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Note about changes due to COVID-19:
There have been changes to the federal student loan program as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that passed in Congress on 3/27/2020 to help those affected by the Coronavirus.
Until January 31, 2022, borrowers have the option to suspend payments without penalty, if needed. Payments made on federal student loans during this time will first apply to unpaid interest accrued from before 3/13/2020, then directly towards the principal balance. In addition, no interest will accrue during this time—effectively setting the rate at 0%.
If you are pursuing Public Service Loan Forgiveness or forgiveness through an income-driven repayment plan, skipped payments will still count towards the monthly payments required to be eligible. The same is true for borrowers working to meet student loan rehabilitation requirements.
Lastly, the government will not garnish tax refunds or money from other federal benefits of borrowers who are behind on student loan payments during this time.
With the rising cost of education across the board, paying for college is no small feat. When savings, scholarships, and grants aren’t enough, students and parents should next turn to federal student loans.
Federal student loans, sometimes referred to as government loans, are funded by the U.S. Department of Education and are made available to students who fill out the Free Application for Federal Student Aid.
Federal student loans don’t require a credit check, proof of income, or a cosigner. You will have to repay the loans with interest. However, federal student loan interest rates are typically lower than even the best private student loan rates.
In this guide:
- Types of Federal Student Loans
- Federal Student Loan Borrowing Limits
- Qualifying for Federal Student Loans
- Deciding How Much to Borrow
- How to Get Federal Student Loans
- Federal Student Loan Servicers
- Benefits of Federal Student Loans
- Alternatives to Consider
Types of Federal Student Loans
All new federal student loans are made through the William D. Ford Federal Direct Loan Program. Students and parents who qualify can borrow directly from the Department of Education and their proceeds can be used at any qualifying school.
There are several variations of Direct Loans that you may be eligible for depending on your level of schooling and how much you need to borrow, all with different interest rates and fees.
|Direct Subsidized||Undergraduates with financial need||Learn more|
|Direct Unsubsidized||Undergraduates, graduates, and professional students||Learn more|
|Parent PLUS||Parents of dependent undergraduate students with no adverse credit history||Learn more|
|Grad PLUS||Graduate and professional students with no adverse credit history||Learn more|
|Consolidation Loans||Most borrowers with federal student loans||Learn more|
>> Read more: Types of Student Loans
Direct Subsidized Loans
- Eligible Students: Undergraduate Students with Financial Need
- Interest Rate for ’21/’22 School Year: 4.53%
- Origination Fee: 1.062%
- Grace Period: 6 Months
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.
This makes them the most beneficial type of federal student loan and you should always maximize subsidized federal student loans before turning to unsubsidized loans or private loans.
Direct Unsubsidized Loans
- Eligible Students: Undergraduate, Graduate, and Professional Students
- Interest Rate for ’21/’22 School Year: 4.53 (undergrad), 6.08% (graduate & professional degrees)
- Origination Fee: 1.062%
- Grace Period: 6 Months
Direct Unsubsidized Loans differ from subsidized loans in that there is no requirement to show financial need to be eligible, but the government does not pay accrued interest during periods of deferment and while you are in school.
During these periods, interest will continue to accumulate unless you make payments on it.
The amount you can borrow stems from the total cost of attendance, minus other financial aid received, up to the federal student loan limits. This amount, however, is still determined by the school you are attending.
Parent PLUS Loans
- Eligible Students: Parents of Dependent Undergraduate Students with No Adverse Credit History
- Interest Rate for ’21/’22 School Year: 7.08%
- 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 a type of PLUS Loan that is specifically for parents of a dependent undergraduate level student who is enrolled at least half-time at an eligible school. The borrower must be the biological or adoptive parent or stepparent in some cases. Guardians are not eligible.
Parent PLUS Loans differ from other federal student loans in that the government will perform a credit check to make sure there is no adverse credit history (such as bankruptcy).
Parent PLUS Loans are first paid to the student’s school, with any remaining amount sent to the parent. Payments are typically required shortly after the loan proceeds are received.
You can compare Parent PLUS Loans to other options in our Student Loans for Parents Guide.
