Federal Student Loans: What They Are and How They Work

Ever wondered, how you can manage the rising cost of college education? Don't worry, a good option is federal student loans. In this blog post, you'll get a clear picture of how federal student loans can help you pay for school and other student loan options for your college education.

Key takeaways

• Federal loans are part of the William D. Ford Federal Direct Loan Program, offering four types of loans based on financial need and educational status
• Interest rates for these loans are set annually and stay fixed for the duration of the loan
• Borrowing limits vary based on the student's dependency status and educational level

Understanding federal student loans

Federal student loans, part of many people’s college financial plan, offer ways to help you pay for school when personal finances and scholarships just don't cover it. Provided by the U.S. Department of Education, these loans are key pillars of higher education for millions of students.

What are the types of federal student loans?

The William D. Ford Federal Direct Loan Program is a helpful resource that offers four main types of loans to students with different financial needs.

1. Direct subsidized loans

Targeted toward undergraduates in financial need, the U.S. Department of Education bears the interest of these loans while the student is studying at least half-time, during the grace period after graduation, and during any deferment periods.

2. Direct unsubsidized loans

Available for undergraduates, graduates, and students pursuing a professional degree, these loans come without a financial need requirement. However, interest does add up while you’re in school, the grace period, and deferral.

3. Direct PLUS loans

Here we have Grad PLUS loans for professional and graduate students, and Parent PLUS loans for parents of undergraduate students. These loans allow borrowing up to the full cost of attendance minus any other financial aid.

4. Direct consolidation loans

For people handling multiple federal student loans, you've got Direct Consolidation Loans, an option to merge all your loans into one package with a fixed interest rate and a single monthly payment.

How do federal student loan interest rates work?

Congress sets the interest rates for these federal student loans annually based on the 10-year Treasury note yield. For the academic year 2022-23, the rates stand as:

• Direct Subsidized Loan: 5.50%
• Direct Unsubsidized Loan: 5.50% (for undergraduates) or 7.05% (for graduates)
• Direct PLUS Loan: 8.05%

What are the borrowing limits for federal student loans?

The borrowing limit for federal student loans depends on whether you're a supported student (dependent) or self-supported (independent), and your study year.

Note that there’s a special exemption for dependent undergraduate students whose parents are unable to obtain a PLUS loan. These students can borrow up to the limit specified for independent undergraduates.

Is there forgiveness for federal student loans?

On August 24, 2022, President Biden proposed a one-time student loan forgiveness of up to $10,000 for most federal student loan borrowers. This relief was meant for people earning less than $125,000 annually, along with Pell Grant recipients. Unfortunately, the Supreme Court blocked this program.

How do you apply for a federal student loan?

Applying for a federal student loan begins with submitting your FAFSA application. This application is your first step when searching for financial aid for college. Here's a quick rundown of the process:

1. Fill out the FAFSA: Processing times are 3 to 5 business days for online applications, or 7 to 10 days for paper applications.
2. Receive your Student Aid Report (SAR): This details your eligibility for federal student aid.
3. Read your offers: Schools listed on FAFSA get access to your financial information. They'll calculate your financial aid offer, which may include federal student loans, federal grants, and work-study programs.
4. Accept financial aid: Reach out to your school to accept the financial aid. If it includes federal student loans, the school will guide on how to accept them.
5. Attend loan counseling: Before receiving your loan funds, you'll need to complete entrance counseling to understand how student loans work.
6. Sign for the loan: Read through and sign the Master Promissory Note.

Do’s and don'ts of managing federal student loans

As beneficial as federal student loans can be, it's important to approach them with a smart strategy. Here are some of the key points to remember when managing these loans.

Understanding federal student loan statistics can provide clarity on student debt and the role these loans play. Here's an overview of some crucial data to consider.

Advantages and disadvantages of federal student loans

Deciding whether or not to apply for federal student loans? Here are some key advantages and disadvantages that can shape your decision.

Advantages of federal student loans

• Lower interest rates compared to most other loans
• Variety of repayment plans
• Options for loan consolidation
• Possibility of loan forgiveness

Disadvantages of federal student loans

• They add to your overall debt
• They often don’t cover the full cost of attendance
• Deferring payments increases the total paid over time, due to interest
• Public Service Loan Forgiveness (PSLF) requires 120 qualifying payments and a public sector job
• Increased dependency on loans may reduce self-financial responsibility

How TuitionHero can help you

TuitionHero is more than just a place to get financial help. We’re your trusted partner who’s with you as you figure out how to pay for college. We've got everything you need: from Private Student Loans and help with refinancing them, to guiding you through the FAFSA and finding the right credit card.

Use our tools and information to help you understand federal student loans and all things related to money for college. We're here to help you and your family be smart with money. The best part? We make it all work together for you – like fitting pieces of a puzzle – to help you handle your college costs without stress.

Frequently asked questions (FAQ)

What are the eligibility requirements for federal student loans?

To get a federal student loan, you need to be a U.S. citizen or a non-citizen who qualifies, have a valid Social Security number, and be signed up or going to sign up in a college program that's officially recognized. You also need to have finished high school or have something equal to a diploma and keep up good grades in school. If you want more information or need some help, take a look at our FAFSA Assistance page.

How can I repay my federal student loans?

The federal loan program offers several repayment plans, including Standard Repayment plans, Graduated Repayment plans, and Extended Repayment plans. It also includes Income-Driven Repayment plans that base your monthly payment on your income.

Can parents apply for federal student loans?

Yes, parents can apply for a type of federal student loan called the Parent PLUS Loan, designed to help parents pay for their child's education. It's important to note that the parent, not the student, is responsible for the repayment of this loan type. Check out TuitionHero's offerings for more financial help for parents.

Final thoughts

Dealing with college finances and federal student loans doesn't have to be such a heavy burden. It's really about knowing how things work, being smart with your money, and getting good advice. And don't forget, we at TuitionHero are here to help you through it all so you can make smart choices and have a solid financial plan for the future.

Source

• Student loan interest rates in November 2023 | Bankrate
• Subsidized and Unsubsidized Loans | Federal Student Aid
• Average Student Loan Debt: 2023 Statistics | BestColleges
• President Biden announces student loan debt relief for borrowers who need it most