanation of each of the above.

Income-Driven Repayment Plans

These repayment options make student loan repayment easier as your payment is based on a percentage of your family’s discretionary income. So if you are currently in a low paying job, or you can’t work full-time to maintain a good work-study balance, or you get married and have a child, you may be eligible for lower payments. However, lower payments do not mean lower interest rates. So, the downside is you will pay more interest over time if you have lower payments.

Public Service Loan Forgiveness

If you work in public service, there are programs that allow your student loan debt to be forgiven.

To be eligible for this you need to have been in your position for a minimum of 10 years and have been making all qualifying payments during that time.

Deferment of Forbearance

If you end up in a situation where you can’t make your payments for a while, this program allows you to pause payments without being penalized.

Each has different eligibility requirements. Deferment can stretch to three years, but forbearance will typically only last for a year.

Federal Student Loans for Graduate School

Clearly, there is a lot to think about if you are considering federal student loans for graduate school—or undergraduate school.

Do yourself a favor and get the FAFSA filled out. Federal loans come with serious benefits that aren’t offered with private loans, and this means that you could be able to better manage your debt in the years to come.