If you or your child will soon be starting college, you should know that there are low-interest federal loans available that could help pay for his or her education. Of course, it’s much better if you don’t have to borrow money to pay for college but if you must, here are 13 important FAQs.
1. What types of low-interest federal loans are available?
There are basically three different types of federal loans – Direct Federal Loans, Perkins Loans and Direct PLUS (Parent Loan for Undergraduate Students) loans. Direct Federal Loans are just that as they come directly from the US Department of Education (ED). Perkins Loans are backed by the federal government but come from the school you or your child will be attending. And as the name implies PLUS Loans are for the parents of students.
2. What are Direct Subsidized and Direct Unsubsidized loans?
Direct Subsidized Loans are those that the federal government subsidizes, which mean they have slightly better terms than Direct Unsubsidized Loans. They are available only to undergraduate students that can prove a financial need. You or your child’s school will determine how much you can borrow and it cannot exceed your financial need. Finally, the US Department of Education pays the interest on a Direct Subsidized Loan so long as you’re in school at least half time.
Direct Unsubsidized Loans are available to both undergraduate and graduate students. You do not have to prove financial need in order to receive a Direct Unsubsidized Loan.
You will be required to pay the interest on an Unsubsidized Loan even when still in school. If you have an Unsubsidized Loan and choose to not pay the interest while you are in school, it will be capitalized. This means it will be added to your unpaid balance and you’ll end up paying interest on it as well.
3. Which type of loans are subsidized?
Direct Federal Loans can be subsidized of unsubsidized. Perkins Loans are need-based and as such are always subsidized. PLUS loans are unsubsidized.
4. How do I apply for a federal loan?
You apply for a federal loan by filling out and submitting a FAFSA or Free Application of Federal Student Assistance. This form is made available on January 1 of every year. It is a bit complicated and you will need to have the following information or documents available in order to complete it.
• Your most recent federal income tax returns, W-2s, and other records of money earned. Bank statements and records of investments (if applicable)
• Records of untaxed income (if applicable)
• Your Social Security Number
• Your Alien Registration Number (if you are not a U.S. citizen)
• A Federal Student Aid PIN to sign electronically
The schools to which you apply will use the information from your FAFSA to determine how much student aid you will be eligible to receive (your financial aid package). Direct Loans are generally included as part of your financial aid package.
5. How much can I borrow?
Your school will determine how much money you can borrow each academic year. But there are limits on the amount of Unsubsidized and Subsidized :oans that you might be able to get each academic year as well as the total amounts you could borrow for undergraduate and graduate study. The actual amount of money you would be able to get each academic year may be less than your annual loan limit. These vary depending on what year you are in school and whether you are an independent or dependent student. As a first year undergraduate student you would be able to borrow up to $5500 if you are a dependent student but no more than $3500 of this can be in subsidized loans. On the other hand, if you are an independent student you could borrow as much as $9500 though again only $3500 of this can be in subsidized loans.
6. What are the interest rates on federal student loans?
The interest rates on federal loans as of this writing was 3.86% for both a Direct Subsidized Loan and Unsubsidized Loan for undergraduates. The interest rate for a graduate student with a Direct Unsubsidized Loan is 5.41%.
7. What else must I do to get a loan?
In addition to filling out and submitting the FAFSA you will be required to complete entrance counseling, which is a tool that will help you understand your obligation to repay the loan. You will also be required to sign a Master Promissory Note (MPN) where you agree to the terms of the loan.
8. How do I get my loan?
Your school will first apply your loan funds to your account to pay for your room and board, tuition, fees and other school expenses. If there are any funds left over after this, they will be given to you. Do understand that all of the money must be used for education expenses including any of the funds you personally receive.
Once you graduate or are attending school less than half time, you will have a six-month grace period after which you will need to begin repaying your loan. Your loan servicer will provide you with information during this grace period as to when your first payment is due. Payments are generally monthly.
10. How do I repay my loan?
There are a number of different repayment plans available. The institution that services your loan will help you understand which one might be best for you depending on your circumstances. You’ll have either 10 or 25 years to repay your loan depending on the repayment plan you choose. The three most popular of these plans are:
• Standard Repayment Plan
• Graduated Repayment Plan
• Extended Repayment Plan
If you choose the Standard Repayment Plan, you will have 10 years to pay back the loan.
The payments will be a fixed amount of at least $50 per month. If you choose this plan, you will pay less interest then with either of the other two plans. Loans that are eligible for a Standard Repayment Plan are both Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford loans and all PLUS loans.
A Graduated Repayment Plan is where the payments are lower to begin with but then increase – usually every two years. The same types of loans are eligible for a Graduated Repayment Plan as a Standard Repayment Plan. The term of the loan will probably be 10 years.
If you choose the Extended Repayment Plan, your payments may be either fixed or graduated. Your monthly payment will likely be lower than that of a 10-year Standard Repayment Plan. If you had a Direct Federal Loan you must have an outstanding balance of more than $30,000 to be eligible for an Extended Repayment Plan. The term of the loan will be up to 25 years and the loans that are eligible would be the same as those for the Standard Repayment Plan.
11. Are there other options for paying back my federal loan?
In addition to the three plans described above, there are four Income-based Repayment Plans. They are the Income-based Repayment Plan, Pay As You Earn Repayment Plan, Income-contingent Repayment Plan and the Income-sensitive Repayment Plan. (Note: For more information on these four plans, go to this page.)
12. What if I have a problem repaying my loan?
If you find you’re having a problem repaying your loan, contact your loan servicer immediately. It will help you understand the options available to keep your loan in good standing. For example, you might be better off changing to a different repayment plan to reduce your monthly payments or you might be able to request either a deferment or forbearance.
13. What happens if I default on my federal loan?
You are considered to be in default on a federal student loan the day after you miss a payment. After 90 days, your default will be reported to the three credit bureaus and your credit score will probably be lowered dramatically. Your entire unpaid balance and any interest charges will be immediately due and payable and you will lose your eligibility for forbearance, deferment or for changing repayment plans. In addition, you’ll lose your eligibility for any more federal student aid and your account will be assigned to a collection agency. The government may withhold your federal and state taxes through what’s called a tax offset. And finally, your debt will increase due to additional interest, late fees, collection fees, court costs, attorney’s fees and any other costs associated with collecting the money from you.
If you need help with your student loan debt