While many students get grants and scholarships to help pay for school, this free money does not always cover all college expenses. This is where federal student loans can cover the remaining costs of higher education.
Federal loans have helped millions of students go to college who could not afford it otherwise.
If you’re not familiar with loans or need a recap, here’s a quick overview from our free college success course:
Now let's zero in on federal loans.
The federal direct student loan program has been around for several decades. Over the years, the program has changed but remains the best option for borrowing money for college.
Federal direct student loans are loans borrowed from the federal government, with the lender being the U.S. Department of Education. Since these loans come from the federal government and not from a financial institution like a bank or credit union, they provide the best terms and interest rates.
The federal government issues student loans based on information provided on the FAFSA (Free Application for Federal Student Aid). This application looks at the student’s cost of attendance (COA) for their chosen school compared to their expected family contribution (EFC) toward paying for college.
Once the FAFSA is complete, the chosen school contacts the student to tell them which federal direct loan(s) they qualify for and for how much.
The amount of money you can borrow in federal student loans depends on:
Which loan you qualify for
The school you plan on attending
Your ability to pay for college
The 4 different types of federal student loans are:
1. Federal Direct Subsidized Loans
These loans are issued to undergraduate students who demonstrate financial need. Since the federal government subsidizes the loans, they do not accumulate interest while you are in school and no payment is required.
Federally subsidized loans provide students with an interest-free grace period of 6 months after graduation. A grace period is time granted on a loan in which the borrower does not have to pay any money toward the loan. The idea behind this is that students can graduate and find a good job before starting their loan repayment.
2. Federal Direct Unsubsidized Loans
Unsubsidized loans are issued to undergraduate and graduate students to help cover college expenses. These loans are unsubsidized, meaning that they accumulate interest as soon as the loan is taken out.
The 6-month grace period after graduation still applies to student loan repayment on unsubsidized loans, but interest is accruing the whole time. A savvy student would make small payments on the loan while in school just to pay for the accumulating interest. which saves them money in the long run.
3. Federal Direct PLUS Loans and Parent PLUS Loans
PLUS loans are for undergraduate, graduate, and professional students who need additional funds on top of their other federal loans to pay for college expenses. These loans are unsubsidized and start to accumulate interest right away.
Parent PLUS loans are similar, but the government issues the loan to the parents of the student attending school. The parents are responsible for repaying the loan as well.
PLUS loans do not have a grace period. But if a graduate or professional student takes out the loan, there is a 6-month deferment after graduation before repayment starts. Deferments and grace periods are both periods of time when the borrower doesn’t pay money on the loan. But with deferments you typically need to apply and make an additional agreement with your lender.
4. Federal Direct Consolidation Loans
Consolidation loans are loans that combine a borrower’s other federal loans.
The federal government allows any person with several federal loans to combine their loans into one consolidation loan to maintain their lower interest rate and only have one payment.
The interest rate on a consolidation loan is based on the average of existing loan interest rates that are currently being paid.
Each federal direct loan program qualifies for federal initiatives such as forbearance, loan forgiveness, and repayment plans.
Federal Student Loan Limits
By knowing the limits of each type of federal student loan, you can plan which types of loans you need to cover all of your college costs. Interest rates will help you calculate the amount of money you will need to pay back.
TYPE OF LOAN
INTEREST UNTIL 7/23
Direct Subsidized Loans
Undergraduate students with financial need
$5,500 to $12,500 per year depending on need
4.99% starting 6 months after graduating
Direct Unsubsidized Loans
Any grad or undergraduate student
Student can choose to borrow up to $20,500
6.54% starting when the loan is taken out
Direct PLUS Loans or Parent PLUS Loans
Grad students or parents of students
Remainder of college costs after other loans
7.54% starting when the loan is taken out
What You Need To Take Out a Federal Student Loan
The federal government wants to make sure that anyone can take out and use student loans to pay for college. This is why they have streamlined the process of accessing student loans through the FAFSA online form.
Any student who is considering going to college should fill out a FAFSA before making any other financial decisions for college or professional school. The key is to complete the FAFSA correctly.
7 Steps for Taking Out a Federal Student Loan
1. Gather your income information
To apply for a federal student loan, you will need to establish how much money you currently have to help pay for school. It doesn’t matter if you’re right out of high school or going back to school in your 30s, you have to report your assets.
If you are a dependent student, you will also need income information from your parents. Gather tax documents from the previous year, any W-2s from work, and your current financial account balances.
The FAFSA Data Retrieval Tool (DRT) can automatically put your tax information into the FAFSA form, but it is best to have your information in hand just in case.
2. Set up your Federal Student Aid (FSA) ID
You will need an FSA ID to fill out a FAFSA. This unique ID number will be used to fill out the FAFSA each year. When you fill out a FAFSA for the first time, the system will prompt you to create an FSA ID first. Write this down in a secure place.
