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While paying for college tuition may seem like a daunting task, you might be surprised to learn about the different types of federal scholarships and financial aid options that are available. The federal government has made available a few different types of student loans to help Americans get a higher education.
Most college students take out student loans in some form. It’s estimated that 65% of college students use student loans to help finance a college education. Higher education is vital for students of today’s generation as it paves the way for a successful career and financial stability. But with ever-increasing college fees and other costs, families with average or low income cannot cover their children’s education expenses and thereby succumb to the pressure of getting a student loan.
In the United States, student loans are of two types: federal and private student loans. While the financial institutions manage private student loans, the U.S. Department of Education administers federal student loans. Federal loans have lower interest rates and flexible repayment options, offering more flexibility than private loans.
Federal student loans are of four types:
Anytime you apply for scholarships and financial aid from a college or university, you may receive an offer for a federal student loan as part of your comprehensive financial aid package. For many students, these loans are attractive alternatives to school loans issued by private institutions. Federal loans typically feature more benefits and better interest rates.
It’s important to keep in mind that any loan you take out for college expenses is money that must be paid back upon graduation – unlike scholarships and grants that might also be part of an overall financial aid package. If you are investigating your options for paying for college, a federal student loan is a great place to start.
The U.S. Department of Education’s federal student loan program is formally known as the William D. Ford Federal Direct Loan Program. Under its administration, the U.S. Department of Education makes loans available for students seeking a college education.
Federal student loans generally have lower interest rates and more favorable repayment terms than loans issued by private lenders. This is because private student loans are often considered a higher risk for lenders. Keep in mind that the Department of Education does not make student loans directly. Instead, it makes funds available that can be distributed through approved lenders across the country.
Let’s take a closer look at the four main types of federal student loans that help Americans attend colleges and technical schools.
Direct subsidized loans are made available to eligible undergraduate students who have shown documented financial need as defined by specific government regulations.
Depending on what year you are in school, you can generally borrow anywhere from $5,500 to $12,500 per year in direct subsidized federal loans. The total amount of your direct subsidized loan cannot exceed the costs determined by the school.
With a direct subsidized loan, the federal government pays the interest on your loan while you’re in school. They also pay interest for a six-month grace period after your graduation and during any periods of deferment.
This type of loan presents the most attractive terms for student borrowers, so students should maximize financial aid through direct subsidized loans before using other financial aid vehicles. With a subsidized federal student loan, your overall loan costs will be lower than with any other loan option.
These types of loans can be used to cover costs associated either with a college, university, or career school. They are made available by the federal government to eligible undergraduate, graduate, and professional students, regardless of their level of financial need.
With an unsubsidized loan, the government does not pay the interest on the loan as it accrues while you are in school, nor will it pay interest that accrues during any grace period or period of deferment. With this type of loan, interest will continue to accrue on the money you owe unless you are making payments on it.
For undergraduate students, direct unsubsidized loans are capped generally between $5,500 and $12,500 per year, while graduate students may be allowed to borrow as much as $20,500 per year for school expenses. The total amount you are allowed to borrow is determined by the total cost of attendance calculated by your school.
Direct PLUS loans are issued to graduate or professional students, or the parents of dependent undergraduate students to help cover education-related expenses that aren’t covered by other financial aid. Direct PLUS loans are credit-based and unsubsidized.
These loans come in two specific types: Parent PLUS and Graduate PLUS. Eligibility is not based on financial need, but a credit check is required. Parents of undergraduate students must be either biological or adoptive parents. In some cases, step-parents may be allowed to borrow on behalf of undergraduate students, but otherwise legal guardians are not eligible for this program.
Borrowers who have less-than-stellar credit scores may be required to meet additional eligibility requirements to qualify for a Direct PLUS loan. There is typically no formal limit to how much can be borrowed through Direct PLUS loans.
