An Overview of Federal Student Loans


  • Prepare for college and university costs.
  • There are 4 main student loan programs.
  • Learn how the loans differ and how to find more information.
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Learn How to Get a Federal Student Loan

A college education is very expensive and the costs keep rising. This article will help you navigate the choices available in federal student loans, and explain which options are right for you. To cover the high cost of higher education effectively, start with these three steps:

  1. Plan ahead Budget and save money for college and university
  2. Look for “free money” Exhaust your options for grants and scholarships, and consider using your current income and assets.
  3. Start shopping Shop for the best student loan options (federal, private, or institutional).

A dizzying array of student loans await student loan shoppers. The most basic distinction is who guarantees or stands behind the loan — the US federal government or private lenders. The US government is the largest student lender. This article focuses on federal student loans, which are usually offered at better rates and terms than private student loans.

Before obtaining federal aid or a federal student loan, you need to complete and submit a Free Application For Student Aid (FAFSA) form. The US Dept. of Education is responsible for federal student aid and federal student loans. Go to the Dept. of Education’s Types of Aid page for details on student aid and student loan eligibility. After filling out the FAFSA form the schools you mentioned in the application will receive the results. You will receive a Student Aid Report (SAR) that you must review. Speak with the school's financial aid department, who will send you an award letter. The letter includes the types and amounts of financial aid and loans you may receive from federal, state, and school sources. This combination of aid is your financial aid package.

The Direct Loan program is the current name of the federal student loan program. The federal student loan program changed in 2010. Before 2010, federal student loans were offered through the Federal Family Education Loan Program (FFLEP). FFLEP loans were originated and serviced by private lenders. Today, the government directly disburses federal student loans and assigns a servicer, except for loans like the Federal Perkins Loans, which are originated directly by schools. The future servicing of the loans may differ between those two programs.

Types of Federal Aid and Loans

The different types of federal aid and federal student loans are illustrated on the chart below:

Source: Dept. of Education Federal Student Aid at a Glance 2012–13 (PDF).
Program Type of Aid
Federal Pell Program Grant. Need not be repaid.
Federal Supplement Education Opportunity Program (FSEOG) Grant. Need not be repaid.
Teacher Education Assistance for College and Higher Education (TEACH) grant Grant. Does not have to be repaid unless student does not fulfill obligations, in which case it becomes a loan.
Iraq and Afghanistan Service Grant Grant. Need not be repaid.
Federal Work-Study Money earned while in school. Need not be repaid.
Federal Perkins Loan Loan. Must be repaid with interest.
Direct Subsidized Loan Loan. Must be repaid with interest.
Direct Unsubsidized Loan Loan. Must be repaid with interest.
Direct Plus Loans for Parents Loan. Must be repaid with interest.
Direct Plus Loans for Graduate and Professional Loan. Must be repaid with interest.

It is important for you to be an informed consumer and understand your options before you apply for a student loan. Let us look at the federal student loan programs available, and the qualifications for each.

Rising Cost of College Education
In 2012, the average debt load for college graduates was $29,400 per student. About 7 out of 10 seniors have student loan debt. (Source: College Access & Success Project on Student Debt)

Federal Student Loan Programs

To best understand the differences between the student loan programs, you need to answer these five questions about the loan you are considering:

  1. Who is the lender?
  2. Who may borrow?
  3. How much may I borrow?
  4. What are the interest rate and fees?
  5. What are the general repayment terms?

1. Who is the lender?

The lender differs as follows:

Source of funds Loan originator Party repaid
Federal Perkins Loan Your college or university Your college or university
All other Federal Loans: The US government Dept. of Education Dept. of Education

Note that servicers of federal loans are not the same as the lenders. The government started its Direct Student Loan Program (DSLP) effective July 1, 2010, abolishing the Federal Family Education Loan Program (FFELP). Comprehensive information regarding your federal aid and/or loan, once taken, can be found on the Dept. of Education Web site. Current servicers are:

  • FedLoan Servicing
  • Direct Loans
  • Great Lakes Higher Education Corp.
  • Nelnet
  • Sallie Mae

2. Who may borrow?

The criteria vary over the different loan types. Here are the major differences:

  • Undergraduate and Graduate Students: Must be enrolled at least half-time
    1. Federal Perkins Loan: Must show exceptional financial need.
    2. Direct Subsidized Loan: Must show financial need
    3. Direct Unsubsidized Loan: No need to show financial hardship.
  • Parents: Students must be dependents, and parents may not have negative credit history. (It is possible to add a co-signer).
  • Graduate and Professional Students: In addition, after utilizing the other loans, the Direct Plus Loan is available for graduate and professional students who do not have a negative credit history.

