With the rising cost of education across the board, paying for college is no small feat. Students and parents have the option to borrow to meet these needs using federal or private student loans. Federal student loans are financing tools funded by the U.S. Department of Education and made available to students who apply through the Free Application for Federal Student Aid.
Federal student loans don’t require a credit check or proof of income, nor is there a need for a cosigner to strengthen an application. However, there is a cost that comes with a federal student loan. Each year, Congress sets federal student loan interest rates, which are fixed for the life of the loan and, generally speaking, lower than what private lenders may offer.
By the time you graduate, you may have several federal student loans with different interest rates. Some federal student loans accrue interest while you are in school, while others do not. But no matter the type, the debt taken on to fund your education must be repaid.
Federal student loans have several inherent benefits for student borrowers, but they come with a handful of caveats as well. In this federal student loan guide, you’ll know all the ins and outs of federal student loans and how they can effectively be used to fund education goals.
Types of Federal Student Loans
There are several different types of federal student loans available to borrowers, each having its own parameters for how much you can borrow and for which kind of degree, along with different interest rates and accumulation of that interest over time. The two broad categories of federal student loans are Direct loans and Perkins loans. Here’s how they work.
All Direct Loans are federal student loans made available through the William D. Ford Federal Direct Loan Program. Students and parents who qualify borrow directly from the Department of Education when receiving these loans, and their proceeds can be used at any qualifying school. Under the Direct Loan program, there are several variations of loans that are important to understand.
Direct Subsidized Loans
Eligible Students: Undergraduate students with financial need
Interest Rate for ’18/’19 School Year: 5.05%
Origination Fee: 1.062%
Grace Period: 6 months after leaving school
Direct Subsidized loans are made available to students who are attending a qualified undergraduate program who have a clear financial need for financing. With this type of direct loan, the school determines the amount of each loan per student based on the cost of tuition and other related expenses.
However, the amount provided through a direct subsidized loan cannot exceed the total financial need of each student. What sets direct subsidized loans apart is the fact that the federal government pays the interest on the loans while you are enrolled at least half-time in school, during the first six months after you leave school (your grace period), and during any period of deferment.
Direct Unsubsidized Loans
Eligible Students: Undergraduate, Graduate, and Professional students
Interest Rate for ’18/’19 School Year: 5.04% (undergrad), 6.60% (graduate & professional degrees)
Origination Fee: 1.062%
Grace Period: 6 months after leaving school.
With a direct unsubsidized loan, students attending an undergraduate or graduate level degree program may qualify. Unsubsidized loans differ from subsidized in that there is no requirement to show financial need, but instead the amount you can borrow stems from the total cost of attendance, minus other financial aid received. This amount, however, is still determined by the school.
Direct Unsubsidized loans also differ from subsidized loans in that you, the borrower, are responsible for paying the interest that accumulates during any period, including deferment, forbearance, and your grace period. Any unpaid interest that accrues during these periods is capitalized when you enter repayment again, meaning it is added to the balance of your loan.
Parent PLUS Loans
Eligible Students: Parents of dependent undergraduate student w/ no adverse credit history.
Interest Rate for ’18/’19 School Year: 7.60%
Origination Fee: 4.248%
Grace Period: No grace period typically but parents may request deferment for 6 months after child leaves school.
Parent PLUS loans are also available under the Direct loan program, specifically for parents of a dependent undergraduate level student who is enrolled at least half-time. The student must be attending a participating, eligible school for a parent to qualify for a PLUS loan. Also, the parent must be the biological, adoptive, or stepparent – not a guardian.
Parent PLUS loans differ from other federal student loans in that they require a strong credit history along with general eligibility requirements tied to receiving federal student aid. Once a Parent PLUS loan is secured, the funds are paid to the student’s school first, with any remaining amounts sent to the parent. Payments are typically required shortly after the loan proceeds are received.
Grad PLUS Loans
Eligible Students: Graduate and Professional students with no adverse credit history.
Interest Rate for ’18/’19 School Year: 7.60%
Origination Fee: 4.248%
Grace Period: 6 months after leaving school.
Similar to Parent PLUS loans, graduate-level students who are attending school at least half-time may qualify for a PLUS loan. Graduate students must be enrolled in a program that leads to an advanced degree or a professional certificate to qualify. A credit check is also required for Grad PLUS loans, and all borrowers must meet the other broad eligibility requirements for receiving financial aid from the Department of Education.
