Federal student loans are loans established by the federal government and provided to students for college and graduate school.
Who Can Get A Federal Student Loan?
There are eligibility requirements for federal student loans. If you have any questions about eligibility, contact the financial aid office at the college your child plans to attend. Generally, the requirements are that the student must:
- Be a U.S. citizen or eligible non-citizen;
- Be enrolled at least half time at an eligible school (virtually any school offering a degree program is eligible);
- Have a high school diploma or equivalent;
- Be making satisfactory progress in the selected course of study;
- Have a valid Social Security number;
- Not be in default on any other federal student loans;
- Not have borrowed more than the allowable limits;
- Have registered for the Selective Service, if a male, and
- Promise to use the loan money only for educational expenses.
In addition to these requirements, most federal student loan programs require that you establish a financial need. A family’s financial need is calculated by the Free Application for Federal Student Aid (FAFSA) form that you must complete to apply for any of the federal loan programs. This is discussed in more detail below.
How Are Federal Student Loans Issued?
All federal student loans must be obtained directly from the federal government under the William D. Ford Direct Loan program. Prior to July 1, 2010, borrowers could obtain a federal student loan either from the federal government under the Direct Loan program or from a private lender who participated in the Federal Family Education Loan (FFEL) program.
Applying For Federal Student Loans
To apply for any federal student loan, you must first complete the FAFSA. This single form serves as your application for all federal student aid programs. The FAFSA can be obtained in your child’s high school guidance office by November of your child’s senior year in high school. Follow the instructions and return the application to the regional office listed on the form as soon as possible after January 1, but not before.
If you plan to apply for student aid from programs administered by your child’s college or state, you should still fill out the FAFSA because most college and state programs require that you apply for federal funding also.
Advantages of Federal Student Loans
Attractive interest rates
All federal student loans now have fixed interest rates that are typically lower than private student loans.
Generous repayment terms
Although standard terms of up to 10 years are available, a variety of flexible repayment arrangements of up to 30 years may be available. In addition, federal student loans are eligible for the government’s income-based repayment (IBR) program. After graduation, students may also receive offers to consolidate all their loans (at a slightly higher interest rate) into a single payment.
Grace period
Under most federal loan programs, students do not start making loan payments until six to nine months after graduation. This gives them time to find a job and start earning (and saving) income.
Deferments and forbearance periods
Most federal loan programs offer deferments or forbearance periods when a student is temporarily unable to repay a loan. For example, students may qualify for a deferment if they are back in graduate school at least half time or faced with economic hardship. A forbearance period is similar to a deferment period and may be allowed if students are unemployed and seeking employment, suffering from health problems, or having significant personal problems. The difference is that interest is not subsidized during forbearance periods; that is, it continues to accumulate, and the student is responsible for paying it.
Cancellation
If a student dies or becomes permanently disabled, he or she (or their estates) is excused from paying their federal loans.
Subsidized interest
Some federal student loans have subsidized interest. This means that the government pays all the interest that accrues while the student is enrolled at least half time in school, during the grace period, and during any authorized deferment periods.
Can borrow from multiple programs
Having obtained a Stafford Loan does not exclude a student from a Perkins Loan. It’s possible to borrow from more than one program as long as the student meets all the eligibility requirements.
Interest is tax deductible in some circumstances
The interest paid on a qualified education loan may be tax deductible, assuming income limits and other requirements are met. A qualified education loan is any debt incurred to pay the education expenses (tuition, fees, room and board) at an eligible educational institution (generally, one that offers a degree and is eligible to participate in federal student aid programs).
Disadvantages of Federal Student Loans
Programs change frequently
The federal government makes changes to its student loan programs on a frequent and unexpected basis. Interest rates change. Forms change. Financial need requirements change. It is important to keep abreast of the changes when your child is near or at college age. Any questions can be directed to your child’s high school guidance counselor or the financial aid officer at your child’s college.
Borrowing limits
Federal loan programs limit the amount of money a student can borrow. Limits for individual loans are discussed in greater detail below.
Types of Federal Student Loans
Currently, there are three main federal student loans available: the Stafford Loan, the Perkins Loan, and the PLUS Loan. There are also a few other specialty loan programs associated with the health-care profession and federal consolidation loans for consolidating several loans.
Stafford Loan
A Stafford Loan is a low-interest, federal loan made to undergraduate and in some cases graduate students who are attending college at least half-time.
Types: Stafford Loans come in two types—subsidized and unsubsidized. With a subsidized Stafford Loan, the federal government pays the interest on the loan while the student is in school, during any deferment periods, and for six months after graduation, leaving school, or dropping below half-time. Subsidized Stafford Loans are available only to undergraduate students. Whether your child qualifies for a subsidized Stafford Loan will depend strictly on financial need. With an unsubsidized Stafford Loan, students are responsible for paying the interest that accrues during the school year, the grace period after graduation, and deferment periods.
The subsidized Stafford Loan is one of only two federal financial aid programs available to colleges on an unlimited basis (the other is the Federal Pell Grant). This means that all eligible students, regardless of how many, can receive a subsidized Stafford Loan–the funds do not run out.
