There are a number of different types of federal student loans, but in general you will find that they all have relatively low, fixed interest rates with favourable terms for paying your loans back. This is a good thing! This means that they offer things like deferments, forbearance, consolidations, and income based repayment plans (If you don’t know what those things are, you will if you read the whole guide).
When you get a federal student loan, it generally either comes from the Department of Education (this is what is referred to as a Direct Loan) or via a private lender (this is what’s called a Federal Family Education Loan or FFEL). With both of the methods, you should know that the actual check will go to your school first. The school will then deduct whatever you will owe them over the course of the year and give you any remaining money via cash, check, or direct deposit.
Types of Federal Loans:
- Federal Perkins Loan – This is a loan which carries a fixed interest rate of 5% over a 10 year repayment period. It has a nine-month grace period in which you don’t have to make payments after you graduate and interest does not begin to accrue until the borrower starts to repay the loan. For undergraduates, the loan limit is $5,500 per year with a lifetime maximum of $27,500. For graduate students, the loan limit is $8,000 per year with a lifetime limit of $60,000 (this includes undergraduate loans). Because of the favourable interest rates, this loan is only available to students from low-income households.
- Stafford Loan – This is a student loan that can be given on a subsidized (for students with high financial need) or non-subsidized basis. This loan has a six month grace period in which you don’t have to make payments after you graduate The interest rate changes annually so should be checked every year and if it is subsidized that means that the interest is paid by the government while the student is in school. If it is not subsidized that means that the interest accumulates on the balance while the student is in school. There is a limit on how much you can borrow with a Stafford Loan. For a subsidized loan, you can borrow up to $8,500 per year. For an unsubsidized loan, you can borrow up to $12,000 per year.
- Parent Plus Loan – Unlike the other two federal loans, these are student loans that are borrowed by a student’s parents. Interest rates are generally higher for these types of loans (usually between 7.9% and 8.5%) and parents are only eligible if they have a favourable credit score. Since the parent is the borrower, it is up to repay this loan. The amount that you can borrow depends on the costs to attend the school that the student is attending.
- Plus Loans For Graduate Students – This loan has similar terms and stipulations as Parent Plus Loans, but it’s given out to graduate students and not their parents
Benefits of U.S. Federal Student Loans:
- Loan forgiveness – The U.S. actually provides students with many opportunities to have their federal student loans discharged. If a student has a disability, for example, they might qualify for a 100% loan discharge. There are also provisions which forgive loans to teachers in specific subjects or for those who work in a lower –income school. A person employed in the public service organization, or serving in Americorps or Peace Corps qualifies for forgiveness after 10 years of 120 consecutive payments without being late.
- Eligibility – Almost all students are eligible for federal student loans. Loans do not take into account a student’s credit score or any financial issues they might have. The only exception is Plus loans for which a credit score matters.
- Flexible Repayment – You can choose extended repayment or change your payments as your income changes
- Pausing Payments – Should you become unemployed, you can pause repayment. While this may result in you paying more over the life of your loan, it will allow you to get through tough financial times easier.
Drawbacks of U.S. Federal Student Loans:
- Need Based Eligibility – The best federal loan, the Perkins Loan, is only eligible to those from low income families.
- Limited Amounts – All federal student loans have maximum amounts that they will provide you with. If for whatever reason you need more money, you will have to turn to private or alternative student loans.
- Higher Interest Rates – While federal student loans have low interest rates, the rates on private or alternative student loans are generally lower. While this might seem like a reason to choose private loans over federal loans, the benefits you get and the flexibility around repayment that federal loans offer often means that they’re still the best choice.