Unlike Parent PLUS loans, Grad PLUS federal student loans do not require immediate repayment. Instead, graduate students may defer payments while they are enrolled at least half-time in school, and for a period of up to six months after graduation or dropping below half-time status.
Eligible Students: Most borrowers with federal student loans.
Interest Rate for ’18/’19 School Year: Weighted average of loans being consolidated rounded up to the nearest eighth of a percentage.
Grace Period: 60 days after the loan is disbursed. If any of the loans are in their grace period, you may request to delay repayment until it is up.
Consolidation loans are another federal student loan program, made available to students who already have several federal student loans. Through a consolidation loan, borrowers have the ability to use a single federal student loan to consolidate two or more federal loans.
In doing so, borrowers streamline their repayment to a single monthly amount, and they may then qualify for different repayment plans or loan forgiveness in the future. Consolidating federal student loans does not require a credit check or a cosigner, but it may result in a higher interest rate overall than keeping the loans separate.
Note that parents with Parent PLUS Loans may not consolidate those loans with their child’s federal student loan.
Federal Perkins Loan Program
The other broad category of federal student loans used to be Perkins loans, which were low-interest federal student loans available to both undergraduate and graduate-level students who have an exceptional financial need. These loans are no longer offered, however, as of September 30, 2017.
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Federal Student Loan Borrowing Limits
Each type of federal student loan has imposed limits, based on the year of attendance, the status of the student (dependent or independent), and other financial aid received for education. Here’s a quick overview:
- First-year undergraduate annual loan limits – Dependent students can borrow $5,500 with no more than $3,500 in subsidized loans; independent students can borrow $9,500, with no more than $3,500 in subsidized loans.
- Second-year undergraduate annual loan limits – Dependent students can borrow $6,500, with no more than $4,500 in subsidized loans; independent students can borrow $10,500, with no more than $4,500 in subsidized loans.
- Third-year and beyond undergraduate annual loan limits – Dependent students can borrow $7,500, with no more than $5,500 in subsidized loans; independent students can borrow $12,500, with no more than $5,500 in subsidized loans.
- Graduate and professional annual loan limits – $20,500 of unsubsidized only
The aggregate loan limits for dependent students is $31,000 with no more than $23,000 as subsidized. Independent undergraduate students can borrow $57,500, with no more than $23,000 in subsidized loans, while graduate and professional students can borrow $138,500, with no more than $65,500 in subsidized loans from undergraduate studies.
Federal Perkins loans may not exceed the student’s financial need, up to a maximum of $5,500 per year or $27,500 in total for undergraduate students. Graduate and professional students may receive up to $8,000 per year, with a total of $60,000, including what was received in undergraduate years.
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Qualifying for Federal Student Loans
To qualify for federal student loans, there are fundamental eligibility requirements that must be met, including:
- Must demonstrate a financial need
- Be a U.S. citizen or eligible non-citizen
- Have a valid Social Security number
- Be enrolled or accepted for enrollment as a student with an eligible degree or certificate program, at least half-time
- Maintain academic progress in college
- Show you are qualified to obtain a college degree or career school education
- Are not in default on existing federal student loans
Anyone attending school may apply for federal student loans, and so long as the maximum loan amounts are not yet met and eligibility requirements stay in place, federal student loans are still an option. However, there may be circumstances that mean you lose your eligibility. If there is not a feasible way to regain eligibility for federal student loans, private student loans through certain lenders may be the next best option.
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Figuring Out How Much to Borrow
While it is always possible to borrow the full amount of available federal student loans each year, it isn’t recommended. Because federal student loans carry interest in most instances, borrowing the maximum when it isn’t needed can be a costly mistake. Instead, start by calculating the cost of tuition and attendance at the school of your choice.
A good rule of thumb is to determine the net college cost and the amount of income and savings currently on hand, then subtract what’s available from the net price. For most students and parents, borrowing 125 percent of this difference is a good gauge of what is needed from student loans. It’s easier to determine the net cost of college because all colleges and universities eligible to receive federal financial aid are required to provide an online calculator through their websites.
Part of the calculation also comes from figures in your federal student aid package. After the FAFSA is complete, a financial aid package is generated for each applicant. Within that package, you are provided details regarding the type of aid offered, including all federal student loans you may be eligible for, federal work-study programs, supplemental educational opportunity grants, scholarships, and Pell grants. Based on the unmet need, you can determine what you may need to borrow to fund your education.
