Federal student loans help make college more affordable for students and parents. They come with lower interest rates, better loan terms, and more forgiveness options than private student loans. Plus, all Federal Direct Loans come backed exclusively by the United States government. These loans are just one way that the federal government tries to make college accessible to everyone.
As of Q1 of 2018, the federal student loan portfolio exceeds $1.3 trillion outstanding dollars with 42.8 million unique borrowers. This dollar amount is more than double the 2008 student loan portfolio amount. The federal student loan program continues to grow because of the rising cost of college and the program’s many benefits.
The Benefits of Federal Student Loans Include:
- Lower fixed interest rates
- Income-sensitive repayment plans
- Deferment periods
- Forgiveness programs
- Discharge options
- No credit checks required (and loans are NOT based on creditworthiness)
How to Apply for Federal Student Loans
Applying for federal student loans is easier than you might think. Plus, you can do most of it online and in the comfort of your own home. Just follow this step-by-step application process:
Complete a FAFSA Form or Renewal FAFSA
Current and prospective US college students must file their FAFSA in order to be eligible for any form of financial aid. This applies to both undergraduate and graduate students. Financial aid includes work-study, federal student loans, grants, and scholarships. You can file the FAFSA online for free and submit it directly to the Department of Education for review.
Learn more about the FAFSA by reading our article here.
Read Your Award Letters
Three to six weeks after submitting your FAFSA, you should begin receiving financial aid award letters. You will get a separate award letter from each school that you sent your FAFSA to. Each letter will outline all of the relevant information regarding your financial aid package for that school. Carefully consider this information as you select which school you want to attend.
Contact Your Chosen School
You must contact your chosen school’s financial aid office to accept your student financial aid package. Many schools have online portals where students login and select which parts of the financial aid package they want. You do not have to accept all parts of your financial aid package. This is up to your discretion. However, if you must take out loans to attend college, federal student loans are you best option.
Sign Necessary Paperwork
After you accept your financial aid package, you will need to review and sign any necessary paperwork associated with your loans, including a Master Promissory Note. This is your promise to repay the loan and sets out the terms that both parties must fulfill.
How Federal Student Loans Work
The Department of Education offers federal student loans directly to the borrower. Federal student loans cover full academic years but are disbursed in two payments–one for each semester. The loans may be subsidized or unsubsidized depending on the loan program.
With federal student loans, the college determines the loan type and how much you can borrow. You can only use loans to cover tuition and the direct cost of living expenses. There are set limits as to how much you can borrow based on whether the loan is subsidized or unsubsidized and whether it is for undergraduate or graduate study.
After you graduate or drop below half-time enrollment, you will have a six-month grace period before you are required to start paying back your loans. You will receive repayment information from your loan servicer during your grace period. When it comes time to repay your loans, you will make your payments either directly to the school or to the Department of Education. It all depends on the loan program.
Federal Student Loan Interest Rates
Federal student loans have non-competitive, standardized fixed interest rates. The rate is determined based on the interest rates for ten-year Treasury notes plus a fixed margin that directly correlates to the type of loan you are taking out. Each loan type has the same interest rate for all borrowers regardless of their income or credit score. In general, these rates are significantly lower than private student loan interest rates.
Below is a chart showing interest rates on federal student loans over the past few years:
|Loan Type||2018-19 Interest Rate||2017-18 Interest Rate||2016-17 Interest Rate||2015-16 Interest Rate|
|Direct Subsidized Loans (Undergraduate)||0.0505||0.0445||0.0376||0.0429|
|Direct Unsubsidized Loans (Undergraduate)||0.0505||0.0445||0.0376||0.0429|
|Direct Unsubsidized Loans (Graduate)||0.0660||0.0600||0.0531||0.0584|
|Direct PLUS Loans (Graduate and Parents)||0.0760||0.0700||0.0631||0.0684|
Most federal loans also have origination fees, which are a percentage of the total loan amount. The origination fee is deducted from each loan disbursement. This means that you actually receive less money than you borrow. However, you still must pay back the entire amount borrowed. Direct subsidized and direct unsubsidized loans have the same loan fees, but Direct PLUS Loans have a much higher loan fee.
|Loan Type||First Disbursement Date||Origination Fee|
|Direct Subsidized Loans and Direct Unsubsidized Loans||On or after 10/1/16 and before 10/1/17||1.069%|
|Direct Subsidized Loans and Direct Unsubsidized Loans||On or after 10/1/17 and before 10/1/18||1.066%|
|Direct PLUS Loans||On or after 10/1/16 and before 10/1/17||4.276%|
|Direct PLUS Loans||On or after 10/1/17 and before 10/1/18||4.264%|
Types of Federal Student Loans
As noted above in the chart, there are several types of federal student loans. Each type comes with its own interest rate, eligibility criteria, and loan terms. Read through the following information carefully so that you are equipped to make educated decisions about your financial aid package.
Direct Subsidized Loan
This loan is available to undergraduate students exhibiting financial need. To qualify, the student must attend college at least half-time. Colleges lend out these funds and receive the loan repayments upon graduation. The Department of Education covers all interest payments that accrue while you attend school at least half-time, during your grace period, and during any period of deferment.
