Federal loans, like other types of monetary loans, must be repaid with interest. There are benefits, however, of borrowing directly from the U.S. Department of Education or from organizations supported by the federal government. These loans often include low interest rates, flexible repayment plans, and deferment options.

Basic qualification criteria include: U.S. or eligible citizenship status, financial need, enrollment or acceptance in an eligible program, and satisfactory academic progress once enrolled. The financial aid office at your school or the school you plan to attend can provide additional information, but the Student Aid help pages offered by the Department of Education are a great place to start.

FAFSA

The Free Application for Federal Student Aid (FAFSA) is where it all starts. You need to complete and submit this form to find out what types of federal assistance you may be qualified to receive. Keep the following in mind as you prepare your application:

  • Deadlines: There is an annual Federal deadline (e.g., Midnight CT, June 30, 2014 for the 2013-2014 school year). Each state also has a separate filing deadline and each institution establishes a deadline for its students to complete the necessary paperwork. Be sure to check with the school(s) you are interested in attending for more information.
  • Documentation: Locate the documents you’ll need in order to complete the FAFSA, such as your social security number, driver’s license, tax returns, income, and investments. If you are a dependant, you may also need your parents’ information.
  • Estimates: The FAFSA4caster is an online calculator that helps you determine what you may be eligible to receive.

It is free to complete and submit the FAFSA form. Students have three different filing options. Most students complete their FAFSA completely online. Once you’ve created a login, the site will walk you through a set of in-screen submission forms. If you prefer to fill out your application on paper, you can download a PDF of the forms on the website, print and mail in your application. If you do not have a computer, you can also request a paper FAFSA application by calling 1-800-4-FED-AID.

While there are services out there that charge a fee to help you complete the process, your school’s financial aid office should be able to assist for no additional charge. You can also watch a series of instructional videos on the FederalStudentAid YouTube channel. The U.S. Department of Education also provides detailed instructions and technical support through an entrance counseling program.

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. Depending on loan and enrollment status, students can expect to pay a fixed rate on the federal loans outlined in their MPN. Currently, interest rates range between 3.86% and 5.41%.

Types of Federal Loans

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.

Direct Subsidized Loans

  • Eligibility: Undergraduate students enrolled at least half-time and demonstrate financial need
  • Annual award available: $3,500 to $5,500
  • Interest rate: 6.8% on loans initiated after July 1, 2013
  • Lender: U.S. Department of Education

Direct Unsubsidized Loans

  • Eligibility: Graduate and undergraduate students enrolled at least half-time, financial need not required
  • Annual award available: $5,500 to $20,500 ,minus any subsidized loans received during the same time frame
  • Interest rate: 6.8%
  • Lender: U.S. Department of Education

Direct PLUS Loans

  • Eligibility: Parents of dependent undergraduate students who are enrolled at least half-time; graduate or professional students enrolled at least half-time; financial need not required; no negative credit history
  • Annual award available: Cost of attendance minus other financial aid received
  • Interest rate: 7.9%
  • Lender: U.S. Department of Education

Federal Perkins Loans

  • Eligibility: Undergraduate and graduate students
  • Annual award available: Up to $5,000 for undergraduate students, up to $8,000 for graduate students.
  • Interest rate: 5%
  • Lender: College where the student is enrolled

If you take out more than one federal loan, you may qualify for a consolidation loan after you graduate, withdraw from school, or drop below half-time enrollment. Consolidation provides some benefits, such as a single monthly bill, flexible terms, and reduced payments.

Direct Consolidation Loans

  • Eligibility: Those who have borrowed at least one Direct Loan or Federal Family Education Loan that is currently in a grace period, being repaid, or in default (with some restrictions) are eligible.
  • Interest rate: A fixed rate determined by the rates of the loans being consolidated
  • Lender: U.S. Department of Education

Note that the details of all of the loans described above are subject to change. Refer to the Federal Student Aid website for the latest information on these and other federal financial aid options, including work-study.

Federal Work-Study program

Undergraduate and graduate students may be eligible for part-time employment to help pay for college expenses while they are enrolled in school. This is not a loan, but instead compensation for work performed on or off campus; compensation that is funded by the U.S. Department of Education.

  • Eligibility: Undergraduate, graduate, and professional students; qualification is determined through the FAFSA and based on financial need
  • Pay and hours: Earnings and number of hours depend on the amount of funding awarded to the student
  • Assignments: Coordinated through the school’s financial aid office and student’s employer; ideally relate to field of study

The Terms of Borrowing

Every loan includes specific terms that outline what will be borrowed and how it will be paid back to the lender. This section of the guide describes some of the key terms of federal loans. Review your loan offers carefully before accepting.

