Whether you’re about to apply to college and looking for ways to afford it, or you’ve already graduated and getting started on your path to repayment, how well you understand federal student loans can directly impact how expensive your college education will ultimately be. Understand them well and you may save thousands of dollars over the lives of your loans; understand them poorly, and you may find yourself even further in debt.
Below, we take a look at federal student loans and answer all of the questions you’ve got: What is a federal student loan? What are the different types of federal student loans? How do they differ from private student loans? How do you apply for them? And more.
What is a federal student loan?
A federal student loan is a loan offered to college students directly from the federal government. These federally-backed student loans are made available through the Federal Guaranteed Student Loan program, which was created through the Higher Education Act of 1965.
Federal student loans can be used to cover tuition, fees, room and board, and other expenses related to pursuing higher education. They come in a number of varieties, and are available to undergraduates, graduate, and professional students, as well as their parents (in some cases).
Types of Federal Student Loans
The most common types of federal student loans include:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct Parent PLUS Loans
- Direct Graduate PLUS Loans
- Direct Consolidation Loans
- Federal Stafford Loans
- Federal Perkins Loans
Each of these types of federal student loans has its own eligibility requirements, borrowing limits, interest rates, and other factors, as established by Congress.
Federal Student Loans vs. Private Student Loans
Student loans can be issued to a borrower either by the federal government or by a private lender. There are a number of important differences between federal and private student loans that you should be aware of, as these differences can severely impact your ability to borrow and repay your loans.
Some of the most important differences to keep in mind are:
- The Lender: With federal student loans, your lender is the U.S. Department of Education, and your loan will be managed by your federal loan servicer; with private student loans, your lender is a private corporation.
- The Interest Rate: With federal student loans, your interest rate is set by Congress; with private student loans, lenders can charge whatever interest rate they wish.
- Borrowing Limits: Federal and private student loans have different maximum borrowing limits.
- Availability of Subsidies: Some federal student loans carry subsidies that will save you hundreds or even thousands of dollars in interest over the life of the loan. Private loans do not typically offer subsidies.
- Eligibility: Eligibility for federal student loans is set by Congress. Private lenders are able to choose whatever requirements they wish.
- Repayment Options: While private lenders may offer a handful of repayment options, federal student loans typically come with many more options, including income-based repayment.
- Forgiveness: Under certain circumstances, certain types of federal student loans may be forgiven outright.
- Ability to Postpone Payments: Federal student loans come with a sixth month grace period after you leave school, during which time you are not required to make payments. You can also choose to place your loans in deferment or forbearance during periods of economic hardship. Private student loans typically do not offer such generous benefits.
- Consolidation Options: You can consolidate all of your federal student loans into a single new federal loan if you wish to do so. To consolidate private student loans, you will need to refinance your debt with a private lender.
- Prepayment Penalties: Some private lenders may charge you a penalty for repaying your student loans early. Federal student loans will never charge such penalties.
Pros and Cons of Federal Student Loans
- Low interest rates, set by Congress
- Low fees, set by Congress
- No required credit score to qualify
- No cosigner required to borrow
- Availability of subsidies for needy borrowers
- Options to pause payments
- Flexible repayment options
- Availability of forgiveness options
- Borrowing limits may not cover total educational costs
- Borrowing limits are lower for dependent students
- Interest rates are higher for parent and graduate/professional borrowers
- No federal refinancing program
- No bankruptcy option
How to Apply for a Federal Student Loan
In order to apply for federal student loans, all you need to do is submit your Free Application for Federal Student Aid (FAFSA). Upon doing so, you will automatically apply for all forms of available student aid, including federal and state aid—and that includes federal student loans.
You will be notified of any aid you are eligible for in your financial aid package, typically sent to you by your school, at which point you can accept or reject aid as you wish.
You can submit a FAFSA application here.
