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According to the National Center for Education Statistics (NCES), the average cost of tuition and fees at a public, four-year college is $9,400 per year. That can be a lot of debt to deal with as a student.
But fortunately, undergraduate students receive an average of $6,617 in federal student loan assistance. Federal loans provide assistance to students who need help covering college costs. Therefore, it is important to understand how these loans work – before you decide to take on this debt.
Continue reading: Student loan debt statistics
What is a federal student loan?
Federal student loans are designed to help you pay for your college education. The federal government provides student loans through the Department of Education’s William D. Ford Federal Direct Loan Program. This type of federal funding offers fixed interest rates, and loans must be repaid when you leave school or fall below halfway through enrollment.
Four types of direct loans are available, including a loan option specifically for parents of dependent students. The federal loan program also offers subsidized and unsubsidized loan options depending on your enrollment level.
How federal student loans work
If you are eligible for federal student loans, you will receive a grant notice from your school. It describes which loans, if any, you may be eligible for and the amount you may receive for the academic year.
You have to choose which loans you want to accept and for what amount. When you first take out a federal loan, you must complete an admissions counseling session that explains how loans work and how you can repay them. You also sign a principal promissory note agreeing to the terms of your loan.
The school then applies the federal loan funds to your outstanding account fees, such as tuition and fees. The remaining amount will be refunded to you.
Once your enrollment falls below midterm or you graduate, a six-month grace period begins during which you are not required to make any payments. After the grace period ends, you start making monthly payments according to the terms of your loan agreement.
Types of federal student loans
Four types of student loans are offered under the direct loan program.
Directly subsidized loans
Directly subsidized loans are one of two direct loans available to undergraduate students. A key advantage of subsidized loans is that they do not require a credit check and the federal government pays a portion of the interest on the loan. You must demonstrate financial need to qualify for this type of loan.
As a rule, the interest on this loan is subsidized if you are at least half enrolled during the first six months after the end of school (grace period) and if the loan is deferred.
Direct unsubsidized loans
Non-subsidized loans are also part of the direct loan program – therefore, no credit check is required for these loans either. Unsubsidized loans are available to undergraduate, graduate and professional students. Financial need is not required to be eligible.
The caveat, however, is that you are responsible for repaying any interest accrued on the loan once the funds are disbursed. However, if you are enrolled in a school or your loan is deferred or deferred, you can defer interest payments.
Deferring interest results in capitalized interest: the interest is added to your loan balance, and you are eventually charged additional interest on the higher balance when you start paying.
learn more: Guide to Federal Subsidized and Unsubsidized Student Loans
Direct PLUS loans
Graduate and working students and parents of dependent undergraduate students are eligible for federal direct PLUS loans.
Applying for a PLUS loan requires a separate application, as a credit check is required. There is no minimum credit rating to be eligible for a Direct PLUS loan, but the primary borrower cannot have negative credit — such as a bad credit history. B. Bad repayment history. If you have negative credit, you may still be able to get a PLUS loan, but you must meet other requirements.
Direct Consolidation Loans
With a direct consolidation loan, you can simplify your loan repayments by combining two or more federal student loans into one. Direct consolidation offers a fixed interest rate based on the weighted average of the interest on your original loans.
A federal consolidation loan can also make it easier for borrowers to access certain repayment options, such as
How to Apply for Federal Student Loans
To apply for federal student loans, you must submit a Free Application for Federal Student Aid (FAFSA) each academic year. The FAFSA is used by your school to determine if you qualify for federal loans and how much you can borrow. Here’s what you need to do:
1. Create a federal study grant card
If you are a first-time student or have not filed a FAFSA in the past, you will need to create a Federal Student Aid (FSA) ID. This ID will help you sign your FAFSA and loan agreements and manage your federal loan account on StudentAid.gov. Parents of dependent students must also create their own FSA ID.
2. Complete your FAFSA
The FAFSA can be completed online at fafsa.gov or using the form in the myStudentAid app. If you prefer a paper application, you can download, print, and mail a FAFSA.
Gather your financial documents in preparation: tax returns, bank statements, statements of assets, and other income and assets documents. If you are a dependent student, you must use your parent’s information.
3. Submit your FAFSA by the deadline
The Department of Education begins accepting FAFSA applications for the upcoming academic year on October 1, and the FAFSA deadline is June 30 each year. But remember, grants are awarded on a first-come, first-served basis, so the sooner you apply, the better.
Tip: States and schools often have their own FAFSA deadlines, so it’s best to submit as early as possible.
Federal vs. private student loans
Federal student loans offer many benefits, including:
- Fixed interest rates not based on your creditworthiness
- Extended procrastination and forbearance
- Access to student loan forgiveness programs
- Ability to use IDR plans to make payback manageable
IDR plans can be applied for by eligible borrowers who need a lower monthly payment, and IDR payments are generally limited to 10% to 20% of your discretionary income. Those on very low incomes may be eligible for $0 monthly payments.
Private student loans, on the other hand, are not subject to the same rules as federal loans. Here are some differences between personal loans:
- Interest charges: Rates can be fixed or variable. But interest rates on private loans aren’t subsidized, so you’re responsible for paying them at school (although some private lenders offer a deferral).
- Subscription Criteria: Lenders set their own borrowing eligibility requirements, which are generally more restrictive than federal loans.
- Credit check: Private student loans also require a credit check. If you have no proven credit or a negative credit history, you likely need a creditworthy co-signer to qualify.
- No IDR option: Private loans are not eligible for federal IDR plans, and not all lenders offer flexible repayment terms. However, some private lenders may offer other options.
- No Student Loan Waiver: Private loans are not eligible for Department of Education loan forgiveness programs. This means that even if you meet all other eligibility requirements but have a personal loan, that personal loan debt cannot be forgiven.
Although private student loans are sometimes necessary, you should first explore other sources of help. Use any scholarships and grants – because these do not have to be repaid. Then, if you need student loans, prioritize federal government student loans before exploring private loan options.
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