Greetings, eager learners and knowledge seekers! Today, we’re embarking on a journey of educational empowerment, where the spotlight shines on the realm of the best federal student loans. Imagine a world where financing your dreams comes with clarity, flexibility, and smart choices. Yes, it’s possible, and we’re here to guide you through the intricacies of the best federal student loans available, ensuring that your pursuit of higher education is not just a destination, but a well-informed adventure.
1. Introduction
Federal student loans came about to help students receive a better education. Such loans can be obtained through the college or university the student intends to or by a bank of the student’s choice. These loans are provided to students to assist in payment of tuition, books, and living expenses while the student is in school.
There are many benefits to receiving a federal student loan. Some federal student loans are subsidized. With a subsidized loan, the government pays the interest while the student is in school, during the six-month grace period after graduation, and during deferment periods when the loan is not being repaid. For those who have an unsubsidized loan, the student is responsible for paying all the interest. With an unsubsidized loan, the student may choose to pay the interest while in school, otherwise the interest will be added to the principal amount of the loan.
The biggest underlying benefit to receiving a federal student loan is the fact that it can be easier to qualify for versus other types of loans.
Step one in determining a student’s eligibility is to fill out a Free Application for Federal Student Aid (FAFSA). This application requires information about the income and tax information of the student and the student’s parents. After the application has been processed, the student will be notified as to what loans they are eligible for. This is very beneficial for students is that it can be a very minimal headache to get the loan. Other types of loans require credit checks, and finding a lender, and sometimes it is necessary to find a cosigner.
Step two is finding out what your school offers in federal student loans. A school will have a list of loans they offer in a financial aid package sent to the student. Requirements and terms of the loan can be reviewed and if the loan is appealing, the student may accept the loan by signing and returning it to the financial aid office. Around the time the student accepts the loan, the student will also have to complete entrance counseling. It will explain the loan process and the student’s rights and responsibilities towards the loan.
The third step is signing a Master Promissory note. This is a legal document where the student promises to repay the loan stated in the document. The Master Promissory note can be used to make loans for up to ten years. With the note, the student can obtain loans at differing times at the school. This sure does beat signing a new promissory note each time a student gets a loan. It is without question that the benefits of federal student loans are far better in comparison to other loans currently available for students today.
1.1. Importance of Federal Student Loans
Nevertheless, students who are deemed to have a greater financial need can be eligible for a subsidized loan, where the government will pay the interest while the student is in school at least half-time, during the grace period, or a deferment.
With a federal student loan, the applicant is judged impartially, regardless of credit history or income, and loans can be obtained up to $20,500 per year. The interest rates for federal loans have been at record lows. Now in 2009, there is a fixed interest rate of 5.6 percent for subsidized and unsubsidized Stafford undergraduate loans, a decrease from 6.0 in 2008. As there is substantially less risk for the loan lenders, they can offer students lower interest rates. This is a major advantage compared to a private loan, where interest rates can be high and without any kind of regulation.
When looking at the loan options, many graduates or degree holders will remember the long and tedious process they had to go through to secure a private loan to pay for their education. While a private loan can help you in dire straits, due to the current economic climate, many private lenders are not easily offering student loans. The nature of the private loan business is solely for company profit, and the loan provider may not offer a very flexible repayment plan, and the interest rate may not be fixed.
It may be hard to discern the difference between a federal student loan and a private student loan. These funding programs, which are available from the Federal Family Education Loan Program or the US Department of Education, have helped many students who find themselves suddenly with a tighter budget or those students who want to further their education to secure a better future.
1.2. Factors to Consider when Choosing a Federal Student Loan
For undergraduate and graduate students, there are three different types of loans. The Stafford Loan, which is the most popular, offers a low-interest rate and is available to students regardless of financial need. Subsidized Stafford Loans are based on financial need, and the government pays the interest while the student is in school, in deferment, and during the loan’s grace period. Unsubsidized Stafford Loans are not based on financial need, and the student is responsible for paying all accrued interest. The PLUS Loan is for parents of undergraduate and dependent students. It helps pay for education expenses not covered by other financial aid, and loans are based on creditworthiness. PLUS Loans are also offered to graduate and professional students. The third type of loan is the Perkins Loan, which is a low-interest loan for undergraduate and graduate students with exceptional financial need.
When choosing a federal student loan, it is important to consider the terms and additional options that come with the loan. There are three different types of student loans available, and each loan type offers different award amounts and has separate loan terms. It is essential to be familiar with the various types of loans to make an informed decision on which loan is right for you.
2. Types of Federal Student Loans
There are four types of federal loans, including Perkins, Stafford, Grad Plus, and Parent Plus loans. Perkins loans are offered to students with “exceptional financial need.” These loans are not as widely available and, as a result, are highly competitive. A Perkins loan does not begin to accumulate interest until after a student is no longer in school. Once a student has graduated, they must repay the loan to the institution they attend. The amount of money a student can receive is not to exceed 27,500 dollars, and the Perkins loan is available to both undergraduate and graduate students.