Each person working on the FAFSA will need their own FSA ID. So, if you are a parent, you will need an FSA ID separate from your student’s FSA ID.
3. Fill out the FAFSA completely
It is important to make sure you fill out the application completely and correctly. This will ensure that you get the best federal loans possible and find out if you qualify for federal grants or work-study programs.
You can save your information on the FAFSA and come back to it, so take your time to do it right.
4. Add your prospective school(s)
The FAFSA allows you to input up to 10 schools that you have applied to. Since the type and amount of federal loan you qualify for partly depends on the cost of attendance, the school’s cost is an important part.
When one school costs more, the amount of federal loans you qualify for at that school will likely be higher. So, put in any schools that you are seriously considering.
5. Review your Student Aid Report (SAR)
Within a week of filling out your FAFSA, you will receive a Student Aid Report. This report summarizes all the information you put into the FAFSA. Go through this document thoroughly to ensure everything is accurate.
The SAR will prompt you to make changes to your FAFSA if needed. Once you confirm the SAR is correct, the federal government will decide on your qualifying federal loans for each of the schools listed.
6. Accept the type and amount of financial aid
When the college of your choice accepts you, you will receive an email from the school’s financial aid office with the financial aid offer.
Your financial aid award letter will list any federal grants or work-study programs the government has awarded you. The letter will also tell you the type of loan and the loan amount you qualify for.
Through the school’s website, you can choose to accept all of your loan offer or a partial amount. You will then sign your master promissory note, which is your agreement that you will pay the loan back according to the repayment terms.
Work with your financial aid office if you have any questions. Remember, they are there to ensure you can go to school, so use their service.
7. Fill out a FAFSA each year
Since a student’s financial situation tends to change from year to year, you will have to fill out a FAFSA each year. You can always accept less money or ask for more as your needs change.
It is best to fill out the FAFSA early so that you can plan for your financial needs. The FAFSA opens on October 1st each year for the following academic year. For example, if you plan to attend school in the 2023-2024 academic year, you could start filling out your FAFSA on October 1, 2022.
Federal Student Loans vs. Private Student Loans
Private student loans differ from federal student loans in a few ways. While they are both student loan options, private lenders are financial institutions like a bank or a credit union instead of the federal government.
Think of private loans in the same way you think of getting a loan for a car or a house. The difference is that with a private student loan, there is no tangible thing to use as collateral. This makes the interest rates much higher.
Due to higher interest rates than federal loans, only about 13% of student loan borrowers take out private loans. Usually, private loans are used to cover additional education expenses once all federal loans are used.
Another key difference with private loans is applying for them. When seeking a private loan, the financial institution will run a credit check to see if your credit score is high enough for the loan.
For students who have insufficient credit or no credit history, they need a cosigner with good credit for the loan application. Most commonly, the cosigner is a parent or guardian.
Frequently Asked Questions About Federal Student Loans
Can you take out federal student loans anytime?
Federal student loans can be taken out by any student who is going to school at least half-time. While it is best to take out student loans before the school year begins, students can access student loans during the semester if they find they need them. Keep these dates in mind.
2022 - 2023
October 1, 2021
June 30, 2023
2023 - 2024
October 1, 2022
June 30, 2024
2024 - 2025
October 1, 2023
June 30, 2025
How much can you take out in federal student loans?
Direct subsidized federal student loans have an annual limit of $12,500 but depend on the amount of need reported on the FAFSA. Students can borrow up to $20,500 per year in unsubsidized loans and use PLUS loans to cover any remaining college costs.
What happens after you submit the FAFSA?
Once the FAFSA is submitted, you will receive a Student Aid Report (SAR) that shows all the information you put on the FAFSA. Check that this information is accurate and approve the report.
Your school will contact you with the details of your federal financial aid, including federal grants awarded and student loans you qualify for. You can choose to accept as much as you wish through your school’s financial aid office.
How can you reduce the amount of loans you take out?
You need to pay back student loans with interest in the future.
Consider finding other ways to manage your college costs while you are going to school. Having a college job is a great way to pay for your living expenses.
By not taking out loans to pay for room and board, you will drastically reduce the amount of money you need to pay back.
The federal government also offers several loan repayment options to help graduates budget to pay off the total loan amount in manageable monthly payments.
By making a college budget, you can have a firm grasp of what your expenses are and not be surprised by additional bills. In fact, by keeping track of your finances in college, you will be learning valuable life skills.
Should You Take Out Federal Student Loans?
Federal student loans should be the first type of loans you take out to help pay for school. Even though loans are a future burden to pay off, they are a means to get you a college degree that can improve your career prospects.
There are thousands of dollars out there that you could qualify for to help pay for school. Taking the time to look into scholarships and grants to pay for school is a great way to reduce your overall loan debt and save you money.
The best approach to paying for college is to keep track of your expenses, have a part-time job, and look for financial opportunities to help pay for it. This way your loan payments will be much more manageable in the future. Remember that federal loans are there to help you when you need them.
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