Grad PLUS Loans
- Eligible Students: Graduate and Professional Students with No Adverse Credit History
- Interest Rate for ’21/’22 School Year: 7.08%
- Origination Fee: 4.248%
- Grace Period: 6 Months After Leaving School
Graduate students who are attending school at least half-time may qualify for a Grad 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 Loans do not require immediate repayment while in school. Instead, graduate students may defer payments while they are enrolled at least half-time in school for a period of up to six months after graduation or dropping below half-time status.
Grad students should first max out their limits on Direct Unsubsidized Loans before turning to Grad PLUS Loans because of the lower interest rates.
Before taking out a Grad PLUS Loan, be sure to compare it to other graduate student loan options.
- Eligible Students: Most Borrowers with Federal Student Loans
- Interest Rate for ’21/’22 School Year: Weighted average of federal loans being consolidated rounded up to the nearest eighth of a percentage
- Fee: None
- 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)
Direct Consolidation Loans are for students who already have several federal student loans and want to combine them into one.
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 slightly higher interest rate overall than keeping the loans separate.
Note that parents with Parent PLUS Loans may not consolidate those loans with their children’s federal student loans.
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 students who had exceptional financial need. These loans stopped being offered on 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 Students – 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 Students – 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 Students – 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 Students – $20,500 of unsubsidized only
The aggregate loan limit 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.
If you have met your federal student loan limit, private loans can fill the gap. Check out our guide to the best private student loans to get started.
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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:
- 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.
There may be some circumstances in which you lose your eligibility for federal student loans. If there is not a feasible way to regain eligibility for federal student loans, private student loans may be the next best option.
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Deciding 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 if you can pay for college with other things like scholarships, grants, or savings.
It’s worth noting that student loans can be used for things like living expenses and housing—not just tuition—so keep this in mind when going through the following sections.
Figure Out the Net Cost of College
Start by calculating the cost of 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.
Consider How You Will Repay Your Loans
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, so keeping track of the total amount borrowed during school is important.
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 from the National Association of Colleges and Employers offers a first look at expected starting salaries broken out by industry.
Once you understand your future salary expectations, you can plan ahead for your eventual federal student loan repayment. Keep your total student loan debt to a manageable amount by estimating your monthly repayment obligation here.
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How to Take Out 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.
1) Figure Out if Your College(s) of Choice Are Eligible for Federal Aid
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.
2) Fill Out the FAFSA
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.
3) Review Your Award Letter
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 sends 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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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.
Relatively Low Interest Rates
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 will your student loan interest rates.
Deferment and Forbearance Protections
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.
A Variety of Repayment Options
In addition to these inherent advantages of federal student loans, borrowers also have the ability to select from a number of repayment plans other than the standard 10-year plan.
There are income-driven 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 extended repayment plans that can as long as 25 years.
Some borrowers may also qualify for student loan forgiveness after a set number of monthly payments are made.
Good Credit Not Require & Can Help You Build Credit
Finally, federal student loans don’t require a good credit score and—because of this—are a great option for those with bad credit.
In addition, federal student loans may 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.
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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 collect your payments and provide you with any help you may need along the way.
Note that no matter who your servicer is, you should be able to access your loan information in the National Student Loan Data System (NSLDS).
Here is a list of federal student loan servicers and their information:
Nelnet is a federal student loan servicer in Lincoln, Nebraska. 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 data from the Consumer Financial Protection Bureau (CFPB).
You can learn more about Nelnet in our Nelnet Student Loan review.
Great Lakes Educational Loan Services, Inc.
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, Pennsylvania.
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, Pennsylvania.
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, Missouri. 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 Student Loans, is headquartered in Knoxville, Tennessee. 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, Utah. 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, New Hampshire. 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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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 some alternatives to consider.
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 most scholarships (but not all), 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 should next turn to 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 lenders usually require that borrowers have a good credit score and proof of income, or a cosigner with both. There are, however, some student loans available for those without a cosigner or credit history.
Private student loans may have lower interest rates than federal student loans, but they do not always offer benefits like income-driven repayment plans, forbearance options, or forgiveness.
Check out our full guide to learn about all of the differences between federal and private student loans.
>> Read More: Best Private Student Loans
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Author: Jeff Gitlen