Stafford loans are available to all students enrolled in higher education. There are two types of Stafford loans: subsidized and unsubsidized. A student who receives a subsidized Stafford loan will not accumulate any interest on the loan until after they are no longer in school. An unsubsidized Stafford loan will accumulate interest while the student is still in school. These loans are very widely available, as interest rates for both subsidized and unsubsidized loans are lower than any other type of federal loan. A student can be eligible to receive anywhere from 5,500 to 20,500 dollars per year, depending on certain factors such as dependency status and what year the student is in school. (For example, freshmen undergraduate students can only receive $5,500.) Students will begin to repay Stafford loans nine months after they are no longer enrolled in school at least part-time.
2.1. Direct Subsidized Loans
Direct Subsidized Loans are federal student loans for undergraduates who need financial assistance. The fact that the word “subsidized” is a part of the name of this type of loan is the most important thing about it because subsidized means that the government will pay the interest on your loan while you are enrolled in school at least half-time, for the first six months after you graduate (a period known as the grace period), and during any deferment periods. This is what distinguishes a subsidized loan from a direct unsubsidized loan. For a direct unsubsidized loan, the borrower is responsible for paying the interest on the loan during all periods.
With direct subsidized loans, the loan amount is determined by the student’s school. Students are eligible to borrow this type of loan if they are enrolled in a program that leads to a degree or certificate and if they are determined to need financial assistance. After the student has borrowed a direct subsidized loan, it will be included in their financial aid award letter and they will be able to see the amount that they are eligible to borrow. The student can borrow a direct subsidized loan each year that they are enrolled in school.
2.2. Direct Unsubsidized Loans
Undergraduate students are considered for Direct Unsubsidized Loans. In contrast with directed advances, students do not need to show financial need to meet all requirements for a Direct Unsubsidized Loan. Your school determines the amount you can get depending on your cost of participation and other financial aid you get. You are responsible for paying the interest on a Direct Unsubsidized Loan during all periods. If you choose not to take care of the interest while you are in school and during grace periods and deferment periods, your interest will accumulate and be capitalized (that is, your interest will be added to the principal amount of your loan).
Students receiving a Direct Unsubsidized Loan are required to complete counseling. The amount of Direct Unsubsidized loan that a student who isn’t financially independent may obtain every year is shown in the table below:
| Year in School | Dependent Undergraduate Student | Independent Undergraduate Student or Dependent Students Whose Parents Were Denied a PLUS Loan |
|---|---|---|
| Freshman | $5,500 | $9,500 |
| Sophomore | $6,500 | $10,500 |
| Junior or Senior | $7,500 | $12,500 |
2.3. Direct PLUS Loans
If your parents are interested in pursuing a Direct PLUS Loan, they will also complete the FAFSA. The information from your parents’ FAFSA can be transmitted automatically to the Direct PLUS Loan application. If your parents choose to complete a Direct PLUS Loan Application instead of having the information transmitted from the FAFSA, they should contact the financial aid office at the school.
Parents may be eligible to borrow a Direct PLUS Loan if they are your biological or adoptive parents, and your school is your parent PLUS the student is a dependent student. (This is federal eligibility criteria; your school may have different criteria.) With a Direct PLUS Loan, parents may borrow up to the cost of your education minus any other financial aid that you receive. There is also a credit requirement for a PLUS loan.
our parents must not have an adverse credit history. A credit check will be conducted to determine whether your parents are eligible for a PLUS loan. If a parent is denied a PLUS loan, you as the dependent student will be eligible for additional unsubsidized Stafford loan funds. If your parents are approved for a PLUS loan, the information will be provided in a loan disclosure statement from the US Department of Education and the funds will be disbursed to the school to pay off your educational expenses through that school.
2.4. Federal Perkins Loans
Federal Perkins Loans were given to students with exceptional financial need. When the program was active, it would provide loans with a fixed 5% interest rate to students attending institutions of higher education, and the interest was paid by the school during the in-school period and deferment (a 9-month grace period after graduation). Federal Perkins Loans were unique because the school was the lender. This meant that repayment would be made to the school or its agent and the loan amount was determined by the school. Because it was a campus-based system, not all schools participated in the program. This loan program ended on September 30, 2017, and while schools are no longer able to disperse new loans to students after this date, students who had already taken out Perkins loans are still within their rights to finish their education or go on to postgraduate education and receive the same benefits.
3. Applying for Federal Student Loans
To apply for a federal student loan, you must first complete and submit a Free Application for Federal Student Aid (FAFSA) form. Based on the information you provide, the government will determine your eligibility. The amount of money you are allowed to borrow will depend on several factors, including your family’s contribution, the cost of tuition and other expenses at your school, and the amount of other aid you are receiving.