3. How much may I borrow?

Exactly how much you can borrow is complicated. The amount varies over time and by a number of other factors, including

  • Amount of student aid you receive
  • Whether you are a dependent
  • Your year in school
  • Your aggregate (total) borrowing
  • Status as undergraduate or graduate
  • Eligibility for various special programs for unique circumstances, such as medical students

The following table shows the maximum amounts that can be taken each academic year, as of 2012, for each program:

Source: Dept. of Education Federal Student Aid at a Glance 2012–13 (PDF).
Student Loan Type Maximum Amount for Academic Year
Federal Perkins Program • Undergraduate Students: up to $5,500
• Graduate and Professional: up to $8,000
Direct Subsidized Loans Between $3,500 and $8,500, depending on year in school.
Direct Unsubsidized Loans Between $5,500 and $20,500 (minus any subsidized amount received for the same period) depending on year in school and dependency status.
Direct Plus Loans for Parents Maximum amount is cost of attendance, minus any other financial aid the student receives.
Direct Plus Loans for Graduate and Professional Maximum amount is cost of attendance, minus any other financial aid the student receives.

4. What are the interest rate and fees?

Although interest rates will fluctuate and there are a number of exceptions and special programs governing the repayment of a student loan, here is some basic comparative information:

Loan Type Interest rate as of June 1, 2011 till June 30, 2012 Other fees
Federal Perkins Loan 5% No other fees
Direct Subsidized Loan 3.4% (undergrad)

6.8% (graduate)
The loan fee is a percentage of the amount of each loan you receive. For loans disbursed on or after July 1, 2010, the loan origination fee is 1.0%, deducted proportionally from each loan disbursement.
Direct Unsubsidized Loan 6.8% The loan fee is a percentage of the amount of each loan you receive. For loans disbursed on or after July 1, 2010, the loan origination fee is 1.0%, deducted proportionally from each loan disbursement.
Direct Plus Loan 7.9% The borrower (Parent or Graduate/Professional Student) will pay a fee of 4% of the loan amount, deducted proportionally each time a loan disbursement is made.

5. General Repayment Terms

When taking out the loan, learn exactly when you will have to start making payments. If you stop school, or go under a half-time status, then your status will be affected. Remember, you will be signing a promissory note and will not be able to discharge the loan in a bankruptcy. The loan is yours until you pay it off.

Big Increase in Student Debt
The total outstanding balance of student loans was $1.03 trillion as of September 2013. The 90-day or more delinquency rate at that date was 12%. By comparison, the delinquency rate was 6% in 2003. (Source: Federal Reserve Bank of New York)

There are three basic repayment plans and other income-based plans, as follows:

  1. Standard: A fixed amount is paid, up to 10 years, with a minimum payment of $50.
  2. Extended: A fixed or graduated amount paid back up to 25 years. Minimum amount of $30,000.
  3. Graduated: An amount that starts low and increases every two years, for a maximum 10-year period.
  4. Income related: There are various programs that allow the borrower to reduce or limit the payment based on their income (if married, joint income), including the Income Based Repayment (IBR) and the Income Contingent Repayment (ICR) for Direct Loans.

There are number of programs that include grace period, deferment, and forbearance options. There are also certain programs that have loan cancelation or forgiveness features for teachers or public-service workers.

Listed below, by loan type are the borrower’s main responsibilities throughout the loan period.

Loan Type General Repayment
Federal Perkins Loan • No payments while student maintains at least half-time status.
• Grace period for nine months (after which payments must be made) after leaving school, or dropping below half-time status.
Direct Subsidized Loan • No interest charged while in school and during grace and deferment periods.
• Grace period is six months.
Direct Unsubsidized Loan Student is responsible for interest during all periods.
Direct Plus Loan Borrower, Parent or Graduate Student, is responsible for interest during all periods.

For more extensive information about repayment terms of Federal Student Loans, see the government’s Dept. of Education’s Direct Education Web site

Getting a Federal Student Loan

Post-high school education, whether it be a technical school to learn a trade or a four-year school for an advanced degree, is an important step to making yourself more marketable in today’s highly competitive economy. A parent or anyone who will contribute to someone’s education should remember to plan ahead and expect the high costs of secondary education. Savings programs with tax benefits designed to help defray the costs of higher education, such as 529 savings plans are an excellent idea.

Different school types have different costs. Private schools are much more expensive than public schools. Choose a school that fits your budget. Think about how much you need to earn to pay off the loans. When you are looking for the correct mix to finance your education, start by looking for all available grants, scholarships, and institutional aid to reduce your need for student loans. When looking for a loan, begin with a federal student Loan. If a federal student loan is not enough to pay your costs, then check to learn more about private student loans.

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