Although these calculations are helpful, it is also necessary to recognize your financial obligation on the other side of the line. Upon leaving school, you need to be able to repay your federal student loans without much of a burden each month, so keeping track of the total amount borrowed during school is paramount to financial success.
Be sure to research your first- and second-year income potential in your selected career field to determine what you can anticipate earning. This resource provides a starting point for these figures. Once you have that amount, understand how your federal student loan repayment will fit into the mix. Keep your total student loan debt to a manageable amount by estimating your monthly repayment obligation here.
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Steps to Getting Federal Student Loans
Getting federal student loans is a relatively simple process, but it begins with understanding the eligibility requirements listed above. Additionally, you need to know whether or not your school is eligible to receive federal student loans from students.
An eligible school can be an institution of higher education or a postsecondary vocational institution that meets specific requirements. The most significant component of an eligible school is that it offers an eligible degree or certificate program that leads to the gainful employment of the student. Details about what is required from eligible schools to participate in the federal student aid program can be found here.
Once you have determined you are enrolled or plan to enroll in an eligible school, you need to complete the Free Application for Federal Student Aid, or the FAFSA. The FAFSA is most easily filled out online, and it requires you to create an FSA ID if you do not already have one.
Once you are logged into the FAFSA site, you can select the academic year you are applying for, whether you are the student or the parent, and then complete the required information. The FAFSA begins with the student demographic section, which includes the pertinent personal details that identify the student.
You also are prompted to enter the school information where you’d like the application to be sent, along with questions regarding dependency status and parent demographic information, if applicable. Finally, specific financial information is requested, including tax return data. Once this information is complete, you simply sign and submit the form. You also have the option to complete the FAFSA in paper form if you prefer.
Upon submitting the FAFSA, the information in the application is sent to the school(s) of choice, and its financial aid office determines the amount of federal student aid you may receive. Information is also sent to the Department of Education, who in return send the Student Aid Report (SAR). That is merely a summary of what was included in the FAFSA – not a detailed report of how much aid you will receive. It does, however, allow you to review for any errors along the way.
Once the school calculates your federal student aid, it will send an award letter to you that details the amounts. Each school varies as far as timing of award letters so it may be some time between submitting the FAFSA and receiving the award information.
When you receive the award letter, determine the amount of aid you want to accept and from which school, and then inform the financial aid office at that school what you would like to do. They will set a deadline, typically detailed in the award letter, so be sure to respond in a timely fashion. Once accepted, the school will let you know how and when the aid is paid out, and if any additional paperwork is required like entrance counseling or signing a promissory note.
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Federal Student Loan Servicers
Although the Department of Education funds federal student loans, it does not act as a direct servicer once loans are dispersed or begin repayment. Instead, the government has selected several different private companies to manage servicing, including the following.
Nelnet is a federal student loan servicer in Lincoln, Neb. After acquiring Great Lakes Educational Loan Services, Inc., in 2017, it’s the largest federal student loan servicer. If your federal loans are serviced by Nelnet, you can find contact information on its website or call 1-888-486-4722. In recent years, the servicer has been under fire for the way it has managed payments and service requests from borrowers. Nelnet is one of the three federal student loan servicers with the most borrower complaints, according to the Consumer Financial Protection Bureau (CFPB).
Great Lakes Educational Loan Services, Inc.
Great Lakes Educational Loan Services, Inc., is located in Madison, Wisc. Borrowers with Great Lakes as a servicer can reach the company online or at 1-800-236-4300. While Great Lakes does not have high reviews from borrowers through online review sites, it does not have any recent negative information published or actions taken by the CFPB.
Navient is one of the larger federal student loan servicers, headquartered in Wilkes-Barre, Pa. Borrowers can get in touch with Navient through the company’s website or by calling 1-888-272-5543. Like Nelnet, Navient is one of the servicers most plagued by complaints for mismanaging payments and service requests from federal student loan borrowers.
FedLoan Servicing (PHEAA)
FedLoan Servicing, also known as PHEAA, is a federal student loan servicer located in Harrisburg, Pa. The company can be contacted either online or by calling 1-800-699-2908. Like Nelnet and Navient, FedLoan Servicing is one of the top three servicers receiving the most complaints through the CFPB.
