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Last update: November 17, 2024
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Federal Student Loans: What They Are and How They Work
Do you know what a federal loan is and how it differs from a private loan? Explore federal student loans by understanding the types of loans and navigating interest rates and borrowing limits.
By Brian Flaherty, B.A. Economics
Edited by Rachel Lauren, B.A. in Business and Political Economy
Learn more about our editorial standards
By Brian Flaherty, B.A. Economics
Edited by Rachel Lauren, B.A. in Business and Political Economy
Learn more about our editorial standards
Ever wondered, how you can manage the rising cost of college education? Don't worry, a good option is federal student loans. In this blog post, you'll get a clear picture of how federal student loans can help you pay for school and other student loan options for your college education.
Key takeaways
- Federal loans are part of the William D. Ford Federal Direct Loan Program, offering four types of loans based on financial need and educational status
- Interest rates for these loans are set annually and stay fixed for the duration of the loan
- Borrowing limits vary based on the student's dependency status and educational level
Understanding federal student loans
Federal student loans, part of many people’s college financial plan, offer ways to help you pay for school when personal finances and scholarships just don't cover it. Provided by the U.S. Department of Education, these loans are key pillars of higher education for millions of students.
What are the types of federal student loans?
The William D. Ford Federal Direct Loan Program is a helpful resource that offers four main types of loans to students with different financial needs.
1. Direct subsidized loans
Targeted toward undergraduates in financial need, the U.S. Department of Education bears the interest of these loans while the student is studying at least half-time, during the grace period after graduation, and during any deferment periods.
2. Direct unsubsidized loans
Available for undergraduates, graduates, and students pursuing a professional degree, these loans come without a financial need requirement. However, interest does add up while you’re in school, the grace period, and deferral.
3. Direct PLUS loans
Here we have Grad PLUS loans for professional and graduate students, and Parent PLUS loans for parents of undergraduate students. These loans allow borrowing up to the full cost of attendance minus any other financial aid.
4. Direct consolidation loans
For people handling multiple federal student loans, you've got Direct Consolidation Loans, an option to merge all your loans into one package with a fixed interest rate and a single monthly payment.
How do federal student loan interest rates work?
Congress sets the interest rates for these federal student loans annually based on the 10-year Treasury note yield. For the academic year 2022-23, the rates stand as:
- Direct Subsidized Loan: 5.50%
- Direct Unsubsidized Loan: 5.50% (for undergraduates) or 7.05% (for graduates)
- Direct PLUS Loan: 8.05%
What are the borrowing limits for federal student loans?
The borrowing limit for federal student loans depends on whether you're a supported student (dependent) or self-supported (independent) and your study year.
Note that there’s a special exemption for dependent undergraduate students whose parents are unable to obtain a PLUS loan. These students can borrow up to the limit specified for independent undergraduates.
Here's a glance at the annual borrowing limits:
Year of study | Dependent Undergraduate Student | Independent Undergraduate Student | Graduate or Professional Degree Student |
|---|---|---|---|
Year 1 | $5,500 (up to $3,500 may be subsidized) | $9,500 (up to $3,500 may be subsidized) | $20,500 (unsubsidized only) |
Year 2 | $6,500 (up to $4,500 may be subsidized) | $10,500 (up to $4,500 may be subsidized) | $20,500 (unsubsidized only) |
Year 3 and beyond | $7,500 (up to $5,500 may be subsidized) | $12,500 (up to $5,500 may be subsidized) | $20,500 (unsubsidized only) |
Lifetime maximum limit | $31,000 (up to $23,000 may be subsidized) | $57,500 (up to $23,000 may be subsidized) | $138,500 (including all undergraduate Federal loans; Up to $65,500 may be subsidized.) |
Is there forgiveness for federal student loans?
On August 24, 2022, President Biden proposed a one-time student loan forgiveness of up to $10,000 for most federal student loan borrowers. This relief was meant for people earning less than $125,000 annually, along with Pell Grant recipients. Unfortunately, the Supreme Court blocked this program.
How do you apply for a federal student loan?
