As a student, it is not easy to afford high education at such young age. Even with your parents’ help, sometimes it is not enough. This is where seeking financial support is essential. Federal student loans account for the vast bulk of student loans in the United States. Those loans are a part of the assistance that the federal government with the U.S. Department of Education provides to the students as the lenders. Federal educational loans typically have better perks and terms than private student loans.
A loan is a specific amount of money that you borrow and must pay back with interest. If you decide to take out a loan, you have to understand who is lending you the money as well as the loan’s terms and conditions. In this article, you will learn more about every type of federal student loan.
Major Types of Federal Educational Loans
Mainly, there are 4 types of federal student loans; direct subsidized loans, direct unsubsidized loans, direct plus loans, direct consolidation loans. They basically have the objective of helping students pay for higher education.
Direct Subsidized Loans
Direct Subsidized Loans are available to qualifying undergraduate students who have proven financial need. Your financial need is estimated based on the information you give on the Free Application for Federal Student Aid (FAFSA).
Direct Subsidized Loans have slightly better terms than other federal loans. The federal government will cover the interest in certain situations, such as:
- When you are enrolled at least half-time in school,
- During the six-month grace period after you leave school,
- And during periods of deferment.
Your institution determines the amount of money you can get depending on your cost of attendance and other financial aid you receive. After July 2021, there has been no limit to how long you can receive a direct subsidized loan.
Direct Unsubsidized Loans
Direct Subsidized Loans are comparable to Direct Subsidized Loans, but there are a few significant differences. Most importantly, even when the loan is not in active repayment, the unsubsidized loan borrower remains responsible for the interest that accrues throughout all times. Unsubsidized loans are also available to both undergraduate and graduate students, and financial need is not an eligibility factor.
Unsubsidized loans have the same interest rate, origination fee, and repayment and forgiveness options as subsidized loans for undergraduates. On the other hand, graduate and professional students pay a higher interest rate (4.3%) on unsubsidized loans.
Direct Unsubsidized Loans, just like direct subsidized loans, do not need repayment while you are enrolled at least half-time in school and during a six-month grace period after leaving school. But interest accrues continuously and students must pay for it when the loans enter repayment.
These loans do not require a credit check but they do have borrowing limits. The loan limits vary depending on whether you are an undergraduate or graduate student, as well as whether you are a dependent or independent student.
The maximum amount you can borrow in Direct Unsubsidized Loans per academic year ranges from $5,500 to $12,500 for undergraduates. That depends on your year of study and whether you are a dependent student. For graduate or professional students, the annual maximum for Direct Unsubsidized Loans is $20,500.
Anyways, a financial aid administrator at your institution can help you understand your loan limits according to your situation. However, keep in mind that the amount you are eligible for may be less than the annual loan limits depending on your cost of attendance and other financial aid you receive.
Direct PLUS Loans
If you still need money to pay for your education after borrowing your maximum limit of unsubsidized and subsidized loans, PLUS loans aim to bridge the gap between the cost of attendance and available resources.
A credit check is necessary for this type of loan. Nonetheless, applicants with an adverse credit history may still be able to get a PLUS loan with the help of a co-signer, commonly known as an endorser, or by completing other requirements. PLUS Loans help pay for education expenses up to the cost of attendance minus all additional financial aid.
Direct PLUS loans are available in 2 forms:
- The Grad PLUS loan for graduate or professional students.
- The Parent PLUS loan for parents of dependent undergraduate students.
There are some key differences between the Grad PLUS and Parent PLUS loans.
Grad PLUS Loans
The US Department of Education provides Direct PLUS Loans to eligible graduate or professional students at institutions participating in the Direct Loan Program. To be eligible for a Grad PLUS Loan, you must meet the following requirements:
- Have a bachelor’s degree or higher.
- Enrolled at least half-time at an eligible institution in a program leading to a graduate or professional degree or certificate
- Not have a negative credit history (unless you meet extra eligibility conditions); and
- Meet the general eligibility requirements of the federal student aid.
This loan has a fixed interest rate for the life of the loan. As for loans first disbursed on or after July 1, 2021, and before July 1, 2022, the interest rate is 6.28%, according to the official student aid website.
Students do not have to start making payments until six months after graduating, leaving school, or dropping below half-time enrollment. Interest will accrue on your loan during any period in which you do not have to make payments. Once your first payment is due, your loan servicer will notify you.
When you have to start repaying you will have 2 options:
- To pay the accrued interest; or
- Allow it to be capitalized (added to your loan principal balance).
Parent PLUS Loans
Parents of dependent students can borrow money to support their children’s financial aid packages. The federal Parent PLUS Loan allows parents to borrow money to cover any expenses not covered by the student’s financial aid package, up to the full cost of attendance. There is no such thing as a cumulative limit for this loan.