MOHELA is a federal student loan servicer located in Chesterfield, Mo. Borrowers can connect with the company through its website or by calling 1-888-866-4352. There have been no significant complaints or lawsuits against MOHELA in recent years.
HESC EdFinancial, also referred to as EdFinancial, is headquartered in Knoxville, Tenn. The company can be contacted either online or by calling 1-800-337-6884. There are no significant complaints or lawsuits against EdFinancial as of May 2018.
CornerStone is another federal student loan servicing company, located in Salt Lake City. Borrowers may get in touch with the servicer online or by calling 1-800-663-1662. There are no significant complaints against CornerStone as of May 2018.
Granite State – GSM&R
Granite State, also known as GSM&R, is a federal student loan servicer operating in Concord, N.H. Borrowers with Granite State as their servicer can contact the company by visiting its website or calling 1-888-556-0022. No major complaints or lawsuits have been filed recently against Granite State as of May 2018.
OSLA Servicing is another federal student loan servicer that operates out of Oklahoma City. Borrowers can connect with OSLA by visiting its website or calling 1-405-556-9224. There is no significant issue or complaint against OSLA as of May 2018.
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Debt Management and Collections System
Student loans that are in default may be transitioned to the Debt Management and Collections System. However, there are more than 30 debt collection agencies that are contracted to work with the Department of Education. You can find information about defaulted loans the servicer by contacting the default resolution group at 1-800-621-3115.
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Can You Choose Your Federal Student Loan Servicer?
Once you receive federal student loans, a servicer is assigned to you without any choice. If you experience issues with a servicing company, like mismanaged payments, lackluster customer service, or unresponsiveness, you do have options for selecting another servicer. To do so, you will need to either refinance your student loans to a private student loan company (the lender then becomes your new servicer), or select a new servicer when you consolidate your federal student loans.
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Benefits of Federal Student Loans
Most students who need to borrow for their education turn to federal student loans first, not only because of the ease of applying, but also due to the inherent benefits federal student loans have. First and foremost, federal student loans help build your credit over time. As long as you make on-time payments in the minimum amount due, federal student loan servicers report your payment history to the three major credit bureaus – Equifax, Experian, and TransUnion – each month. This helps you establish a strong track record of responsible money management, which aids in getting new credit in the future.
Additionally, federal student loans have lower interest rates than some private student loans, making the cost of borrowing for your education less expensive. Federal student loan interest rates are set by Congress each year, but once you receive a loan, the interest rate does not change. Some private student loan lenders offer variable interest rates that may seem lower initially, but as interest rates rise, so do your student loan interest rates. Federal student loans issued after 2006 have fixed rates.
Federal student loans also come with deferment and forbearance options, designed to help borrowers who are facing financial hardship or trouble paying their loans back each month. Deferment is the process of delaying student loan payments for a set period of time, either because you are currently in school at least half-time or because of a financial hardship. During deferment, you may not be subject to accruing interest on select federal student loans.
Forbearance is also the process of temporarily suspending student loan payments, but due to financial hardship alone. Most student loan borrowers in forbearance do experience interest accumulation that may be capitalized on the loan once the forbearance period ends.
In addition to these inherent advantages of federal student loans, borrowers also have the ability to select from a number of repayment options. There are income-based repayment plans that allow for lower or no monthly payments while earnings are low; graduated repayment programs that start low and then increase every few years; and standard repayment plans that can be extended 10 or more years. Some borrowers may also qualify for federal student loan forgiveness after a set number of monthly payments are made. Each of these repayment plans offers flexibility in how student loans are repaid, and in what amount.
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Federal Student Loan Alternatives
Student loans offered by the Department of Education are often the go-to for borrowers for the reasons listed above, but there are plenty of alternatives to federal student loans. Here are the most common.
Receiving a scholarship for your education can make all the difference in how much you pay out of pocket or borrow to earn a degree. A scholarship is an award for financial aid that does not need to be repaid. It can be used for tuition, room and board, and other expenses associated with earning your degree. Scholarships come in many forms including awards for outstanding sports and other abilities, having specific traits, or being a part of a particular organization or group.
Grants are another method of paying for your college degree through funds that do not need to be repaid. Unlike scholarships, grants are often need-based, meaning applicants have to show a financial need for the funds. Both grants and scholarships can come from a variety of places, including governments, corporations, and community organizations.
