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How do federal student loans work?

Avoid cracking the books with our primer on getting a student loan from the DoE.

Given ever-rising costs of higher education, chances are you’ll need a student loan to pay for at least part of your undergraduate or graduate degree. Your school might suggest federal loans, but it’s sometimes hard to tell exactly what you’re getting into. Here’s a rundown as to why you just might want to consider them first.

What’s a federal student loan?

A federal student loan is a loan issued by the federal government that students can use to cover college costs, including tuition, fees, living expenses, textbooks, transportation and more.

Federal loans come with a low fixed interest rate set by Congress each year, and they’re often the least expensive student loan option out there. They also come with more flexible repayment plans, deferment and forbearance options and even student debt forgiveness programs that you can’t find anywhere else.

You can apply for a federal student loan by filling out the Free Application for Federal Student Aid (FAFSA). Your deadline to submit your application depends on your state, though the sooner the better. Reach out to your school’s financial aid office for your specific deadline.

Who’s eligible for a federal student loan?

Unlike other types of debt, you don’t need to have a job or a credit score to qualify for a federal student loan. But you have a handful of requirements to qualify.

  • US citizen or eligible noncitizen. If you’re not a citizen, permanent resident or US national, you must have the right type of visa.
  • Valid Social Security number. This requirement doesn’t apply to Micronesia, Marshal Islands or Palau citizens.
  • Registered with Selective Service. Men between 18 and 25 must register to have their names added to a lottery in the event of a military draft.
  • Regular student. You must be on track to receive a degree or certificate at the end of your program.
  • Enrolled or accepted to an eligible program. Your school must participate in the Title IV program.
  • Satisfactory academic progress. This usually means you have to maintain a 2.0 GPA, pass at least two-thirds of attempted credits and graduate within 150% of the normal length of your program.
  • No defaults on student loans. You can’t be more than 270 days late on a student loan repayment or owe money on federal grants.
  • Proof of qualification. You must have a high-school degree or its equivalent, or be enrolled in a career pathway program.
Take a deeper dive into eligibility requirements for federal aid

3 types of federal student loans

If you’re an undergrad or graduate student, you’ll most likely get a loan through the William D. Ford Federal Direct Loan Program — also commonly called Stafford Loans. Some of these loans are subsidized, meaning the government forgoes interest under specific circumstances. With others, interest starts adding up as soon as your school gets the funds.

Learn more about how each loan program works.

How cost of attendance affects your loan amount

Aside from annual and lifetime limits for different loan programs, there’s one limit that overrides them all: Your school-certified cost of attendance (COA). COA includes tuition, fees, supplies and other general living expenses associated with attending the school, and each financial aid office has their own way of calculating it.

According to federal law, students can’t receive financial aid packages worth more than the COA. This includes loans in addition to grants, scholarships and work-study.

What happens after I get a federal loan?

The government first disburses the funds to your school’s financial aid office. After the school collects your tuition and fees, the financial aid office typically contacts you with instructions for picking up any remaining funds.

The grace period

Federal loans come with a six-month grace period before you need to start making full repayments according to your repayment plan. This grace period goes into effect as soon as you drop below half time. So if you take a semester off or lighten your course load, you’ll need to start paying off your student loans earlier.

If you have a direct subsidized loan, you don’t need to worry about paying it off until your grace period is up. Students with direct unsubsidized or PLUS Loans might want to consider making at least interest-only repayments while in school to avoid something called interest capitalization.

Interest capitalization is when a lender adds to your loan balance all of the interest that accumulates while you put your payments on hold. It means paying off a larger loan amount and more in interest. You can learn more with our article on how interest capitalization works.

Repayment plans

After your grace period expires, it’s time to choose a repayment plan. Typically, your loan servicer helps you decide which is right for you, showing you how to sign up.

Federal student loans come with a wide range of repayment plans:

  • Standard repayments. Take up to 10 years to pay off your loan with the same fixed repayment each month.
  • Graduated repayments. Take up to 10 years to pay off your loan with gradually increasing repayments each month.
  • Extended repayment plans. Take up to 25 years to pay off your loan with either fixed or gradually increasing repayments each month.
  • Revised Pay As You Earn (REPAYE) repayment plans. Take up to 20 years for undergraduate debt and 25 years for graduate debt to make monthly payments worth 10% of your income after taxes. If your loan isn’t paid off by the end of your term, the government forgives your debt.
  • Pay As You Earn (PAYE) repayment plan. Take up to 20 years to pay off your student loan with 10% of your income. The government forgives any remaining debt.
  • Income-Based repayment (IBR) plan. Make monthly repayments of 10% to 15% of your income after taxes over 20 to 25 years.
  • Income-Contingent repayment (ICR) plan. Take up to 25 years to pay either 20% of your income after taxes or what your payments would have been if you paid off your loan with a 12-year standard repayment plan. If you still have any debt after 25 years of repayments, the government forgives your remaining student debt.
  • Income-Sensitive repayment plan. Take up to 10 years to pay off your loan with repayments based on your income. How much you pay each month varies depending on your lender.

Student loan repayment programs explained

Federal loan deferment

When it comes to federal loans, deferment generally refers to pausing your repayments when you’ve hit a temporary financial roadblock. Interest continues to add up on most federal loans, with the exception of direct unsubsidized loans.

