What You Should Know About Federal Student Loans
Many students take out loans to help pay for college. Federal student loans are loans provided by the U.S. government to help cover the costs of higher education at a college or career school. These loans usually have better terms than loans from banks or other private sources. Here’s what you need to know about federal student loans for college.
During the COVID-19 pandemic, the U.S. Department of Education enacted a student loan payment pause. This included a suspension on the accrual of interest, repayment, and collections for all federal student loans. The pause ended on June 30, 2023. Interest will resume accruing on September 1, 2023, and payments will be due starting in October for borrowers who are in repayment. Students who are attending college are not required to make payments on their federal loans until after they graduate.
See below for information about upcoming changes to repayment policies and plans and new interest rates for 2023-2024.
WHY CONSIDER A Federal Student LOAN?
College loans provided by the U.S. Department of Education’s federal student loan program, known as the William D. Ford Federal Direct Loan Program, generally have lower interest rates and more flexible repayment terms than private loans. Most federal student loans do not require a credit check.
If you demonstrate financial need, you may qualify for a Direct “subsidized” loan. The advantage of subsidized loans is that the government pays the interest on the loan while you are in college. If you are unable to demonstrate financial need, you may still be eligible for an “unsubsidized” federal student loan. With a Direct unsubsidized loan, you are responsible for paying the interest even while you’re in school.
What TYPES OF FEDERAL STUDENT LOANS Are Available?
The U.S. Department of Education offers the following four types of Direct Loans.
- Direct Subsidized Loans are made to eligible undergraduate students who demonstrate financial need. Loan interest is subsidized (paid by the government) while the student is in school at least half-time and for a period of six months after the student leaves school.
- Direct Unsubsidized Loans are loans made to undergraduate, graduate and professional students without regard to financial need. Students are responsible for paying interest on a direct unsubsidized loan during all repayment periods and even while they are in school. However, students enrolled in an eligible college or career school at least half-time usually qualify for “in-school deferment.” During this deferment period, students do not have to make interest payments while they are in school and for six months after leaving school, but interest will accrue during that time and will be added to the balance of the loan. This deferment is usually granted automatically to students who qualify.
- Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. Borrowers who have an adverse credit history must meet additional requirements to qualify.
- Direct Consolidation Loans allow students to combine all of their eligible federal student loans into a single loan with a single loan servicer.
How Much Can I Borrow?
There are limits on the amount of subsidized and unsubsidized loans that you may receive each academic year (annual loan limits) as well as limits on the total amount you may receive for undergraduate and graduate study (aggregate loan limits).
The amount you can borrow may vary depending on what year you are in school and whether you are a dependent or independent student. For example, dependent undergraduate students may borrow up to $3,500 in Direct Subsidized Loans and $2,000 in Direct Unsubsidized Loans during their freshman year of college, for an annual limit of $5,500. These limits are increased during their sophomore, junior and senior years of college.
Parents and graduate students who are eligible for PLUS loans can borrow an amount up to the cost of attendance at the school the student attends minus any other financial aid the student receives.
If you are a dependent student whose parents are ineligible for a Direct PLUS Loan, you may be able to borrow more than the limit on Direct Unsubsidized Loans. Check with your college’s financial aid office for more information.
What Are the INTEREST RATES ON FEDERAL STUDENT LOANS?
The interest rate on federal student loans is established annually and varies depending on the type of loan. Federal student loans also have fees, which will be deducted from your award. Below are the interest rates and fees for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans first disbursed on or after July 1, 2023, and before July 1, 2024.
Federal Direct Loans
Eligibility: Undergraduate and graduate students with or without financial need.
Annual Loan Limits: Dependent undergraduates: $5,500 first year, $6,500 second year, $7,500 third year and beyond; limits for independent and graduate students are higher.
Interest Rate for Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students: 5.50%
Interest Rate for Direct Unsubsidized Loans for Graduate and Professional Students: 7.05%
*The fee on Direct Subsidized Loans and Direct Unsubsidized Loans is a percentage of the loan amount and is proportionately deducted from each loan disbursement.
Eligibility: Parents of dependent undergraduate students with or without financial need; graduate and professional students with or without financial need.
Annual Loan Limits: Up to the total cost of college for the year, minus any financial aid already received.
Interest Rates for Direct PLUS Loans: 8.05%
HOW Do You QUALIFY FOR A FEDERAL STUDENT LOAN?
