Federal Student Loans

Federal student loans are unlike private student loans due to the fact that they are not provided by independent private lenders, and are rather made by directly via the Department of Education.

Up until 2010 about 75% of all federal student loans were made as part of the FFELP Loan Program (Federal Family Education Loan Program), which consisted of private lenders making federal Stafford Loans that were insured by the Department of Education.

This loan program has now been deprecated, and now all federal student loans are made via the Direct Loan Program, which means that private lenders are no longer part of the equation when you are applying for a federal student loan.

Federal Student Loans At a Glance

Federal student loans typically cost less than most private student loans, but do not have the same capacity to provide funding to student borrowers as most private loans do, as they have loan amount limits that are capped off with regard to the degree progress of the student.

They are based off of financial need, instead of credit, and for the most part only require you to submit the FAFSA by the appropriate deadlines in order to become eligible—there is no need to fill out numerous applications to separate lenders.

Here are some quick facts about federal student loan funding:

• Department of Education is the lender
• Must apply via the FAFSA
• Fixed interest rates that are lower than most private student loan rates
• Very low fees, if any
• Based on financial need, not on credit (except PLUS Loans)
• A wealth of repayment benefits, including deferment and forbearance
• Capped loan amount limits
• Can be used in conjunction with other forms of aid

The main thing to keep in mind when comparing federal student loans to private student loans is that they are generally easier to acquire due to the fact that they are based on financial need and not credit, with the main downside being their capped loan amount limits.

Getting a federal student loan is about completing a FAFSA by the appropriate deadlines, demonstrating financial need, and satisfying the litany of federal student aid requirements.

Becoming Eligible

To become eligible for a federal student loan you must be able to qualify for federal student aid. This means that you must be able to satisfy the list of federal student aid eligibility requirements.

Review this article about these requirements here, and make sure that you are able to answer appropriately for each item, as not being able to answer correctly for even one requirement can make you ineligible for the following academic term.

Once you have satisfied this list of federal student aid eligibility requirements, it is then about your ability to demonstrate the necessary level of financial need to qualify for the Subsidized Stafford Loan, and the Perkins Loan. The Unsubsidized Stafford Loan, PLUS Loans, and the Direct Consolidation Loan are not based on financial need.

Financial need is measured by the Department of Education via your expected family contribution, or EFC. This metric is calculated with regard to the information that you provided during the completion of your FAFSA, and relies primarily on the following factors:

• Your income as a student borrower
• Parents’ income if still a dependent
• The size of your household
• Number of family members that may be attending college

Once you have completed your FAFSA the aforementioned major factors will used to calculate your EFC, which should stand as an indicator of your ability to pay money towards your educational expenses out of your own pocket.

It is therefore better to have a lower EFC if you want to qualify for the highest amount of federal student aid, with EFC values of zero almost always being able to qualify for the maximum amount of aid possible.

You can learn more about the completing the FAFSA, and the process of receiving, and accepting your federal student aid in this article about submitting the FAFSA.

The Different Types of Federal Student Loans

There are six main types of federal student loans:

• Direct Subsidized Stafford Loan
• Direct Unsubsidized Stafford Loan
• Federal Perkins Loan
• Direct PLUS Loan for Parents
• Direct PLUS Loan for Graduate and Professional Students
• Federal Direct Consolidation Loans

Each type of federal student loan has its unique aspects that must be examined in order to gain a full understanding of how it can be successfully utilized in any financial aid award package.

Direct Subsidized and Unsubsidized Stafford Loans

Stafford Loans are the most common federal student loans in existence, and provide an enormous amount of aid to millions of students from across the country each year.

The main difference between the subsidized, and the unsubsidized versions is that interest does not accrue while you are in school with the Subsidized Stafford Loan, while it does with the Unsubsidized Stafford Loan.

The subsidized version is heavily based upon financial need, while its unsubsidized counterpart is not, and is given out to almost any student who can qualify for federal student aid.

Both loans can be used in conjunction with each other, and together they can total up to a specific capped loan amount that is contingent on the student’s degree progress.

You can learn more about Direct Stafford Loans in this article that explains everything you need to know about these federal student loans in detail.

Federal Perkins Loans

The federal Perkins Loan is a federal student loan that is made available at roughly 1,800 postsecondary institutions from around the country. It is heavily based on financial need, and is only given to those students with the lowest EFC values.

Here are some quick facts about the Federal Perkins Loan Program:

• Is only made available at roughly 1,800 colleges
• Is heavily based on financial need
• Has a fixed interest rate of five percent
• Must apply via the FAFSA
• Can benefit both undergraduate, and graduate students
• Undergraduate students are able to get up to 5,500 dollars in aid per year
• Graduate students are able to get up to 8,000 dollars in aid per year
• Undergraduate students can receive a maximum of 27,500 dollars of aid
• Nine-month grace period upon leaving school

Most students end up receiving about half the maximum available award amount, whether they are an undergraduate, or graduate student.

It has recently come to my attention that the Perkins Loan is no longer a subsidized federal student loan, as the interest which accrues while you are in school is money that you will owe upon leaving school.

Overall this does reduce the overall quality of this federal loan in my opinion, although it is still a great piece of financial aid to have in your repertoire.

You can learn more about this type of federal aid in this article about the Federal Perkins Loan Program.

PLUS Loans

There are two different kinds of PLUS Loans:

• PLUS Loans for Parents
• PLUS Loans for Graduate and Professional Degree Students

The former requires the parent of a dependent student to apply while the student is still an undergraduate. The latter does not have such a requirement, and a student who is currently enrolled in a graduate-level program is able to apply for a PLUS Loan on an independent basis.

PLUS Loans are federal student loans that are partly based on credit, and require the completion of a separate application as such. In this respect they are a bit different than the other types of federal student loans that I have already described, although they still have a low, and fixed interest rate that is preferable to most private student loans.

Another main advantage to getting a PLUS Loan is the fact that they can provide up to the cost of attendance much like a private student loan can. This is why I advise students to at least consider what a PLUS Loan can do for them before they look into any sort of private student loan funding.

Learn more about these unique types of federal student loans in this article about PLUS loans.

Federal Direct Consolidation Loans

The Federal Direct Consolidation Loan is the last type of federal student loan I am going to cover, as it is a unique kind of loan that doesn’t necessarily give you money directly to use for college, rather it can consolidate all of your current federal student loan debt into a completely new loan that will have a different interest rate, and loan term.

Applying for a Direct Consolidation Loan makes sense for a number of reasons:

• Pay off all current federal student loans with a new loan
• Will only have to make a single monthly payment instead of multiple payments
• Can get a lower interest rate that can lower the overall cost of your debt
• Can get an extended loan term that can lower monthly payments

If you think that a Federal Direct Consolidation Loan may be right for you, the application can be found at loanconsolidation.ed.gov. In this article I’ve provided more detailed information about consolidating your student loan debt.

Final Thoughts on Federal Student Loans

Federal student loans are great types of financial aid that should be utilized by any student who even has a slight need for additional funding to put toward educational expenses.

They key to applying for federal student loans, and for all federal student aid for that matter is completing the FAFSA as early as possible, as this is the universal application that the government makes available to students who wish to become eligible for federal student aid.

• The earliest you can submit a FAFSA is: January 1
• The latest you can submit a FAFSA is: June 30

I urge students to submit their FAFSA as early as possible so that their school’s financial aid department can get their award package in order, and so that they can maximize their ability to get the absolute most federal aid they possibly can.

Remember that students should apply for federal aid first via the FAFSA before taking out any private student loans, as they will then know how much private aid they will perhaps need, and will be saving money in the process.