Funding from work-study programs is also available to some students. Work-study programs provide part-time employment for both undergraduate- and graduate-level students who can show a financial need. These programs help students earn money that can be used to pay for education expenses, and they often encourage work in the community or directly related to the student’s major.
Private Student Loans
When federal student loan funding has been exhausted, students have the opportunity to apply for private student loans. Unlike federal student loans, private student loans are offered by private lenders, and the maximum amounts, interest rates, and repayment plans available vary from company to company. Private student loans are more difficult to qualify for because private lenders want some level of confidence that the borrower has the ability to repay the funds over time. This means a check of credit is required, along with proof of income or an employment offer. Private student loans may have lower interest rates than federal student loans, but they do not always offer benefits like income-based repayment, forbearance options, or forgiveness for eligible borrowers.
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Ways to Reduce Your Federal Student Loan Payments
Federal student loans are simple to get, which means it’s easy to overborrow. To help eliminate the burden of student loan debt and the monthly payments that come with it, you have some options while you are in school and after graduation.
While You’re Still in School
The best step you can take to reduce your total federal student loan burden is to borrow as little as possible to cover your education expenses. Understanding what is available to you by way of savings and income before accepting federal student loans is beneficial, as is working throughout your college career to help keep the loan balance down. In addition, applying for scholarships, grants, and work-study programs can be a significant help in decreasing the amount of federal student loan debt you have after you graduate.
You also have the opportunity to make in-school payments on your federal student loans. Most federal student loans are deferred while you are attending school at least half-time, but for unsubsidized loans, interest accrues from the time to loan proceeds are received by you or the school. Paying off the interest – and the principal if possible – while you are still attending school can make a substantial difference in how much you owe on a monthly basis after graduation. Work with your federal student loan servicer to determine how you can most efficiently pay your student loans while in school.
After You’ve Graduated
You also have the option of reducing your federal student loan payments after graduation, through consolidation or refinancing.
Federal student loan consolidation is the process of consolidating all or some of your loans into a single loan with one monthly payment. This process is done online at no cost, and it does not require the help of a third party. Consolidating your federal student loans creates a new loan that is used to pay off the outstanding balances of the federal loans you request, establishing a single payment and only one loan to monitor over time.
Through the consolidation process, you have the option of selecting a new, single student loan servicer, and you still enjoy a fixed interest rate. However, the interest rate applied to a federal student loan consolidation is the weighted average of the interest rates on all loans included in the consolidation, rounded up to the nearest one-eighth of a percent.
Consolidating federal student loans offers some benefits above and beyond a simplified repayment. Borrowers also have access to income-based repayment plans, which can significantly lower the monthly payment due. Borrowers may also extend their total repayment period with a consolidation. It is important to note that selecting an income-based repayment plan or opting to extend loan repayment may result in a much higher cost of the loan over time.
Federal student loans that are consolidated still have the benefits of non-consolidated student loans, including options for forbearance and deferment should financial hardship take place.
Another option for reducing your federal student loan payment after graduation is refinancing. Unlike federal student loan consolidation, student loan refinancing involves a private student loan lender, not the Department of Education. Through a private lender, you have the option to apply for a single loan that pays off all or some of your federal student loans, potentially with a lower interest rate, a more favorable repayment plan, or both. However, refinancing federal student loans to a private student loan lender comes with some caveats of which you should be aware.
First, refinancing requires a credit check, verification of income or a job offer, and in some cases, the addition of a cosigner to strengthen the application. This means not everyone will qualify for a private student loan refinance. Also, private student loan lenders may offer both fixed and variable interest rate loans, which can be confusing at first. Fixed interest rate loans may be lower than federal student loan interest rates for the most qualified borrowers, but they are often higher for borrowers with less than perfect credit. Variable interest rate can be lower than federal student loan rates, but over time, they may increase as broad interest rates rise. An increase in a variable interest rate on a private refinanced student loan can drastically increase the total cost of the loan over its lifetime.
Finally, private student loan refinancing takes away the built-in advantages of federal student loans, including forbearance and deferment options, income-based repayment plans, and forgiveness in the future. It is crucial to review each of the benefits and drawbacks of refinancing federal student loans before taking that leap – because once you make the decision, you cannot go back to federal student loans.
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Author: Jeff Gitlen
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