Federal college loans are loan opportunities offered by the government for college and university students. Students who qualify for these loans can borrow a set amount of money from the government at interest rates that are often lower than private loan interest rates. They are awarded based on financial need.
To qualify for federal financial aid, students must be enrolled at an approved college or university and must take classes on a half-time basis at a minimum. They must be in satisfactory academic standing as well. Students who meet these qualifications should fill out the Free Application for Federal Student Aid, which will determine further eligibility. Once an award is offered, students will sign a Master Promissory Note (MPN), which will act as an agreement to the terms and conditions of the loan and repayment.
There are two main types of federal loans. One is a direct student loan, which is a loan that is offered directly through the U.S. Department of Education. The other is an indirect loan, which is when the school acts the lender for the student. The loans within these categories may be subsidized or unsubsidized. With subsidized loans, the federal government pays the interest accrued during the student’s education. On the other hand, students who take out unsubsidized loans are responsible for all of the interest accrued, regardless of their academic status.
Repaying a Federal Loan
Loan forgiveness is an option for students who teach in low-income schools for five years or public service professionals who have made 120 payments on their loans while working at an approved agency. If you do not meet those qualifications, you will need to pay off your loan without assistance. However, in extreme circumstances, disability, death, or bankruptcy may lead to a discharge.
Even if you do not qualify for federal loan forgiveness, you may have a grace period during which you do not have to pay back your loan. This grace period takes place for six months after a student either graduates or enrolls for lower than half-time, although interest may accrue throughout the grace period. Most federal loans qualify for a grace period, with the exception of the PLUS loan, which must be repaid starting at disbursement. However, the exact terms of repayment on Perkins loans will vary with each lender school.
Once your grace period ends, you’ll have to repay your loan on a monthly basis. It’s best to pay more than the monthly amount if possible because the quicker you pay off your loan, the less interest it will accrue. If you are struggling to pay your loans, you may be able to get some help.
For graduates who are experiencing financial hardship, there is an income-based repayment plan, which will lower monthly payments. You can qualify for this plan if you have a low income and cannot make your monthly payments. Typically, this plan will reduce monthly payments into a more manageable increment.
If you have multiple loans, you also have the option of federal loan consolidation. Loan consolidation is when multiple loans are combined into a single loan. When your loans are consolidated, you only have to make one payment each month, rather than multiple payments. Payments may be lower under this plan, especially if you are able to extend your repayment period, however you may wind up paying more in interest.
Before making a decision about how to repay your federal loans, consider your options and the amount of money you have to spend on loan repayment each month. Do your research and select the best possible arrangement for your unique situation.
Types of Federal Loans
- Stafford Loans: These direct loans are offered based on need to students who will be enrolled at least half-time. These are also known as guaranteed student loans. They can be subsidized or unsubsidized. Undergraduate students can be awarded anywhere between $5,500 to $12,500 each academic year and graduate students can earn up to $20,500 each academic year.
- Perkins Loans: These indirect loans are offered through a student’s college or university at a low interest rate and are awarded based on need. Undergraduate students can be awarded up to $5,500 each academic year if they continue to qualify for the loan and graduate students can earn up to $8,000. Other financial aid, such as scholarships and grants, can affect the amount awarded.
- PLUS Loans: These direct loans are awarded to both graduate students and parents of undergraduate students. They are offered at a fixed interest rate of 7.9% and are offered based on the cost of the student’s college or university tuition.