Millions of Americans apply for a student loan, also known as a government loan, to continue their college studies. The government offers money to student loan borrowers to cover tuition, books, living expenses, and others.
What is a federal student loan?
Federal student loans are originated, guaranteed, and regulated by the Department of Education of the USA.
Federal student loans include:
Direct Subsidized loans
Direct Subsidized loans are provided to eligible undergraduate students according to their financial needs. Each university and school determines the amount of direct subsidized loan per student depending on their expenses. The maximum loan amount in this category depends on the student's year of study:
First Year: $5,500 for dependent students and $9,500 for independent students.
Second Year: $6,500 for dependent students and $10,500 for independent students.
Third Year and Beyond: $7,500 for dependents and $12,500 for independent students.
Such a type of direct loan does not include interest rates in monthly loan payments while the student is studying or when loans are deferred after graduation.
Same as the cost of attending each school varies, the amount of received money can also vary.
Main Benefits: fixed interest, partly or wholly paid by the state; no credit history required to qualify; forbearance and deferment options.
Direct Unsubsidized Loans
Direct Unsubsidized Loans are provided to eligible undergraduate, graduate, and professional students, regardless of financial need. Educational institutions determine the maximum loan amount based on the cost of attendance and other financial aid received by a student.
So, students are obliged to pay all the interest, and however, most students start making these payments only after graduation. If a borrower does not pay the interest while in school, the unpaid interest is added to his principal balance(capitalized) when he graduates or drops below half-time status.
The APR (the annual cost of a loan to a borrower) on such loans for undergraduate students is 3.73%, and for graduate and professional students, it is 5.28%.
Main Benefits: low interest; different options for paying; opportunity to consolidate the loans.
Direct PLUS loans
Direct PLUS loans are provided to graduate or professional students and parents of undergraduate dependent students.These loans are federal and provide the same low interest rates as Direct Loan Program loans. PLUS Loans also charge a fee per loan.
Main Benefits: fixed rates, flexible repayment options.
Direct Consolidation Loans
Direct Consolidation Loans allow to combine multiple federal education loans into one loan and avoid making several payments.
Main Benefits: one payment instead of several ones; does not hurt credit score; fixed rates.
The other option for covering education expenses is a private student loan provided by banks and private lenders such as credit unions and online lenders. Private student loans generally charge higher interest rates and fees than federal student loans, and also they offer less repayment flexibility. However, there are some cases when private student loans could be a viable alternative to federal student loans.
For example, this could happen if borrowers are graduate students or professionals with a high probability of getting employment and a high credit score.
How to apply for a federal student loan?
The first step in applying for a federal student loan is completing and submitting the FAFSA (Free Application for Federal Student aid) form. Depending on the evaluation, the university or school chosen by a student will send them a financial aid offer that could include the federal student loans available.
The university will also guide a student on accepting or rejecting all or a part of the loan amount. Before receiving the funds, the borrower has to:
Go through an entrance counseling, which is a tool that allows the university to make sure that all obligations to pay the loan and conditions are understood clearly.
Sign a promissory note accepting all the terms and conditions established by the federal government to grant the loan.
What are the main requirements for getting a federal student loan?
To receive federal financial aid, most borrowers should:
demonstrate financial need (for the majority of programs);
have a U.S. citizenship or be an eligible noncitizen;
be enrolled at least half time (to get federal financial aid through a Direct loan);
have a valid social security number;
have not defaulted on federal student loans before;
be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program;
maintain adequate academic progress
In addition to basic requirements, some special conditions can be provided for eligible non-U.S. citizens (permanent residents with "green cards" and other categories), students with criminal convictions, and students with intellectual disabilities.
To get a complete set of eligibility criteria and more details about the entire procedure for a particular program, you will need to contact your college's financial aid office.
Ways to get a federal student loan
The only way to apply for federal student aid is by completing the FAFSA form, and the application is free of charge.
Many states and colleges use the data on a student's FAFSA form to decide whether they are eligible for federal aid and school aid. Some private financial aid providers may also use the data FAFSA form to determine if students qualify.
When students complete their FAFSA form, they will get a Federal Student Aid ID, also known as the FSA ID, consisting of a username and password. The ID allows the following:
Log in to your Federal Student Aid account to view your loan, grant, and enrollment history;
Complete the FAFSA form;
Find out more about available repayment plans and compare them;
Apply for income-based repayment plans or loan forgiveness programs and complete other related loan documents.
