Note that the government is allowing an interest-free pause for repayment on most federal student loans through the end of September 2020 to help ease the impact of the coronavirus pandemic. Many other lenders and servicers are also offering relief options during this time. Check out our Student Loan Hero Coronavirus Information Center for details and news.
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For most students, covering the cost of education means taking out student loans, especially as the price of tuition and room and board goes up. Even the cost at public universities — typically a much cheaper option than private schools — has increased 29.8% in the decade ending in the 2018-2019 school year.
The U.S. Department of Education’s student loans are a popular choice if you are looking for affordable funding for college.
There are seven kinds of federal loans available and eligibility for them varies slightly for them. Navigating the federal loan program can feel overwhelming so we’ve come up with this guide to help you go through the choices available.
7 kinds of U.S. Department of Education student loans
The loans offered by the federal government tend to have lower interest rates and generous repayment terms than private loans. The downside? Navigating the federal loan system can feel overwhelming.
There are many different loans available but you might be eligible for only a select number of them, so it’s important to understand their differences.
The federal government offers different loans based on your education level (undergraduate versus graduate or professional school) and income.
Each loan has its own eligibility requirements, interest rates and repayment terms. Here are the seven kinds of loans that the Department of Education currently manages (though two of these programs no longer offer new loans) :
1. Direct subsidized loans
2. Direct unsubsidized loans
3. Parent PLUS loans
4. Grad PLUS loans
5. Direct consolidation loans
6. Perkins loans (discontinued)
7. Family Federal Education Loans (discontinued)
1. Direct subsidized loans
Direct subsidized loans are one of the best options you can use to pay for school. With subsidized loans, the Department of Education pays the interest that accrues while you’re in school at least half time, during your grace period after graduation, and if you put your loans into deferment.
Even when you’re responsible for paying the interest, the rates are low. As of June 2020, direct subsidized loans have a 4.53% interest rate.
However, these unique loans are available only to undergraduate students with financial need. The federal government issues the loan, but your college decides if you meet the financial requirements and how much you can borrow. Each school may have different criteria, so you might receive more in subsidized loans from one school than another.
You are only eligible to receive subsidized loans for 150% of your program’s length. For example, if you attend a four-year school to earn a bachelor’s degree, you can receive loans only for six years. If it takes longer than that to finish your degree, you will have to take out other forms of loans.
There are also limits on how much you can receive in subsidized loans each year:
- First-year undergraduate: $3,500
- Second-year undergraduate: $4,500
- Third-year and up undergraduate: $5,500
Direct subsidized loans are eligible for all income-driven repayment (IDR) plans and Public Service Loan Forgiveness (PSLF).
2. Direct unsubsidized loans
Available to both undergraduate and graduate students, direct unsubsidized loans are another affordable option to pay for school.
Like direct subsidized loans, direct unsubsidized loans also have low interest rates: 4.53% for undergraduate students and 6.08% for graduate or professional degree borrowers. The key difference between the two types of loans is that the government will not cover the interest that accrues on unsubsidized loans.
To qualify for an unsubsidized loan, you must be enrolled at least half time in school. Unlike subsidized loans, you do not have to show financial need to be eligible for a loan.
Unsubsidized loans are eligible for all IDR plans and PSLF.
3. Parent PLUS loans
Some Department of Education student loans are available to parents, as well. For those who want to help their children pay for school, you can take out a parent PLUS loan with an interest rate of 7.08%.
You can borrow up to the total cost of attendance minus any other financial aid your child receives. There is a disbursement fee with the loan: It’s 4.236% of your loan total, if the loan is taken on or after Oct. 1, 2019, and before Oct. 1, 2020.
You can take out a parent PLUS loan if you have a dependent who is enrolled at least half time at an eligible school for pursuing an undergraduate degree. The loan is in your name, so you are responsible for repaying the debt after your child graduates.
Credit history and parent PLUS loans
Unlike in the case of most other federal loans, the government does consider your credit history when evaluating your application for a parent PLUS loan. If your credit doesn’t meet their criteria, you might need an endorser on the loan who agrees to make payments if you fall behind.
Another major difference is that payments on parent PLUS loans become due right away, not after your child’s graduation. You can request a deferment while your child is in school, but the loans will continue to accumulate interest and you’ll pay more over time.