Interest rate: The interest rate on unsubsidized Stafford Loans disbursed on or after July 1, 2006 is fixed at 6.8 percent. The interest rate on subsidized Stafford loans is as follows:
- 6.0 percent for loans first disbursed on or after July 1, 2008 and before July 1, 2009
- 5.6 percent for loans first disbursed on or after July 1, 2009 and before July 1, 2010
- 4.5 percent for loans first disbursed on or after July 1, 2010 and before July 1, 2011
- 3.4 percent for loans first disbursed on or after July 1, 2011 and before July 1, 2013
The rate on Stafford Loans disbursed before July 1, 2006 is variable (tied to the 91-day Treasury bill) and capped at 8.25 percent.
Borrowing limits: The Stafford Loan program has annual borrowing limits, depending on whether your child is a dependent or independent student and an undergraduate or graduate student.
Currently, annual limits for Stafford Loans for dependent undergraduate students are as follows:
- First-year student: $5,500 (maximum $3,500 subsidized)
- Second-year student: $6,500 (maximum $4,500 subsidized)
- Third-, fourth-, and fifth-year students: $7,500 (maximum $5,500 subsidized)
- The maximum amount a dependent undergraduate can borrow is $31,000.
Currently, annual limits for Stafford Loans for independent undergraduate students and dependent students whose parents do not qualify for a PLUS loan (defined below) are as follows:
- First-year student: $9,500 (maximum $3,500 subsidized);
- Second-year student: $10,500 (maximum $4,500 subsidized);
- Third-, fourth- and fifth-year students: $12,500 (maximum $5,500 subsidized), and
- The maximum amount an independent undergraduate can borrow is $57,500.
Annual limits for graduate and professional students:
- Each year: $20,500 (maximum $8,500 subsidized), and
- The maximum amount a graduate or professional student can borrow is $138,500, including undergraduate loans.
Perkins Loan
A Perkins Loan is a low-interest, federal student loan that is available to undergraduate and graduate students with the lowest expected family contributions, or EFCs. It is awarded strictly on the basis of need.
The Perkins Loan program is a campus-based program, which means the loan is available only from individual colleges, not the federal government. The Perkins Loan program is a first-come, first-served program. Each college receives a certain amount of money for this program, and once the funds are awarded, there are no more until the following year. So, even though your child may be eligible for a Perkins Loan based on your EFC, you may not receive one because the funds might be given to students with greater need or students who complete the college’s financial aid paperwork ahead of you.
Because the Perkins Loan program is a first-come, first-served program, it is worth your while to apply for aid as soon as deadlines permit because the early applicants will likely get the best aid packages.
Interest rate: The interest rate on a Perkins Loan is currently 5 percent. A Perkins Loan is subsidized–that is, the federal government pays the interest on the loan while a student is in college, during deferment periods, and for nine months after graduating, leaving school, or dropping below half-time.
Borrowing limits: Like the Stafford Loan, the Perkins Loan has annual borrowing limits. Undergraduates can borrow up to $4,000 per year, with maximum loans to $20,000. Graduate students can borrow up to $6,000 per year, with maximum loans to $40,000 (including undergraduate loans).
PLUS Loan
A PLUS Loan is a federal student loan made to parents and graduate/professional students with good credit histories. PLUS Loans are not based on financial need, so borrowers of all income levels can receive a PLUS Loan. The only requirement is that borrowers pass a credit check. However, parents who are delinquent up to 180 days on their home mortgage or medical debt will still be eligible for a PLUS Loan.
Caution: Stepparents are not eligible to apply for PLUS Loans, even though their income and assets must be reported on the FAFSA.
Interest rate: The interest rate on current PLUS loans is fixed at 7.9 percent. (The interest rate on PLUS Loans disbursed prior to July 1, 2006 is variable—tied to the 91-day Treasury bill—and capped at 9 percent.)
Borrowing limits: The full cost of a student’s education can be borrowed, less whatever other financial aid (loans, scholarships, grants, or work-study) the student has received.
Other terms: Parents have the option of deferring repayment of their PLUS Loan for up to six months after their child has left school. In some instances, the principal and/or interest can be deferred, canceled, or considered for forbearance. The lender can explain any provisions that may apply to your situation.
Loans for health-care professionals
There are several loan programs for students studying in the health-care profession. Unlike other federal loans that are managed by the Department of Education, these loans are managed by the Department of Health and Human Services. There are two main loans:
Health Professions Student Loans (HPSLs): These loans are made by schools to financially needy students pursuing degrees in medicine, osteopathy, dentistry, optometry, pharmacy, podiatry, or veterinary medicine. The interest rate is capped at 5 percent. HPSLs are subsidized (interest does not accrue while the student is in school or during authorized deferment periods), there is a grace period of 12 months, and there are no origination or insurance fees.
Nursing Student Loans (NSLs): These loans are made by schools to financially needy students who are pursuing a course of study leading to a degree (undergraduate or graduate) in nursing. Each school can decide how much a student can borrow under the program. As with HPSLs, the interest rate is low–never more than 5 percent. Also, NSLs are subsidized, there is a grace period of nine months, and there are no origination or insurance fees.
A federal consolidation loan allows borrowers to consolidate several federal student loans into one loan (loans made by a state or private lender aren’t eligible). The interest rate on a federal consolidation loan is fixed for the life of the loan. The rate is based on the weighted average interest rate of the loans being consolidated, rounded to the nearest one-eighth of one percent, and capped at 8.25 percent. As with other types of federal student loans, borrowers can choose from multiple repayment plans to repay their consolidation loan.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