Applying for a federal student loan begins with submitting your FAFSA application. This application is your first step when searching for financial aid for college. Here's a quick rundown of the process:
- Fill out the FAFSA: Processing times are 3 to 5 business days for online applications, or 7 to 10 days for paper applications.
- Receive your Student Aid Report (SAR): This details your eligibility for federal student aid.
- Read your offers: Schools listed on FAFSA get access to your financial information. They'll calculate your financial aid offer, which may include federal student loans, federal grants, and work-study programs.
- Accept financial aid: Reach out to your school to accept the financial aid. If it includes federal student loans, the school will guide on how to accept them.
- Attend loan counseling: Before receiving your loan funds, you'll need to complete entrance counseling to understand how student loans work.
- Sign for the loan: Read through and sign the Master Promissory Note.
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Dos and don'ts of managing federal student loans
As beneficial as federal student loans can be, it's important to approach them with a smart strategy. Here are some of the key points to remember when managing these loans.
Do
Always meet your application deadlines
Constantly check for loan forgiveness opportunities
Consider consolidating your loans if it benefits you
Complete any required counseling
Don't
Borrow more than you need
Ignore your repayment schedule
Forget that unpaid interest accrues
Overlook other forms of financial aid
Understanding federal student loan statistics can provide clarity on student debt and the role these loans play. Here's an overview of some crucial data to consider.
Fact | Detail |
|---|---|
Average Student Debt | The average Federal student loan debt totals around $37,650 |
Number of Borrowers | 43 million students currently carry federal student loans |
Total Value | Federal student loans add up to an aggregate of $1.63 trillion |
Advantages and disadvantages of federal student loans
Deciding whether or not to apply for federal student loans? Here are some key advantages and disadvantages that can shape your decision.
- Lower interest rates compared to most other loans
- Variety of repayment plans
- Options for loan consolidation
- Possibility of loan forgiveness
- They add to your overall debt
- They often don’t cover the full cost of attendance
- Deferring payments increases the total paid over time, due to interest
- Public Service Loan Forgiveness (PSLF) requires 120 qualifying payments and a public sector job
- Increased dependency on loans may reduce self-financial responsibility
Why trust TuitionHero
TuitionHero is your trusted partner in managing college costs, offering private student loans, refinancing options, and FAFSA guidance. Use our tools to understand federal student loans and other college funding. We help you and your family be smart with money, making it easy to handle college expenses without stress.
Frequently asked questions (FAQ)
To get a federal student loan, you need to be a U.S. citizen or a non-citizen who qualifies, have a valid Social Security number, and be signed up or going to sign up in a college program that's officially recognized. You also need to have finished high school or have something equal to a diploma and keep up good grades in school. If you want more information or need some help, take a look at our FAFSA Assistance page.
The federal loan program offers several repayment plans, including Standard Repayment plans, Graduated Repayment plans, and Extended Repayment plans. It also includes Income-Driven Repayment plans that base your monthly payment on your income.
Yes, parents can apply for a type of federal student loan called the Parent PLUS Loan, designed to help parents pay for their child's education. It's important to note that the parent, not the student, is responsible for the repayment of this loan type. Check out TuitionHero's offerings for more financial help for parents.
Final thoughts
Dealing with college finances and federal student loans doesn't have to be such a heavy burden. It's really about knowing how things work, being smart with your money, and getting good advice. And don't forget, we at TuitionHero are here to help you through it all so you can make smart choices and have a solid financial plan for the future.
Source
Author
Brian Flaherty
Brian is a graduate of the University of Virginia where he earned a B.A. in Economics. After graduation, Brian spent four years working at a wealth management firm advising high-net-worth investors and institutions. During his time there, he passed the rigorous Series 65 exam and rose to a high-level strategy position.
Editor
Rachel Lauren
Rachel Lauren is the co-founder and COO of Debbie, a tech startup that offers an app to help people pay off their credit card debt for good through rewards and behavioral psychology. She was previously a venture capital investor at BDMI, as well as an equity research analyst at Credit Suisse.
At TuitionHero, we're not just passionate about our work - we take immense pride in it. Our dedicated team of writers diligently follows strict editorial standards, ensuring that every piece of content we publish is accurate, current, and highly valuable. We don't just strive for quality; we aim for excellence.
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