Parent PLUS loans are eligible for the graduated repayment and extended repayment plans. And parent PLUS loans do qualify for PSLF, but they are ineligible for any IDR plan — the repayment options that are the most valuable to PSLF-seekers — unless they are first consolidated with a direct consolidation loan.
4. Grad PLUS loans
If you’re a student going to graduate school or pursuing a professional degree at least half time, you might qualify for a student PLUS loan. Like parent PLUS loans, grad PLUS loans have a 7.08% interest rate and require a credit check.
However, PLUS loans made out to students have more benefits than those made out to parents. Graduate PLUS loans are eligible for all IDR plans and qualify for PSLF without needing to be consolidated beforehand.
5. Direct consolidation loans
If you have federal loans, then juggling multiple loan servicers and payment due dates can be stressful. One way to simplify your finances is to consolidate them into one loan with a direct consolidation loan.
Combining your loans with a direct consolidation loan can give you access to more IDR plans and even help you qualify for PSLF.
When you consolidate, your new interest rate is based on the weighted average of the rates on your old loans. You might also be able to extend your repayment term and reduce your monthly payments.
The following loans are eligible for direct consolidation:
- Direct subsidized
- Unsubsidized
- Parent PLUS loans
- Graduate PLUS loans
- Perkins loans
- Some Family Federal Education Loans
To be eligible for consolidation, the loans must be in repayment or you must be in your grace period after graduation.
If your loan is in default, you need to contact your loan servicer to make payment arrangements. If your wages are being garnished because of student loan default, you cannot consolidate the loans until the wage garnishment order has ended.
6. Perkins loans (discontinued)
The federal Perkins loan program ended in 2017. Current borrowers with Perkins loans can still enjoy their benefits, but the government will not issue any new loans through this program.
Perkins loans were meant for low-income students, and were a cheaper option than some other forms of debt. With an interest rate of just 5% and a nine-month grace period, they were one of the better forms of financial aid available.
However, Perkins loan borrowers should know that these loans have limitations. Perkins loans are ineligible for PSLF. Plus, they don’t qualify for income-driven repayment plans. In some cases, you might qualify for both PSLF and IDR plans by consolidating your debt with a direct consolidation loan.
7. Family Federal Education Loans (discontinued)
As of 2010, Family Federal Education Loans (FFEL) are no longer available to students. For those who already have FFEL debt, however, these loans were guaranteed by the government but issued directly by private lenders.
FFEL debt is ineligible for PSLF. The only way you can qualify for PSLF is if you consolidate your loans with a direct consolidation loan. If you’ve made payments toward your loans before consolidating, they do not count toward the 120 necessary payments. The Department of Education will only apply payments made on the consolidation loan.
How to apply for federal student loans
Finding a way to pay for school can be overwhelming, but Department of Education student loans can be useful tools to fund your education. Thanks to lower interest rates and added benefits, federal student loans can make it easier to afford your education.
If you’re in need of financial aid for the upcoming semester, the first step is filling out the Free Application for Federal Student Aid (FAFSA) to access grants, scholarships and federal student loans.
How to find your federal student loans after you receive them
Now that you have your federal student loans, you will want to keep track of them. If you have more than one loan from the government, this can get confusing, especially if you are a busy student or working graduate. Thankfully, federal student loans are not hard to find.
You can locate your federal student loan information using your My Federal Student Aid (FSA) ID account. This account is connected to the Department of Education’s National Student Loan Data System (NSLDS), which tracks student loans.
This data system is the keeper of the information you will need to identify your individual loans and almost anything you need to know about them.
The NSLDS shows not only the amount you owe on each individual loan, but also each loan’s status from default to deferment to paid off, and the type of loan (subsidized or unsubsidized, for example). One thing to remember: You won’t find your private loans or Parent PLUS loans borrowed in your parent’s name on your NSLDS dashboard.
Your student loan servicer is responsible for the billing of your federal loans. Signing up for an automatic debit payment via your federal loan servicer is a good way to ensure that you never miss a payment. And according to Federal Student Aid, if you have a direct loan to pay for school, you will be eligible for a 0.25% interest rate deduction if you use automatic payments to pay your loans.
Maya Dollarhide contributed to this article.
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