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Federal Student Loan Essentials

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Federal Student Loan EssentialsThis is the third of a four part article series on student loans.  This article covers federal student loan basics.  Other articles cover an introduction to student loans, private student loans, and choosing between federal and private loans.

If you are thinking of taking out a federal student loan, it’s important to understand how they work and what your options are.  There are a number of different types of federal student loans.  Here are the most common:

Federal Loans that Require Financial Need

Subsidized Stafford Loan

Subsidized Stafford loans charge a fixed rate and are given to students who have demonstrated financial need.  The government generally covers the interest on a subsidized Stafford loan until the student has been out of school for 6 months.

Perkins Loan

Perkins loans are only given to students with the greatest financial need, so these loans can be very difficult to qualify for.  Perkins loans are different from other federal student loans in that participating schools receive a limited amount of Perkins money to lend to students.  So in theory, you could qualify for a Perkins loan at one school but not another.  Interest is not charged and no payments are due until 9 months after the student leaves school.

Federal Loans that Don’t Require Financial Need

Unsubsidized Stafford Loan

You don’t need to show financial need to qualify for an unsubsidized Stafford loan.  Unsubsidized Stafford loans accrue interest while you are in school, but you don’t have to begin making payments until the student has been out of school for 6 months.

PLUS Loan for Parents

A PLUS loan allows a parent to borrow as much money (up to the full cost of attendance) as needed to pay for a dependent child’s higher education expenses, as long as they have good enough credit

Other Government Programs

In addition to the above mentioned federal loans, a number of states will lend money to students who live or will attend college in-state.  Rates, repayment terms, and fees vary by state, so see your applicable state for details.  Additionally, some students may be eligible for college work-study or other programs.

Benefits of a Federal Student Loan

In an ideal world nobody would have to take out loans in order to attend college.  However, if you must borrow, there are definitely some advantages to taking out a federal student loan.  Here are some of them:

  • Parents don’t have to co-sign a federal loan like they may have to on a private loan, so generally only the student is on the hook for payments on the loan.
  • The interest rate on federal student loans is generally fixed, so there is less payment uncertainty.  If interest rates increase, payments on federal student loans don’t increase.
  • Since no credit check is generally required, students with poor credit receive the same interest rate on their loans as those with excellent credit.
  • Although the terms on private student loans vary by lender, should you have difficulty making your loan payments, federal student loans generally offer more flexibility and repayment options than private student loans.
  • Federal loans may be eligible for cancellation under rare circumstances, such as permanent disability or death.  If you don’t qualify for cancellation, though, the standard to disqualify your student loans under bankruptcy is very difficult to meet (federal or private student loans).
  • The government may subsidize part of the interest on certain federal loans.

 Downsides of a Federal Student Loan

Unfortunately federal student loans do have a few downsides:

  • Since no credit check or risk of default is taken into consideration, an Ivy League student with excellent credit does not receive preferential loan terms compared to a community college student with awful credit.  Federal loans charge the same interest rates no matter how likely a student is to default.
  • Borrowers with good credit can sometimes receive a private student loan with a lower initial interest rate and lower fees than a federal student loan.
  • If interest rates decrease, the payments on a private student loan could decrease while payments on a federal student loan likely would not change.
  • Students generally have to fill out the FAFSA in order to qualify for aid from the federal government.  Students who take out only private student loans don’t have to bother filling out the FAFSA.
  • There are limits to the amount of money the federal government will lend a student, and many students need to borrow more than this limit.  Private lenders are oftentimes willing to lend more than the federal government.

If you need to take out student loans, it’s crucial that you understand all your options so that you can borrow responsibly and take out the most appropriate loans for you.  Doing your homework on student loans can save you thousands of dollars in interest and fees over the life of the loan.

What has been your experience with federal student loans?  Leave a comment below!

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