Federal student loans come with several different deferment options:

  • In-school deferment. Defer your student loans while you’re still in school and during the six-month grace period after you drop below half time. Interest doesn’t add up on subsidized loans.
  • Graduate fellowship deferment. Defer your student loans while you attend a graduate fellowship program full time. Repayments start as soon as you leave for most loans.
  • Rehabilitation training program deferment. Defer your student loans if you enter rehab for any reason, including recovering from an injury or addiction. Repayments start as soon as you leave the program for most federal loans.
  • Unemployment deferment. If you can’t find a job, you might qualify for six months of unemployment deferment. Borrowers can get a total of 36 months of unemployment deferment over the life of a student loan.
  • Economic hardship deferment. Former students who qualify for federal benefits programs or are serving in the Peace Corps can get up to 36 months of economic hardship deferment as long as it meets the government’s requirements.
  • Military service and post–active duty deferment. Servicemembers who are about to go on active duty or returning from active duty can defer their federal loans for up to 13 months after their military service ends.
  • Parent PLUS borrower deferment. Parents who take out a loan in their student’s name can apply to defer payments until the six-month grace period is up.

How deferment and forbearance work on student loans

Direct consolidation loans

By the time you graduate, you may carry more than one student loan in your or your parents’ name. To make repayments easier, consider consolidating your student loans with a direct consolidation loan. Consolidation loans can be especially beneficial to borrowers that have multiple servicers.

A direct consolidation loan is a new student loan that you can use to pay off all of your student loans. With this option, you have up to 30 years to pay off your debt and can potentially qualify for lower monthly repayments than you would with other loans. It can also give you access to more repayment programs if you don’t have a direct loan.

The interest rate on a direct consolidation loan is a weighted average of all loans you want to include, rounded up to the closest one-eighth of a percent.

Federal student loan forgiveness programs

In addition to flexible repayment programs and extensive deferment options, you might be eligible to have your federal loan forgiven. Aside from forgiveness built into income-based repayment plans, several forgiveness programs are available to federal borrowers:

  • Public service loan forgiveness. People who work in a qualifying nonprofit or government job while making at least 120 repayments can potentially have their loan forgiven after 10 years.
  • Teacher loan forgiveness. Teachers who work at low-income schools or educational service agencies for at least five years in a row might be able to get up to $17,500 of their student debt forgiven.
  • Federal Perkins Loan cancellation. This program offers loan forgiveness programs on Perkins Loans by profession — a former federal loans program. Teachers, public service workers, librarians and some volunteers are eligible to get up to 100% of their debt forgiven.

Student loan forgiveness programs explained

What are the benefits of a federal student loan?

  • Competitive rates. It’s hard for private student loans to beat the rates on federal loans, which are set by the government and the same for everyone regardless of income or creditworthiness.
  • Forgiving repayment programs. Few lenders offers different income-based repayment plans, let alone graduated or extended repayment.
  • Forgiveness options. Federal loans tend to offer more forgiveness options than private student loans, including forgiveness after paying off a loan on an income-based repayment plan.
  • No cosigner needed. Students can generally qualify on their own without a credit history or income.

10 benefits of federal student loans

Where do federal loans fall short?

  • Lifetime limits. Depending on your degree, you could hit the maximum amount you’re able to borrow. After that, you’ll need to find other sources of financing.
  • Doesn’t cover all educational costs. Bar study courses and relocating for a residency might be directly related to your degree, but you can’t take out a federal student loan to cover costs after you’ve graduated.
  • Not for international students. International students must check out private student loans and personal loan options instead.
  • Your grades matter. You’re no longer eligible for any kind of federal aid if your GPA drops below 2.0 — including work-study and scholarships.

Federal vs. private student loans

Federal student loans and private student loans are intended to help students cover the upfront costs of education.

Federal student loansPrivate student loans
  • One fixed interest rate for each program
  • Origination fee
  • Range of fixed and variable rates that can sometimes be lower than federal loans, but are often much higher
  • Application or origination fees, though these aren’t very common
Eligibility requirements
  • No credit or income requirements for some programs
  • Good credit and a steady income — or a cosigner
    Use of funds
    • Less flexibility on how you use the funds
    • More flexibility — including using funds to relocate for a residency or study for the bar exam
      Repayment options
      • More flexible repayments, including income-based repayment plans, deferment, forbearance and even forgiveness programs
      • Less flexible repayments

        How do federal and private student loans stack up?

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        CommonBond Private Student Loans
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        $5,000 - $500,000
        5 to 15 years
        Finance your college education through this lender with a strong social mission and terms that fit your budget.
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        Quickly compare private lenders for your school and apply for the right student loan.
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        Starting at $1,000
        5 to 20 years
        Get prequalified rates from private lenders offering student loans with no origination or prepayment fees.

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        Bottom line

        Federal loans are typically the first place eligible students look after scholarships, grants and other types of federal aid. That’s because the rates, terms and benefits are so hard to beat that private student loan providers typically present themselves as a federal loan alternative.

        Need help deciding? Read our guide to student loans to learn which might be right for your circumstances.

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