Most college graduates—70%, to be exact—leave school with student debt, and the bulk of these loans are federal. In fact, the total balance of all outstanding loans in the U.S. is currently a staggering 1.6 trillion dollars, according to the Federal Reserve. The population of the entire U.S. is only around 329 million, which means there’s about $4,800 in student loan debt for every person in the country—that includes babies, retirees, and people who never went to college!
As a student (or a parent of a student), it’s critical that you understand how to finance your education in a way that will give you the best options after graduating, and minimize the long term impact on your finances. After scholarships, grants, and other sources of funding that you don’t have to pay back, federal student loans are generally the most attractive option, because most of them come with competitive interest rates and a very flexible set of benefits and repayment plans.
Unfortunately, if you’ve tried researching your federal student loan options on the U.S. Department of Education website, you may have found that it’s organized like a plate of spaghetti. Fortunately, Purefy has put together this comprehensive guide to help you decide how to finance your education.
Let’s start with a few basics. If you take out a federal student loan, your lender (the entity you repay over time) is the U.S. Department of Education. These are sometimes called “Direct” loans, because the money comes directly from the federal government.
The interest rate on your loan will be fixed for the entirety of your repayment term, and federal student loan interest rates are frequently (but not always) lower than private student loan interest rates.
Some federal loans require you to pass a basic credit check, or to have a cosigner. A cosigner is someone who is equally responsible for your loan, should you be unable to make payments in the future—for most students this is a parent or close relative.
That said, the credit checks for federal student loans are much less stringent than for private loans, and you just need to meet a minimum standard. You don’t get a better rate for having good credit.
As far as repayment, you do not have to make payments on your federal student loans until you leave school or drop below half-time enrollment. As a borrower you also have access to the federal forbearance program, which lets you postpone loan payments if you are having financial difficulty.
Furthermore, if you enter certain career paths after college, you may be eligible to have a portion of your loans forgiven, through programs like Public Service Loan Forgiveness.
To apply for federal student loans, you will need to complete the Free Application for Federal Student Aid (FAFSA) by the deadline. Keep in mind, that the earlier you submit the FAFSA, the more likely you are to qualify for financial aid.
Your Federal student loan offers will be presented to you in a student aid report, and also in the financial aid award letter you’ll receive from your school. The aid letter will summarize the cost of attendance, any scholarships and grants you’ve received, the federal student loans you are eligible to take out, and the remaining gap to be filled. This gap is usually filled either through family college savings (if available), or through private student loans. For more information, see our step-by-step guide to applying for loans.
At the moment, there are four main types of federal student loans, which each have different eligibility criteria, interest rates, and loan limits:
For Parent PLUS loans only:
Loan limits are one area where federal student loans can be very confusing. There is a limit on how much you can receive in direct unsubsidized loans, and also a limit on what you can receive on direct unsubsidized and subsidized loans, combined. The limits vary from $5,500 to $12,500 for undergraduates, depending on what year of school you are in, and your dependency status (whether your parents claim you as a dependent for tax purposes).
For graduate or professional students, the maximum loan amount for direct unsubsidized loans is $20,500. Grad PLUS loans can be used to cover any remaining college costs not covered by other financial aid.
For parents of a dependent undergraduate student, you can receive a Parent PLUS loan for the remainder of your child’s college costs not covered by other financial aid.
This chart helps explain the loan limits for Subsidized and Unsubsidized Loans:
|Dependent Students||Independent Students|
Annual Loan Limit
|Second-Year Undergraduate Annual Loan Limit||$4,500||$6,500||$4,500||$10,500|
|Third-Year+?Undergraduate Annual Loan Limit||$5,500||$7,500||$5,500||$12,500|
|Graduate/Professional Annual Loan Limit||n/a||n/a||n/a||$20,500|
|Undergraduate Lifetime Loan Limit||$23,000||$31,000||$23,000||$57,500|
|Graduate/Professional Lifetime Loan Limit (includes undergrad loans)||n/a||n/a||$65,500||$138,500|
Federal student loans do come with fees—these fees get subtracted from your total loan disbursement, so the amount you borrow from the government will actually be less than your original loan request. The below chart shows the current fees—note that the fee for PLUS loans is much higher than subsidized or unsubsidized loans. That’s one reason to think about choosing private student loans over Parent PLUS loans or Grad PLUS loans—most private student loans come with no fees, and borrowers with excellent credit can get a lower rate.
|Loan Type||First Disbursement Date||Loan Fee|
|Direct Subsidized Loans and Direct Unsubsidized Loans||10/1/2018–9/30/2019||1.062%|
|Direct PLUS Loans||10/1/2018–9/30/2019||4.248%|
One attractive aspect of federal student loans is the flexibility of the repayment plans that borrowers are eligible for. The standard plan will usually have you paying off your loans in 10 years, but there are a multitude of other options to lower your payments and extend your term. You are also free to pay off your loans ahead of schedule. After finding steady employment, a growing number of borrowers now choose to refinance federal loans after they graduate to reduce their interest rate and to pay off the loans sooner. But keep in mind, this will sacrifice access to federal benefits like forbearance and loan forgiveness.
In addition to the three plans above, federal student loans have multiple repayment plan options which are based on your discretionary income. For these plans, the discretionary income used to calculate your payment is the difference between your adjusted gross income and 150 percent of the poverty guideline amount for your family size and state. Each year you must “recertify” your income and family size, even if there has been no change in your income or family size.
Under all these plans, any remaining loan balance is forgiven if your federal student loans aren't fully repaid at the end of the repayment period. The amount that is forgiven may be taxed, so keep that in mind. Periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will all count toward your total repayment period.
Another important note is that under all these plans, the lower monthly payment you receive comes at a cost: you will generally pay more over the life of the loan than you would have on the standard 10 year repayment plan. That said, these plans are a good option if you are seeking Public Service Loan Forgiveness.
|REPAYE Plan||PAYE Plan||IBR Plan||ICR Plan|
|Eligibility||No Parent PLUS loans (even if consolidated)||No Parent PLUS loans (even if consolidated)||No Parent PLUS loans (even if consolidated)||Parent PLUS loans OK if consolidated first|
|Payments||10% of discretionary income||10% of discretionary income||10% of discretionary income (15% for older loans)||It’s complicated. (see details in the bullets below)|
|Best for||Better than PAYE for single borrowers||Better than REPAYE for married borrowers||OK for married borrowers||Parents|
And, the details for these repayment plans:
The Public Service Loan Forgiveness Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.
To qualify for Public Service Loan Forgiveness, you must:
According to the Internal Revenue Service, student loan amounts forgiven under PSLF are not considered income for tax purposes. There is no income requirement to qualify for PSLF.
Before you decide to pursue Public Service Loan Forgiveness, it’s important to know that just 206 people across the country have been released from their debt through this program. 2018 was the first year of eligibility, and as of September 2018, about 41,000 borrowers applied to have their debt forgiven, according to the Education Department's data. That means less than only 0.5% percent of people who've applied actually got federal student loan forgiveness.
For a detailed look at forgiveness programs, check out our in-depth guide.