A direct subsidized loan will not exceed $3,500 to $5,500 per year or $23,000 for a lifetime. The yearly amount all depends on what year you are in school:
- First-year undergraduate: max of $3,500
- Second-year undergraduate: max of $4,500
- Third-year and beyond undergraduate: max of $5,500
Direct Unsubsidized Loans
Direct unsubsidized loans are awarded to undergraduate and graduate students who attend college at least half-time. Colleges lend out these funds and receive loan payments. There is no requirement to demonstrate financial need. Unlike those with a direct subsidized loan, students with a direct unsubsidized loan are responsible for interest payments during all periods. They do not have to make interest payments while in school or during their grace period, but the interest will accrue and be added to the overall loan balance.
A direct unsubsidized loan can be between $5,500 and $20,000 yearly minus any subsidized amount. Your total federal student loan portfolio cannot exceed $31,000 for dependent undergraduates, $57,500 for independent undergraduates, or $138,500 for graduate or professional students. This includes both subsidized and unsubsidized loans. Your annual loan limit for both loan types depends on your status and year in school:
- First-year undergraduate dependent: max of $5,500
- First-year undergraduate independent: max of $9,500
- Second-year undergraduate dependent: max of $6,500
- Second-year undergraduate independent: max of $10,500
- Third-year undergraduate dependent: max of $7,500
- Third-year undergraduate independent: max of $12,500
- Graduate or professional students: max of $20,500
Direct PLUS Loan for Parents
Parents who have dependent students enrolled at least half-time can borrow through the Direct PLUS Loan program. The Department of Education lends these funds and receives the loan payments. Unlike other federal loan programs, this program does consider credit history. Parents must not have a negative credit history. They are responsible for the loan’s interest from the first month of disbursement, and there is no period of deferment while their student is actively enrolled.
The maximum lending size is equal to the cost of attending college minus any other financial aid the student has received. There is also a loan fee of 4.264%. This fee applies for all Parent PLUS loans taken out on or after October 1, 2017 and before October 1, 2018.
Parents can transfer these loans to their child by applying for refinancing. You can learn more about refinancing Parent PLUS loans here.
Direct PLUS Loan for Graduates
Graduate or professional degree students who are enrolled at least half-time can borrow through the Direct PLUS Loan program. The Department of Education lends these funds and receives the loan payments. Eligible students must not have a negative credit history. Students are responsible for interest on the loan during all periods.
The maximum lending size is equal to the cost of attending college minus any other financial aid the student has received. Direct PLUS Loans for graduates come with a loan fee of 4.264%. This fee applies for all loans taken out on or after October 1, 2017 and before October 1, 2018.
Federal Perkins Loans
Both graduates and undergraduates can receive Federal Perkins Loans. These loans are for students exhibiting exceptional financial need. Not all colleges participate in the Federal Perkins Loan program. Those that do participate offer the loans at an interest rate of 5%. Once the student graduates, payments would be due to the university that the loan originated at.
Undergraduate students qualify for up to $5,500 annually or a total of $27,500. Graduate students can receive up to $8,000 annually or a total of $60,000, which includes the amount borrowed as an undergraduate. There are no fees associated with Federal Perkins Loans aside from the 5% interest rate.
*as of September 2017 the Perkins Loan program has ended.
Four Approved Federal Loan Servicers
The federal government uses loan-servicing companies to help students navigate the borrowing and repayment process.
FedLoan Servicing (a.k.a. PHEAA): This company was established to support the US Department of Education in the servicing of federal student loans. Contact them at 1-800-699-2908.
Great Lakes: This non-profit company is dedicated to helping college students. It works with both the US Department of Education and private lenders to make every step in the borrowing and repayment process easier. Contact them at 1-800-236-4300.
Navient: Navient is one of the select group of companies chosen to service student and parent federal loans by the US Department of Education. Their loan-servicing department helps customers by providing both financial literacy tools and broad-based servicing. Contact them at 1-888-272-5543.
Nelnet: This company works with the US Department of Education in assisting borrowers through every stage of their loan’s life cycle: during school, during their grace period, and throughout repayment. Contact them at 1-888-486-4722.
What about Private Student Loans?
If you have exhausted your savings, scholarships, grants, and federal student loan options, it may be time to look into private student loans. Private student loans help students cover the remaining cost of their education. You can use the money to cover books, fees, tuition, living expenses, and other associated college costs.
Banks, credit unions, and other loan service providers disburse private student loans. Unlike federal student loans, private student loans have competitive interest rates and terms. The interest rates for private student loans can vary widely depending on the lender, term length, whether the loan is fixed or variable rate, and the credit history and debt-to-income ratio of the borrower or cosigner.
In general, the higher your credit score, the higher the likelihood you will secure a low-interest rate. If you do not have credit or have a low score, you will need a cosigner with strong credit to help boost your application.
After reviewing your financial situation, the lender will either accept or deny your application. If you are accepted, you will need to review the terms. Your loan will come with either a fixed or a variable interest rate. Fixed interest rates remain the same for the duration of the loan term, but they may start out a little high. A fixed interest rate makes it easy to predict your future monthly payments. Variable interest rates might start out lower, but these rates can change on a whim. This makes it difficult to plan ahead.
Private vs. Federal Student Loans
Private student loans might seem enticing, especially if you have an excellent credit score. However, you should only turn to private student loans as a last resort and only after you have exhausted your federal student loan options. Private student loans do not come with the borrower protections and forgiveness programs that federal student loans do.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.