Repayment Period

In most cases loan repayment begins after graduation. However, repayment can also begin when and if your enrollment decreases to less than half-time. Repayment of PLUS loans must begin once you have received the full amount, even if you are still in school.

The lender or the loan servicer (i.e., a separate company that manages loan administration and collections) will determine when payments should be made, how often they should be made, and the amount to be paid.

It is possible to have a grace period between graduating, or drop in your enrollment hours, and when repayment starts. Some federal loans allow a six-month grace period and this can be extended or delayed due to special circumstances such as being called to active military duty or reenrolling in school. Check the terms of your loan package to find out more about the options available.

Repayment Options

The lender or loan servicer will provide you with available options for repaying your loan, and the plans available vary depending on the types of loans you received. Primary repayment plan options are described below. Refer to the Federal Student Aid website for additional details.

Standard

  • Eligible loans: Direct Subsidized and Unsubsidized, Direct PLUS for Parents, Direct PLUS for Graduate and Professional Students, Direct Consolidation, Subsidized and Unsubsidized Stafford
  • Monthly payment: Fixed, $50 minimum
  • Time frame: Fixed for up to 10 years
  • Considerations: This is the default plan you will be expected to follow if you do not choose a plan at the time of repayment. May have the largest monthly payments, but loan is paid off earlier, accumulating less interest

Graduated

  • Eligible loans: Direct Subsidized and Unsubsidized, Direct PLUS, Direct Consolidation
  • Monthly payment: The amount you pay each month begins at a lower rate, then increases periodically over your repayment period. Monthly amounts will cover at least the interest accrued on the loan between payments.
  • Time frame: Up to 10 years
  • Considerations: This loan is designed for individuals with low incomes, who may end up paying more over the life of the loan than they would with a standard plan, which is due to higher interest accumulation early on.

Extended

  • Eligible loans: Direct Subsidized and Unsubsidized, Direct PLUS, Direct Consolidation
  • Monthly payment: Fixed or graduated; may be lower than the standard plan
  • Time frame: Up to 25 years
  • Considerations: Must owe more than $30,000 on the loan you want to repay with this plan; may pay more over the life of the loan than with standard plan since more interest accumulates early when amount owed is higher.

Income-Based

  • Eligible loans: Direct Subsidized and Unsubsidized, Direct PLUS for Graduate and Professional Students, some Direct Consolidation
  • Monthly payment: Based on income and family size; capped at 15% of your discretionary income as calculated by the loan servicer; adjusted annually
  • Time frame: Up to 25 years; unpaid balance after that time may be forgiven
  • Considerations: Must have partial financial hardship to qualify for this plan; may be taxed on amount that is forgiven

Income-Contingent

  • Eligible loans: Direct Subsidized and Unsubsidized, Direct Plus for Graduate and Professional Students, some Direct Consolidation
  • Monthly payment: Based on annual income, family size, total loan amounts
  • Time frame: Up to 25 years; unpaid balance after that time may be forgiven
  • Considerations: May be taxed on amount that is forgiven

Income-Sensitive

  • Eligible loans: Federal Family Education Loans (note: FFEL program loans have not been issued since July 1, 2010)
  • Monthly payment: Based on annual income; adjusted as income increases or decreases
  • Time frame: Up to 10 years
  • Considerations: Each lender determines how monthly payment will be calculated.

Pay as You Earn

  • Eligible loans: Direct Subsidized and Unsubsidized, Direct PLUS for Graduate and Professional Students, some Consolidation loans
  • Monthly payment: Based on annual income; adjusted as income increases or decreases
  • Time frame: Up to 20 years; unpaid balance after that time may be forgiven
  • Considerations: Must have partial financial hardship to qualify for this plan; May be taxed on amount that is forgiven

Perkins Loans have different options and plans, with payment based on the amount that was borrowed. Students should check with their school’s financial aid office to find out more about repayment of these loans.

Loan Forgiveness Programs

Loan forgiveness, cancellation, and discharge options vary depending on the type of loan. Students with outstanding Direct Loans, FFEL Program Loans, or Perkins Loans may be eligible under a wide range of conditions, such as:

  • Borrower’s total and permanent disability or death
  • Bankruptcy (in rare cases)
  • Closed school
  • False loan certification (from school)
  • False loan certification (identity theft)
  • Unpaid refund (from school)
  • Teacher loan forgiveness
  • Public service employment

Keep in mind that while there are often provisions for forgiveness, student loan debt generally cannot be cancelled or forgiven as part of a bankruptcy claim.

If you think you may be eligible for one of these programs, contact your loan servicer for more information and to submit an application.