What Is a Federal Student Loan?

College tuition prices have soared over the decades, making federal student loans a prerequisite for many students embarking on higher education. These loans provide enough funds to cover tuition, and you won’t have to worry about them until you graduate. The monthly loan payments will kick in soon after you graduate or if you are no longer in school. Knowing the type of loan you have and the payment schedule can help you get out of debt sooner.

Federal student loan definition 

A federal student loan is a financial product students can use to fund their college tuition. The government backs these loans and has favorable terms for borrowers that private lenders can’t provide. As with any loan, you must repay the principal over time with interest.

Benefits of federal student loans

Federal student loans are a popular resource for aspiring college graduates. Here are some of the benefits federal loans provide over private loans.

1. Low interest rates

The first difference between private and federal student loans is that federal loans have lower interest rates than most private student loans. That makes the monthly payments more affordable, and because these interest rates are fixed, you won’t have to worry about your monthly payments changing over time. 

2. Flexible repayment plans

Federal student loans have more repayment plans available. You don’t have to make monthly loan payments on a federal loan while attending college, and you can be eligible for an income-driven repayment plan if you encounter financial obstacles. Private student loans do not provide that many choices, and you can get stuck with monthly loan payments while attending college. Paying your student loan balance during your college years can get you out of debt sooner, but federal loans give you a choice.

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3. Loan forgiveness programs

Federal student loans are subject to loan forgiveness programs. Some of these forgiveness programs are built into the loans, while others may come as a result of policies in the future. The government can only forgive debt that it has issued. 

Because a private student loan isn’t government-issued debt, it is more difficult for the government to forgive private student loans. Federal student loans also provide deferral and forbearance programs that allow you to temporarily pause payments for up to 12 months if it becomes necessary. For a forbearance, you can opt to reduce your monthly payment for up to 12 months. It’s a good idea to pay the interest during this time frame so your debt does not grow, but it’s not required that you do so. Private student loans do not come with forbearance and deferral programs.

4. No credit history needed

Many lenders require credit history for applicants. Credit history helps lenders assess a borrower’s ability to repay the loan. This history also reveals how a borrower has handled other financial commitments. Federal student loans do not require a credit history for their applicants, and even without credit, you can still secure a lower interest rate than private student loans.

5. No co-signer requirements

Federal student loans do not require co-signers, a decision that makes it easier to get a loan without giving someone else the financial burden of repaying the debt. A co-signer becomes legally responsible for paying off the loan if the borrower cannot make payments. This rule puts co-signers in a risky situation, but having a co-signer may be a borrower’s only way to get private student loans. If you keep your federal student loan without a co-signer, you don’t have to worry about the debt falling on someone else if you can’t keep up with loan payments.

Federal student loan types

The government offers several types of loans for borrowers seeking funding for their college tuition payments. These are the available federal student loans:

1. Direct subsidized loans

These loans go to students who can demonstrate a financial need that is determined by the Federal Direct Loan Program. Students enrolled part time or full time will not owe interest throughout enrollment, during grace periods, or during deferment. 

2. Direct unsubsidized loans

These loans go to students who cannot demonstrate a financial need as defined by the Federal Direct Loan Program. Interest accumulates on these loans throughout the term’s duration, even when the student is enrolled in classes. Schools look at your financial aid and the cost of education to determine the loan’s amount.

3. Direct PLUS Loans

These are unsubsidized loans that go to parents who want to pay for their student’s tuition. Parents must go through a credit check to receive Direct PLUS Loans, and additional requirements may be put in place if the parent has a bad credit score. 

4. Perkins Loans

The Perkins Loan program ended in 2017, but some borrowers still have these loans. Perkins Loans are subsidized loans that have up to 10-year terms. Repayment starts after you have been out of college for nine months. As with any loan, it’s good to reduce the principal while you are enrolled in college. Incoming students will not have to worry about Perkins loans because the program was discontinued.

Eligibility requirements for federal student loans

Federal student loans have several requirements you need in the moment. You must also maintain other requirements to ensure you continue receiving funds for your college tuition. These are the requirements:

• You must be a college student or have been accepted to a college as a regular student.
• You must be a U.S. citizen or an eligible non-U.S. citizen.
• You need a valid Social Security number (some exceptions apply).
• You need to use the Free Application for Federal Student Aid (FAFSA) to sign an agreement.
• You need to demonstrate you are qualified to receive a higher education.

If you want a subsidized loan, you must also prove that you have a financial need as outlined by the Federal Direct Loan Program.

How to apply for federal student loans

To get started, you will have to fill out the FAFSA form to get matched with a financial aid offer from your school. Your school will provide details on how to accept the offer.

Financing Higher Education

Federal student loans are the gateway to a collegiate education for many students. These loans provide the capital you need without checking your income or credit history. Students should assess their choices and come up with ways to pay off the debt sooner because it is a significant financial commitment. Knowing your options as a federal student loan borrower can provide some solace during financial hardships.

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