Federal student loans are designed to help make college more affordable for both students and their parents. They do this by offering students many more benefits than private student loans. Where private student loans are made by banks and financial institutions, federal student loans are made by the Department of Education. After the passage of the Health Care and Education Reconciliation Act of 2010, the Federal Direct Loan Program became the only loan program backed exclusively by the US government.
As of 2015, the total Federal Student Aid loan portfolio amounted to over $1 trillion in direct federal student loans.
Here are some of the benefits of federal student loans:
- Lower fixed interest rates
- Income-sensitive repayment plans
- Deferment periods
- Forgiveness options
- No credit checks required (and loans are NOT based on credit worthiness)
How Federal Student Loans Work
Federal student loans are made directly from the Department of Education to the borrower. These loans will cover full academic years and be disbursed in two payments, one each semester. These direct loans can also be subsidized or unsubsidized depending on the program.
With federal student loans, the school determines the loan type and how much you can borrow. The loans may only be used to cover tuition and direct cost of living expenses. All payments must be made either directly to the school or the Department of Education (depending on the program). There are limits on how much you can borrow based on whether the loan is subsidized or unsubsidized and whether it’s for undergraduate or graduate study.
After you graduate or drop down below half-time enrollment, you will have a 6-month grace period before you are required to start paying back your loans. During that grace period, you will receive all repayment information from your loan servicer.
All subsidized and unsubsidized federal loans made before October 1st, 2016 will also be subject to a loan fee of 1.068%, and 1.069% afterward.
Interest Rates: Federal vs. Private Student Loans
Federal student loans have the benefit of a fixed interest rate and usually, have lower rates than private student loans. Private student loans can be either fixed or variable rate. Variable rate loans are often tied directly to the Prime or LIBOR rate and adjust accordingly.
Below is a chart showing interest rates on federal student loans for 2015 and 2016:
(Chart: Access Group)
|Loan Type||2016-17 Interest Rate||2015-16 Interest Rate|
|Direct Subsidized Loans (Undergraduate)||0.0376||0.0429|
|Direct Unsubsidized Loans (Undergraduate)||0.0376||0.0429|
|Direct Unsubsidized Loans (Graduate)||0.0531||0.0584|
|Direct PLUS Loans (Graduate and Parents)||0.0631||0.0684|
The interest rates for private student loans can vary widely depending on the lender, term length, whether the loan is fixed or variable rate, and the credit history and debt-to-income ratio of the borrower or cosigner. Current rates can vary from 2.5% up to 18%!
There are several different types of federal student loans available that we will discuss below.
Federal Perkins Loan
A Federal Perkins Loan can be made to both undergraduate and graduate students. The funds are typically available at the college with an interest rate of 5%. Once the student graduates, the payments would be due to the university that that loan originated at. Undergraduate students qualify for up to $5,500 annually (or a total of $27,500), and graduate student up to $8,000 annually (or a total of $60,000). Other than interest, there are no additional fees with a Perkins Loan.
Direct Subsidized Loan
A direct subsidized loan is available to students who can prove a financial need and will also be attending college at least half-time. The interest rate on a direct subsidized loan is 3.76% for loans made between July 1st, 2016 and June 30th, 2017. The student is not liable for interest on the loan while attending school or in any deferment periods. The lender of a direct subsidized loan is the school itself, to which all loan payments would be made. A direct subsidized loan can be between $3,500 and $5,500. All interest on the loan is paid by the Department of Education while you’re in school (at least half-time), during your grace period, and during any period of deferment.
Direct Unsubsidized Loan
A direct unsubsidized loan is available to undergraduates and graduate students who are attending college at least on half-time. There is no requirement to demonstrate financial need. The interest rate is set at 3.76% for undergraduate loans made between July 1st, 2016 and June 30th, 2017 and 5.31% for graduates during that period. The student is responsible for interest payments during all periods (unlike the direct subsidized loan). The lender is the school itself, to which all loan payments would be made. A direct unsubsidized loan can be between $5,500 and $20,000 minus any subsidized amount.
Direct PLUS Loan for Parents
The Direct PLUS Loan for Parents is available to parents who have dependent students who are enrolled at least half-time. The interest rate is 6.31% for loans made between July 1st, 2016 and July 1st, 2017 and the parents must not have a negative credit history. The parent would be responsible for interest on the loan from the first month. The lender is the Department of Education, to which all loan payments would be made. The Direct PLUS Loan for Parents has a maximum lending size equal to the cost of attending college minus and other financial aid the student has received. There is also a loan fee of 4.272% for loans made before October 1st, 2016 and 4.276% afterward.
Direct PLUS Loan for Graduates
The Direct PLUS Loan for Graduates is available for graduate students or professional degree students who are in college at least half-time. The student’s credit score will be checked and must not have a negative credit history. The student is responsible for interest on the Loan during all periods. The interest rate on the loan is 6.31% for loans made between July 1st, 2016 and July 1st, 2017. The lender for Direct PLUS Loans for Graduates is the Department of Education, to which all loan payments would be made. The maximum lending size is the cost of attendance minus any other financial aid the student has received. There is also a loan fee of 4.272% for loans made before October 1st, 2016 and 4.276% afterward.
How to Apply for a Federal Student Loan:
Applying for federal student loans can seem like a daunting process, but it’s actually very simple and can be done mostly online. To make it easier, we’ve outlined the step-by-step application process below:
- Start by completing an FAFSA Form (or Renewal FAFSA for returning students). This form is required for both current and prospective US college students (both undergraduate and graduate) to determine their eligibility for financial aid. It can be completed online and submitted directly to the Department of Education for review.
- The student will begin receiving financial aid award letters anywhere from 3 days to 6 weeks after submitting their FAFSA. Each letter will outline all of the relevant information regarding the financial aid package being offered.
- Upon receiving these letters, the student will contact their chosen school’s financial aid office to accept the student loan package being offered.
- Once the student loan package is accepted, the student will simply review and sign any necessary paperwork associated with the loans, such as a Master Promissory Note.
4 Approved Federal Loan Servicers:
FedLoan Servicing (also known as PHEAA): This company was established to directly support the US Department of Education in the servicing of federal student loans. Contact them at 1-800-699-2908.
Great Lakes: This non-profit company is dedicated to helping college students by working with both the US Department of Education and private lenders to make every step in the borrowing and repayment process easier. Contact them at 1-800-236-4300.
Navient: One of the select group of companies chosen to service student and parent federal loans by the US Department of Education. Their loan servicing department helps customers through both financial literacy tools and broad-based servicing. Contact them at 1-888-272-5543.
Nelnet: This company works with the US Department of Education in assisting borrowers through every stage of their loan’s life cycle: during school, during their grace period, and throughout repayment. Contact them at 1-888-486-4722.