Everything You Need to Know About Federal Student Loans
Many people take out student loans to help pay for higher education. In fact, the most recent census data published in September 2022 shows that approximately one in have student loan debt. The vast majority of these loans 鈥� about 92% 鈥� are federal loans owned by the U.S. Department of Education.
If you're in college or planning to enroll soon, statistics suggest that you'll borrow money to pay for your degree. A 2022 NerdWallet analysis of National Center for Education Statistics data predicts that first-year college students will borrow an average of $39,500 over four or five years to earn a bachelor's degree and significantly more for a graduate degree. Given the likelihood that you'll be taking out a federal student loan, it's essential for you to understand how these loans work.
What Are Federal Student Loans?
Student loans are one of the most common forms of financial aid offered to undergraduate and graduate college students. These loans can be divided into two categories: 1) federal student loans that are funded by the government and administered by the U.S. Department of Education, and 2) private student loans that are funded and managed by banks and other private lenders.
Once you accept a federal student loan, the money will be sent to your school to be used for tuition and possibly other expenses for one academic year. You'll have to re-submit an application for each year that you expect to need financial aid, which means you could end up with multiple student loans by the time you graduate. Depending on your repayment plan, you'll be required to pay back the money — including interest — in monthly installments after you graduate or when your enrollment drops below half-time status.
In general, federal student loans are preferred over private loans because they typically feature lower interest rates, offer more flexibility in repayment terms, and may be partially or wholly forgiven or discharged for a variety of reasons.
Federal Loan Interest Rates
Interest is defined as "the cost of borrowing money." You can also think of it as the additional fees you pay for the privilege of borrowing money. Interest rates can be fixed, meaning they're locked in for the period of time when you'll be repaying the loan, or variable, which means they can fluctuate — sometimes dramatically — over the life of the loan. Variable interest rates can make it hard to predict how much you'll actually have to pay for the loan.
Because loan interest can add substantially to the total cost of your college education, you need to understand interest rates before you agree to a loan. The four federal student loan types have different fixed interest rates, which currently . Government representatives will evaluate your application and forward their findings to the school you attend. Your school's financial aid counselors will then evaluate your application to determine if the school can provide any additional funding. Eventually, your school will send you a financial aid offer letter, which may include one or more types of federal student loans.
When you're a first-year student submitting a FAFSA form, the government's assessment of your application will go to all of the schools you've applied to, and each school that has accepted you for enrollment will send you a financial aid offer letter.
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Apply for private scholarships. One way you may be able to reduce the amount of student loans you need is to obtain money through private scholarships. Many professional, civic, and philanthropic organizations offer scholarships — some based on financial need and some on merit. When you consider how much you'll have to pay in interest, you can see how even the smallest scholarships can benefit you by reducing the amount of money you need to borrow.
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Compare offers. First-year students will receive financial aid offers from all the schools where they've been accepted. Compare these offers carefully, as one school may offer a more favorable package that leaves you with less debt.
Even if you're not a first-year student and have received just one offer from the school where you're enrolled, you should still examine each aspect of the offer carefully. If loans are involved, be sure you understand the terms and repayment plan. Use a student loan calculator to determine how much you'll ultimately pay, and research the salary potential of your desired career to evaluate whether you'll be reasonably able to pay it off. If you need help understanding an offer letter, contact the school's financial aid office to get more information.
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Negotiate and accept your financial aid offer. Students should avoid borrowing more money than they need to complete the academic year, so before you accept an offer, make sure you've considered any loans in the context of money you've received through private scholarships or other sources. You may be able to minimize the amount of your student loan or eliminate it altogether. Your financial aid counselor can help you make these final adjustments before you sign off on your financial aid package.
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Complete any loan-related paperwork. If you're getting a federal student loan, you may need to complete something called entrance counseling that will explain your financial responsibilities as a borrower. You'll then need to sign a master promissory note for each loan. Keep in mind that by signing that promissory note, you're committing to paying off the loan, even if you don't graduate from college or have a hard time making payments in the future.
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Apply for private student loans, if needed. Despite all of the grants, scholarships, and federal loans you've received, you may still need more money to cover tuition and other expenses for the academic year ahead. If so, you may need to apply for a private student loan from a bank or lending institution.
Federal Student Loan Repayment
As with any type of loan, it's important to make your monthly loan payments on time and in full. If you miss more than nine payments, your loan will go into default, which can have serious repercussions on your credit history. Rather than defaulting on your loan, contact your loan provider to discuss possible options, such as deferment and a change to your repayment plan. Visit or not. At this time, these policies are scheduled to end either 60 days after June 30, 2022, or 60 days after the Supreme Court makes a ruling, whichever comes earlier. Borrowers are welcome to continue making payments in the meantime if they choose.
Federal Student Loan Forgiveness
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