Direct PLUS loans are designed to fill the gap between your total school costs and other financial aid sources, so they will adjust to meet the full costs determined by your individual school, college, or professional school. There is no formal grace period associated with these loans, though parents may request deferments in some cases. For the most part, parents are expected to begin making payments shortly after the loan funds are received. Loan proceeds will be paid directly to the student’s school, with any amount remaining then being sent to the parents.
Graduate students who qualify for Graduate PLUS loans are not required to immediately begin repaying the loan. They may defer payments for up to six months after either graduating or dropping below half-time status.
For those who have taken out multiple federal student loans, a direct consolidation loan option allows you to consolidate all federal student loans into a single loan with a single loan servicer and single repayment schedule. This makes it easier to keep payments organized and on track for timely repayment.
The one exception to loan consolidation with this program is that parents who have taken out Direct PLUS loans may not combine their parent loans with other federal loans issued in their student’s name.
Any student or parent can apply for federal student loans. The process is free. Eligibility is not affected by age, race, or field of study. Your household income may be a consideration point for many federal student loans, particularly those based on financial need.
The first step in qualifying for a federal student loan is to complete and submit the Free Application for Federal Student Aid (FAFSA) form, which includes detailed information about your financial situation. You can easily complete the FAFSA online and submit it to your school of choice. The results of your FAFSA form will then be used by your school to compose an overall financial aid package which may include federal student loans.
In addition to federal student loans, your FAFSA application can determine your eligibility for other funding sources, like federal student scholarships, grants, and work-study. Your full financial aid package will likely offer a mixture of funding types. If so, your school will provide instructions for how you can accept all or even just a portion of your federal student loan offer.
Every school operates on its own timetable, so you may have to wait a bit before you receive your financial aid offer from your chosen college. The FAFSA submission period runs from October through June of each year.
Each type of federal student loan may have additional specific eligibility criteria, along with lending limits that are determined based on the following qualifications such as:
All types of federal student loans share a core set of eligibility criteria. For first-time borrowers, requirements include being a U.S. citizen or eligible non-citizen; having a valid Social Security number; and being enrolled or accepted for enrollment as a student within an eligible degree or certificate program, with student status of at least half-time.
After your first year, you also must show that you are making adequate academic progress, that you remain qualified to obtain a college degree or other professional certification, and that you have not defaulted on any of your federal student loans.
To qualify as an eligible non-citizen, you may be asked to provide a copy of your green card or to show your documented Arrival-Departure Record (I-94) from U.S. Citizenship and Immigration Services that identifies you as a refugee, a Cuban-Haitian entrant, a conditional entrant if issued before April 1, 1980, a parolee or as someone to whom the U.S. government has granted asylum. You also may be classified as an eligible non-citizen if you can show documentation of battered immigrant status, a T-visa, or a parent’s T-1 visa.
Anyone attending college or planning to enroll can apply for federal student loans. As long as you haven’t yet met the maximum loan amount and continue to meet eligibility requirements, federal student loans can be a much preferable option to private student loans.
Submit a ‘Free Application for Federal Student Aid’ (FAFSA) form to apply for a federal loan. Your college will then use data from this form to determine your federal aid eligibility.
Filling the FAFSA application is direct and hassle-free. All you have to do is, select the “Fill Out the FAFSA” button on the Federal Student Aid website’s homepage and follow the directions.
Below are the steps involved in the process –
Create an FSA ID, a combination of your username and password, that lets you sign the FAFSA form electronically. You can create the ID by visiting the Federal Student Aid website and can be used to sign loan contracts, myStudentAid app, and access some specific information online.
If you are a dependent student, your parents, whose details are recorded on the FAFSA form, will also require an FSA ID so that they can electronically sign your application. But if your parent doesn’t have a Social Security Number (SSN), they cannot create the ID and will have to choose the option to print a signature page.
While filing the FAFSA form, you will be required to enter several details, including your name, address, date of birth, and financial situation. Depending on whether you are a U.S. citizen and the tax form you use, etc., you might need additional information as you fill the application. They include:
Some of them include:
Next, fill the FAFSA form. You can choose any of the following methods to fill the form for the first time:
If you filled out a FAFSA form the previous year and want to renew it, then go to the FAFSA home page and select “Login.” Next, select “I am the student,” enter your FSA ID, and click “FAFSA RENEWAL.” The system will fill non-financial fields for you. However, make sure you update information that has changed since last year, if any.