Currently, the yearly maximum that a dependent undergraduate student can borrow is $5,500 for the first year, $6,500 for the second year, and $7,500 for the third and subsequent years, with a cumulative maximum of $31,000. The yearly maximum increases to $9,500 for students who qualify as independent based on parental refusal to sign the FAFSA, with a cumulative maximum of $57,000. Graduate students can currently borrow up to $20,500 per year, with a cumulative limit of $138,500, including loans received for undergraduate study.
Note that these figures are subject to change, so make sure to check with your school’s financial aid office for the most current information. Once you have been deemed eligible, you will receive a letter from your school’s financial aid office informing you of the loan amount and type. Keep this letter for your records. You will also need to complete both entrance and exit interviews before you can receive the funds. Make sure you understand all the terms of the loan as well as your rights and responsibilities.
The information provided here is just a basic overview; for more details, visit the Federal Student Aid website.
4. Understanding the Financial Aid Award Letter
You should receive an award letter from the college(s) to which you were accepted and applied for financial aid. The award letter will detail the types of aid the student is being offered as well as the amount of each award. Some colleges are now providing the Net Cost Worksheet (see helpful hints) as part of the award letter. The Net Cost Worksheet is a tool used to help students and families understand the true out-of-pocket cost to the student for one year at that specific college. Understanding the award letter is essential to comparing aid offers from different colleges. Since the format of award letters can differ significantly from college to college, it is a good practice to get out a highlighter and make note of the value of each type of aid being offered. As you become familiar with the financial aid process, you will find that not all “awards” are providing an award. For example, a loan is something that must be paid back and students are generally eligible for the loan amount, but it is not being directly paid to the student at the time of award. Oftentimes, students will accept or deny loans, so it is important to distinguish the types of loans being offered and the amount of loan that will be added to the future student bill. Moving forward, it is important to clarify whether each award is for one year or the total amount for expected years until the degree. This is another great reason to discuss with the financial aid office personnel. Make sure that the student is aware of the commitment being made and take the time to consult a financial aid administrator if the award letter is unclear.
Now, let’s talk about grants. A grant is an award that does not need to be repaid and is awarded based on need. If the award letter indicates that a student is eligible for a Pell Grant, it is important to understand that this amount could change based on the student’s enrollment status. For instance, if the award letter says that a $2000 Pell Grant is offered, this is likely the amount that a full-time student will receive. If the student is only enrolled at half-time status, the Pell Grant will be split into two $1000 dispersals. The same concept applies to the Federal Supplemental Educational Opportunity Grant (FSEOG). It is a good practice to accept free aid (grants or scholarships) while waiting as long as possible to decide on loans. This will allow for a clear understanding of the best-case scenario for out-of-pocket costs. Consider the hypothetical college A and college B acceptance with varying financial aid award letters. The out-of-pocket cost is the college cost minus any free aid. By waiting to decide on loans until receiving a possible award off of a loan waiting list, a student can make the proper loan comparison when deciding between colleges.
5. Accepting and Managing Federal Student Loans
The school that will be lending the money to the student will inform the student of the amount of money that can be borrowed. In most cases, a student will not be given the amount listed in the award letter especially if it is for a student loan. This is a catch-22 because to know how much that they will need a student must go through the process of applying for a loan and going through the credit check. To minimize money borrowed, a student should figure out what specific amount will be needed for the entire educational process. In certain instances, a student may want to consider taking out a private student loan to supplement the federal student loan. The school will provide the student with the terms of the loan, the date of disbursement, and the amount of money that can be borrowed. This process works differently according to the type of federal loan. To accept a Federal Perkins Loan, the student will need to sign the Perkins promissory note to receive the funds. At some schools, this signing process is done online. The student should know that they are allowed to cancel the loan amount or a portion of it by informing the school before the disbursement of the loan. A student should keep in mind that a low-interest federal student loan is still a better option over any type of alternative loan so long as the loan amount is kept low. A Stafford Loan and a Federal Parent PLUS loan are both accepted differently. Often times a student will need to complete a master promissory note and entrance counseling for a Stafford Loan. This is also something done online and will help to prepare the student for combating debt post-graduation. The terms and conditions to the Stafford Loan will need to be reviewed and accepted before the loan can be disbursed.
Managing your federal student loan is crucial and the student should always borrow what they need and not what they want. It is key to know some of the consequences of taking out a federal student loan and what may occur to cause the loan to go into default. While a federal student loan can be a burden, it is still an investment in the borrower’s future. A student loan debt not only helps to increase the potential salary of an individual, but it is also a debt that will always be able to be paid off, even if the loan goes into default. This being said, a federal student loan debt is not as bad as a private student loan debt because it can be discharged if the borrower becomes totally and permanently disabled.