How to repay a federal student loan debt
The best way to quickly repay a student debt is by paying more money than the minimum monthly payments. The more a student pays, the lower interest they owe, and thus it will be easier to make all student loan payments faster. Extra payments will help to pay off student debts in less time.
Here are some additional tips and repayment options:
Make extra payments: additional payments can be made at any time. Ensure that the extra payment is applied to the current balance and that the next month's deadline is kept.
Make biweekly payments: Instead of making full monthly payments, pay half of a payment every two weeks. In the long run, you can make an extra payment every year.
Sign up for automatic repayment plans: it is possible to allow a loan servicer to deduct payments directly from the bank account. In this case, the loan servicer can offer a quarter-point rate discount, called 'autopay deduction.' Be sure to find out all terms of automatic repayment plans.
Stick to the standard repayment plan: Providers of government loans automatically put federal student loans on a ten-year standard repayment plan. If it is inconvenient to make significant extra payments, the fastest way to repay the debt is by following such a payment plan.
Refinance the debt: Those with a steady income and good credit can be considered good candidates for debt refinancing. They can choose a new loan term shorter than the previous one and get a lower interest rate.
Pros and cons of federal student loans
If there is a need to get a higher education, federal student loans represent the best option for most borrowers. It's better to examine federal loan opportunities before taking out private loans.
Main federal student loans benefits
Fixed interest rate
That means that student loan payments will stay the same during the loan term.
Temporary reduction or delay of payment
Temporary reduction or delay of payment can be offered to borrowers facing financial hardship or trouble paying their loans back.
Income-Based Repayment (IBR)
Income-based repayment (IBR) is a federal student loan repayment program adjusting the amount of a loan each month based on the income and family size.
The government pays interest rate instead of a borrower
For Direct subsidized loans, the US government pays the interest on a loan while student borrowers are in school.
Public Service Loan Forgiveness program
It is an option to satisfy a debt without repaying it. To qualify for a loan forgiveness program, the applicant should:
work full-time for a public agency or nonprofit organization
repay loans on an income-driven repayment plan,
have Direct Loans (or have consolidated other federal student loans to qualify),
make 120 qualifying payments.
Drawbacks for federal student loans
Graduate students can not take out subsidized federal direct loans
No opportunity to declare bankruptcy
Borrowers who default or become otherwise unable to repay their federal direct loans are not able to declare bankruptcy.
Dependents can't borrow as much as independents
Undergraduates who apply for direct unsubsidized loans are claimed as dependents, and they cannot borrow nearly as much as independents.
Legal regulation of federal student loans in the USA
Many states have created resources to protect loan borrowers from illegal activities, according to the National Conference of State Legislatures, or NCSL.
While most student loans originated and are overseen by the federal government, many states still provide information and assistance to borrowers or supervise federal student loan servicers.
Remember that federal student loans are provided only via the federal student aid program, which is administered by the Department of Education of the USA.
If there are any complaints about federal student aid, it is advised to contact the Federal Student Aid Ombudsman Group.
The FSA ombudsman group resolves discrepancies with balances and payments of student loans, clarifies requirements for a forbearance period, loan postponement, cancellation, or discharge, and explains loan interests and other charges.
However, the Ombudsman group does not accept complaints about private student loans, accept loan payments or process deferment, forbearance, discharge requests, or replace formal channels of problem resolution in federal court.
The real cost of a federal student loan
Before taking out federal student loans, it is necessary to calculate their total amount. Although it is easy to determine the principal — the education cost, calculating the total interest rate may be more challenging.
The real cost of federal loans consists of principal, origination fees, and interest rates. Also, extra fees such as application fees, late fees, or returned payment fees can be added.
Origination fees
Unsubsidized and subsidized loans imply origination fees of around 1% of the loan amount. Direct PLUS loans have about 4% of the loan amount origination fees.
Interest rates
Interest rates for federal student loans depend on their type:
For Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduate students, it is 3.73%
For Direct Unsubsidized Loans for graduate students and professionals, it is 5.28%
For Direct PLUS Loans, it is 6.28%
We recommend examining the real cost of a loan before receiving any financial assistance. Getting a higher education may be more expensive than previously revealed, and failure to make unaffordable payments can hurt the borrower's credit score.
In contrast, a careful approach can help maintain a positive credit score or improve it further.