Before submitting your FAFSA form, you have to sign it. Make sure you sign the form with your FSA ID. Doing so will help you process the form quickly. If you have provided parent information, then one of your parents needs to sign your application. Note that if you logged in to your form by providing the FSA ID, you need not use it again while signing.
Once you apply, you will see the confirmation page indicating your submission was successful. If you have included an email address on the form, you will receive the confirmation page by email.
Your FAFSA confirmation page includes an option for the parent information in your application that transfers automatically into another student’s form. You can use this if you have a sibling who requires you to fill the FAFSA application. If you are filing the FAFSA form on the myStudentAid app, you will only see this option if your parents sign and submit it after you.
It is important to note that some states may allow you to transfer your complete information directly into your state aid form, provided they have collaborated with the Federal Student Aid. So, if you find a link from your confirmation page to your state financial aid, you must select it.
After you submit your FAFSA form, you can check its status immediately. Go to myStudentAid mobile app or fafsa.gov and log in with your FSA ID. If you submitted a paper FAFSA form, you can check the status after it has been processed, i.e., approximately 7 to 10 days from the mailing date. If you have any queries, you can visit the Federal Student Aid Information Center and chat with the authorities or call 1-800-4FED-AID (1-800-433-3243).
The federal FAFSA due date for the academic year 2022-2023 is 11:59 p.m. CT on June 30, 2023. You can submit any corrections or updates by 11:59 p.m. CT on September 11, 2023. The FAFSA deadline for the academic year 2023-2024 is 11:59 p.m. CT on June 30, 2024. You can make any corrections or updates by 11:59 p.m. CT on September 09, 2024.
Each state and college has its deadline. Check with your state and college to know the deadline for FAFSA Application.
Federal student loans offer several benefits over loans issued by private lending institutions. The interest rate assigned to federal student loans is a fixed rate, and it is generally lower than the rates you’ll find from private lending institutions. Since you will pay less interest over the life of your loan, the overall cost of your education is lower with a federal student loan.
Congress sets the rate for federal student loans each year, but once you’re awarded a loan, your interest rate is set and will not change. Be very aware of this important fact: You may see variable interest rates from private lenders advertised as lower than the rate for federal student loans, but a variable interest rate will rise over time, ultimately costing you more than a federal student loan. With a federal student loan, you’re protected against sudden hikes as interest rates fluctuate.
For the most part, you don’t need a credit check or a cosigner to be approved for a federal student loan. The federal government recognizes this as an investment in your future. It means that if you have bad credit – or no credit at all – you still may find it fairly easy to qualify for a federal student loan. As long as you make timely payments toward your loan balance, a federal student loan can help you build credit and repair a lower credit score.
Your payment activity around your federal student loan is reported to the major credit bureaus, so making timely payments can help you build a history of responsible borrowing. This is much different from a typical private loan, for which you would need to qualify by having a credit score. Since most entering college students have a shallow credit history, it’s unlikely for them to be approved for a private student loan without having someone else cosign for them.
With a federal student loan, you are not required to begin paying back your loan until you are finished with college or you drop your attendance to below half-time status. In cases where a student shows documented financial need, the federal government may also subsidize the interest accrued on the loan while the student remains in school. This represents the subsidized version of the federal student loan. Typically, private lending institutions will not allow you to take out a subsidized loan.
Federal student loans often allow you to defer payments. If you find yourself in financial hardship or you remain a student at least half time, you can apply to defer your loan payments for a set period. You may also be able to enter forbearance, which also allows you to suspend loan payments due to financial difficulties. Interest is often subsidized during a deferment, though interest on your loan will continue to accrue if you enter forbearance. You may find that some private lenders also allow for deferment or forbearance, but the time limits on these opportunities are generally much shorter than those allowed for federal student loans.