Federal Student Loan Eligibility
In order to qualify for federal financial aid, including student loans, you must meet certain basic eligibility requirements. To qualify, you must:
- Be a U.S. Citizen (or eligible non-citizen)
- If male, be registered with the Selective Service
- Be enrolled in an eligible degree- or certificate-awarding program
- Be enrolled under at least half-time status
- Maintain adequate grades and academic progress while enrolled
- And a few other requirements
Additionally, certain federal student loans (such as Direct Subsidized Loans) are only made available to students with financial need, as demonstrated in their FAFSA application.
Federal Student Loan Interest Rates
The interest rate on federal student loans are set by Congress, and typically varies from year to year based on a number of factors including the general condition of the market.
That being said, the interest rate for different types of federal student loans will vary depending on the type of loan you borrow. Direct Loans borrowed by undergraduates will typically carry lower interest rates than those borrowed by graduate or professional students, which in turn will typically carry lower interest rates than Direct PLUS Loans borrowed by graduate students and parents.
Learn more about interest rates on federal student loans here.
Federal Student Loan Fees
In addition to interest charges, borrowers will be required to pay a loan origination fee for most student loans. This is a percentage of the total loan amount. Loan origination fees vary by year and type of loan borrowed, typically raging between 1% and 5%.
Federal Student Loan Servicers
When you borrow a federal student loan, your lender is the U.S. Department of Education. But your individual loan will ultimately be managed by one of 11 federal student loan servicers. This servicer will collect your monthly payments, help you understand your repayment options, guide you through forgiveness, and more.
Currently, the list of federal servicers includes:
- FedLoan Servicing (PHEAA)
- Granite State (GSMR)
- Great Lakes Educational Loan Services
- Edfinancial (HESC)
- Navient (formerly Sallie Mae)
- OSLA Servicing
- Default Resolution Group (Maximus Federal Services)
On June 24, the U.S. Department of Education announced that it had signed contracts with five companies who would act as student loan servicers after the department’s current contracts expire. This list includes some familiar names, such as Edfinancial, MOHELA, and Maximus Federal Services. But it also includes two new companies: F.H. Cann & Associates and Texas Guaranteed Student Loan Corporation (Trellis Company).
These contracts are scheduled to go into effect between December 14, 2020 and December 14, 2021, but are very likely to see legal challenges from current servicers, including Nelnet/Great Lakes. We will continue to update this information as more becomes available.
Federal Student Loan Repayment Plans
One of the benefits of federal student loans is that they typically come with many more options for repayment than private loans. While the exact repayment plans available to you will depend on the type of loan you have borrowed, the list includes:
- Standard Repayment Plan
- Graduated Repayment Plan
- Extended Repayment Plan
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay As You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
- Income-Sensitive Repayment Plan
Your student loan servicer can help you understand the differences between each of these repayment plans, including whether or not you qualify. Enrolling in different repayment plans may cause the total amount of debt you repay to increase, sometimes substantially. This is because different repayment plans may include a longer payback period, or require substantially smaller monthly payments which lower your principal more slowly than others
Should you borrow a federal student loan?
Ultimately, the answer to this question is a personal one that you will need to make for yourself. That being said, if you need to borrow money to go to college, federal student loans will likely be the safer, cheaper option compared to private student loans, due to their lower interest rates, lower fees, more flexible repayment options, and minimal eligibility requirements.
Generally speaking, it is wise to exhaust your federal options before turning to private loans.
Alternatives to Federal Student Loans
If you do not qualify for federal student loans, or the federal loans you do qualify for won’t cover the total cost of your education, you do have other options available. Private student loans, while typically more expensive and less flexible than federal loans, can help you cover any gaps.
Additionally, if you have borrowed federal student loans and wish to take advantage of lower interest rates, refinancing to a private loan may help you achieve that goal, though it can come with risks that you should consider. Therefore, it’s important to weigh the pros and cons of refinancing before you make a decision.
Of course, all sources of free funding, such as grants, scholarships, and work study should be accepted first before any student loans are borrowed.