In order to receive the Parent PLUS Loan you have to meet the following eligibility requirements:
- You have to be the biological or adoptive parent (or, in some situations, stepparent) of a dependent undergraduate student enrolled at least half-time at a participating institution;
- You should not have an adverse credit history (unless you meet certain additional requirements); and
- fulfill the general standards of federal student aid.
Bear in mind that Grandparents (unless they have legally adopted the dependent student) and legal guardians, even though they have had the main responsibility for raising the student, are ineligible for Parent PLUS Loans.
This loan has the same interest rate percentage as the Grad PLUS Loans, which is 6.28% for the same period.
Direct Consolidation Loans
Consolidation Loans are a bit different from other types of federal student loans. They allow borrowers to combine all eligible federal educational loans into a single loan –usually after graduation–without paying an application fee.
To determine the interest rate on a new consolidation loan, you should calculate the weighted average of the current interest rates on the student loans that will be consolidated, then round it up to the nearest one-eighth of 1%.
Loan consolidation has many advantages, but you need to think carefully about whether this is the right thing to do. Consolidating your student loans might make repayment easier to handle. It provides you with a single, possibly lower monthly payment and a single student loan servicer. Furthermore, If you are not already eligible, you can apply for additional loan repayment plans and forgiveness programs.
Nevertheless, if you have made qualifying payments toward Public Service Loan Forgiveness (PSLF) or if you are paying a current loan on an income-driven repayment plan, consolidating such loans will cause you to lose credit for any payments you have made toward PSLF or income-driven repayment plan forgiveness.
Understanding the Difference Between Direct Subsidized Loans and Direct Unsubsidized Loans?
Both Direct Subsidized Loans and Direct Unsubsidized Loans are a lot similar. They both are federal student loans that aim to help eligible students pay for higher education at a four-year college or university, a community college, or a trade, career, or technical school.
The major difference between them is that Direct Subsidized Loans have slightly better terms to help out students with financial needs. Also, while Direct Subsidized Loans are dedicated only to undergraduates, Direct Unsubsidized Loans are available for undergraduate and graduate students. Accordingly, graduate students may have a bit higher interest to pay.
Federal Educational Loans Benefits
Although any student loan is a legal agreement that must be repaid with interest, federal student loans are often more flexible than private student loans. For instance, with federal student loans, the borrower has the ability to change their repayment plans even after the loan has been disbursed (sent to your school).
You Can Make Payments Based on Your Salary
Some federal student loans have income-driven (or income-based) repayment programs that cap payments based on the borrower’s income and family size.
No Need for a Cosigner
Other than Direct PLUS Loans, most federal student loans do not assess the borrower’s credit, so it is not essential to apply with a cosigner.
Credit History Does Not Matter
Unlike private student loans, most federal student loans do not require a great credit history of the borrower. This is particularly helpful for recent high school grads who want to attend college but haven’t had enough time to build up their own credit.
How to Apply for a Federal Educational Loan
It is free to apply for a federal educational loan. All you have to do is to fill out the Free Application for Federal Student Aid (FAFSA). The FAFSA determines your eligibility for other federal student aid, such as grants and work-study, in addition to federal student loans. To get federal student assistance, you must complete the FAFSA each year you are enrolled in college.
The quickest and most convenient way to file the FAFSA is online. Your application will be reviewed within 3-5 business days. You can also mail in a paper application, but it will take 7-10 days to be processed. The FAFSA form is completely free to fill out. If it says that you need to pay, you have come to the wrong website.
Following the submission of the FAFSA, the government will send you a Student Aid Report (SAR). This report will provide you with basic information regarding your eligibility for federal student aid. This information will be available to the institutions you listed on your FAFSA. Consequently, they will use it to determine the amount of government funding you may be eligible for.
The universities to which you have been admitted will send you a financial aid offer outlining the financial aid you are qualified for, including federal student loans, grants, and work-study. The amount of federal aid you receive from each school varies, as does the cost of attending each institution.
In addition to interest, all Direct Subsidized and Direct Unsubsidized Loans have a loan fee. The loan fee is a percentage of the loan amount and is deducted proportionately from each loan payout. This percentage slightly varies depending on when you started to receive the loan.
It was 1.059% for the first disbursement dates between Oct. 1, 2019, and Oct. 1, 2020. Recently it was reduced to 1.057% for the dates between Oct. 1, 2020, and Oct. 1, 2022. The loans that were first disbursed before Oct. 1, 2019, have different loan fees.
As for Direct PLUS Loans, the percentage of the loan fee for the first disbursement dates between Oct. 1, 2021, and before Oct. 1, 2022, is 4.228%.
To sum up, many people cannot afford the high cost of education. When it comes to financing solutions, students have a variety of options. Most people tend to choose federal student loans because they can provide more flexibility than private student loans. That is why it is critical that you learn about your possibilities before choosing a financing strategy. These loans can give you hope for better education.
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- Grad PLUS loans | Federal Student Aid