Federal loans also generally offer the most flexibility when it comes to repayment. This allows you to uniquely structure your repayment plan and even defer payments if you find yourself with reduced financial means.
The federal government even allows you to adjust your repayment terms after the funds from the loan have been disbursed. The standard repayment plan is a 10-year payment schedule, but it can be adjusted.
In addition to the standard repayment plan, you may also choose a graduated or extended payment plan. Under a graduated plan, you start with a fairly low monthly payment, which gradually increases over time. These increases typically occur every two years. Under an extended plan, your goal is to pay off your loan within 25 years, using either fixed or variable payments or a combination of the two. To qualify for this payment plan, a borrower must have an outstanding loan amount of at least $30,000.
For example, you could choose an income-dependent plan that allows your payments to increase as your income gets larger – in some cases starting with no payments at all if your income is extremely low. Some repayment plans give you as long as 25 years to fully repay your loan. Plus, if you choose an income-driven plan, any remaining loan balance can be forgiven if your loan isn’t paid in full at the end of the repayment period. However, a loan forgiven under this type of plan is typically considered taxable income by the IRS.
The federal government offers four different income-dependent repayment plans. Both the “Pay As You Earn” plan and the “Revised Pay As You Earn” plan cap payments at 10% of a borrower’s discretionary income. For these purposes, the U.S. Department of Education defines discretionary income as the difference between a borrower’s adjusted annual income and 150% of the federal poverty guideline amount, based on family size and the state in which you reside. This amount is recalculated each year.
PAYE loans can be forgiven after 20 years, while Revised PAYE loans can be forgiven after 20 years for undergraduate study and 25 years if the loans were entered into for graduate study.
The federal government also offers the Income-Based Repayment Plan, which caps payments at either 10 or 15% of the borrower’s discretionary income, depending on when the loan originated. This type of loan can be forgiven after 20 or 25 years, depending on the loan origination date.
Another option is the Income-Contingent Repayment Plan, which limits payments to either 10 or 15 of the borrower’s discretionary income, depending on when the loan was funded. Payments can never be more than those associated with standard repayment plan payments, and these loans may be forgiven after 20 or 25 years, depending on when they were funded. The final income-dependent repayment option is the federal government’s Income-Sensitive Repayment Plan, which calculates payments based on annual income. These loans may be forgiven after 15 years.
In some cases, if you work in certain high-demand jobs, the federal government may forgive a portion of your federal student loan. Or, you may qualify for loan forgiveness after a certain number of payments have already been met, as outlined with the income-based repayment plans above. Choosing the right repayment plan depends on your situation. Your best option will depend on your overall annual income and the amount you owe, plus other financial responsibilities.
Be cautious when you’re accepting a federal student loan – the flexibility and attractive interest rates don’t mean you should borrow a larger amount of money than you actually need. Taking out a federal student loan legally obligates you to pay back the money according to the terms of the loan, so it’s important to be responsible. Try to borrow only what you need to complete your college education so that repayment won’t be a major burden for you in later years. You want your student loan payments to be a small portion of your take-home income once you enter the workforce.
One good rule of thumb is that you should calculate the net costs of attending the college of your choice. Then, determine how much you have in savings, scholarships, federal student grants, and any other source that doesn’t have to be repaid. Once you’ve identified the gap between what you have and what you need, many financial advisers will recommend borrowing 125% of that gap, which will usually provide plenty of funds to cover your college-related expenses.
Federal student loans remain one of the most attractive and reliable ways to access money for a college education. The U.S. Department of Education’s Office of Federal Student Aid disburses more than $120 billion each year in a combination of grants, loans, and work-study funds that help deserving students pay for college or career school.
If you’re unemployed and thinking about going back to school, don’t let a lack of savings stop you. Investing in yourself through a college education is one of the best ways to guard against future unemployment and find a career you enjoy. It’s also one of the surest ways to build a career of purpose that provides additional opportunities to grow and develop. With their favorable terms and flexible payment options, federal student loans can help you build a career full of satisfaction.