To apply for a federal student loan, you must submit a completed FAFSA (Free Application for Federal Student Aid) between October 1 and June 30. For a Direct PLUS Loan, you will also be required to complete the Direct PLUS Loan Application and sign a promissory note. Many states and colleges set priority deadlines by which you must submit the FAFSA form to be considered for the aid programs they administer. Additionally, because some states and schools have limited funds, you should try and submit your completed FAFSA as soon as you can after October 1 to have the best chance to qualify for a federal student loan.
To qualify for a federal student loan, you must meet the following general eligibility requirements:
- Demonstrate financial need (for most programs)
- Be a U.S. citizen or eligible non-citizen
- Show you are qualified to obtain a college or career education by having a high school diploma or recognized equivalent, such as a General Education Development (GED) certificate, completing a high school education in a homeschool setting approved under state law, or enrolling in an eligible career pathway program
- Have a valid Social Security number (with the exception of students from the Republic of the Marshall Islands, Federated States of Micronesia, or the Republic of Palau)
- Be enrolled or accepted for enrollment as a regular student in an eligible degree or certification program
- Be enrolled at least half-time to be eligible for Direct Loan Program funds
- Maintain satisfactory academic progress in college or career school
ADDITIONAL PLUS LOAN REQUIREMENTS
To qualify for a parent PLUS loan, the borrower must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time at an eligible school; not have an adverse credit history (unless certain additional requirements are met); and meet the general eligibility requirements for federal student aid.
To qualify for a grad PLUS loan, the borrower must be a graduate or professional student enrolled at least half-time at an eligible school in a program leading to a graduate or professional degree or certificate; not have an adverse credit history (unless certain additional eligibility requirements are met); and meet the general eligibility requirements for federal student aid.
REPAYMENT PLANS ARE FLEXIBLE
The federal government offers several loan repayment options. Borrowers are assigned a payment plan when they first begin repaying their loans, but they can change repayment plans at any time, free of charge.
- The standard plan sets up the same payment amount every month (with a minimum payment of $50).
- The graduated plan starts out with lower payments that increase every two years. Payment amounts are set to enable the student to repay the loan within 10 years.
- The extended plan sets up either a fixed or graduated payment over a period of 25 years and applies only to loan amounts above $30,000.
- Income-driven plans allow payments to fluctuate according to the borrower's annual income, family size, and other factors. The federal government offers several income-driven plans with different qualifications. For example, the Revised Pay As You Earn plan reduces monthly loan payments to 10 percent of discretionary income and forgives the remaining loan balance after 20-25 years of consistent payments.
A New Repayment Plan is Coming Soon
The federal government will begin rolling out a new income-driven plan later this summer, the Saving on a Valuable Education (SAVE) plan intended to significantly reduce monthly loan payments and to prevent loan balances from ballooning due to unpaid interest. When the plan is fully enacted (sometime in 2024), student loan payments will be set at 5 percent of a borrower’s discretionary income and, for borrowers with original loan balances of $12,000 or less, the plan will forgive the remaining loan balance after 10 years of consistent payments. If you are a single borrower earning $32,800 or less, your loan payment under the new plan may be as low as $0.
For more information on SAVE and other repayment plans, see the Federal Student Aid website. The website also features a free Loan Simulator to help you review different repayment plans and select the best one for your situation.
what’s next after the end of the loan payment pause?
As mentioned above, the student loan repayment pause enacted by the federal government during the COVID-19 pandemic came to an end on June 30, 2023. To help borrowers transition to making loan payments again, those borrowers who miss payments between October 1, 2023 and September 30, 2023 will not be considered, or reported to the credit bureaus as, delinquent nor will their account be placed in default or referred to debt collection agencies.
According to the Federal Student Aid website, you should receive a billing statement or other notice at least 21 days before your payment is due. This notice should include your payment amount and due date.
If you do not receive a billing statement or other notice, you should contact your loan servicer to confirm your payment due date, interest rate, and monthly payment amount. You can find your loan servicer on the Federal Student Aid website.
Financial HELP BEYOND STUDENT LOANS
If federal student loans do not cover all of your college expenses, there are other financial aid options offered by the federal government, such as (which is financial aid that doesn’t have to be repaid unless, for example, you withdraw from school), work-study (which is a work program through which you earn money to help pay for school), and various other financial aid and loan repayment programs as well as tax breaks for education.
With few exceptions, not repaying a student loan will lead to garnishment of wages and income tax refunds, and a negative impact on your credit history. It’s important to think carefully about your future educational and career goals before taking out a student loan and understand how student debt can impact your financial future.
Portions of this article were excerpted from the US Department of Education’s Federal Student Aid website.