What is a federal student loan?

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    Jordan Moore
    Team StellarFi

    A federal student loan is issued by the United States Department of Education. These loans are granted to eligible students or parents who need financial aid to cover the cost of education. About 92% of all student loans held currently are federal loans. 

    There are different types of federal loans:

    1. Direct Subsidized Loans: These loans are for students who have a financial need, as determined by the federal government. You don’t have to pay interest on these loans while you’re enrolled at least half-time in school (deferment period) and during the six-month grace period after you graduate – the time given to look for a job after graduation. 
    2. Direct Unsubsidized Loans: These are not based on financial need. Your school decides how much loan you will receive based on the cost of attendance and other additional financial aid like scholarships and grants. Interest accrues while you are in school and during the grace period. This may increase the total cost of your federal student loan.
    3. Direct PLUS loans: These loans are meant for graduate students or parents of students enrolled in undergraduate or graduate courses. They are unsubsidized loans used to help pay for education expenses not covered by other financial aid. They are not based on financial need, but you need a good credit history. If you have a poor credit score, you may need to fulfill additional requirements to qualify for the loan. Interest is charged throughout the loan period (including while the student is in school) and may be capitalized or added to the principal amount if you miss a payment. 

    Depending on whether you qualify, you can take out multiple federal loans, but there are limits to the total amount you can borrow. This depends on the type of loan, which year of school you’re in, and whether you are a dependent student. Direct Loans range from $5,500 to $12,500 a year. As a graduate student, you can borrow up to $20,500 a year. 

    Federal student loans are generally the preferred choice amongst most borrowers because they have lower interest rates compared to private loans and offer several benefits and protections:

    • The interest rates are lower and remain the same throughout your loan period, unlike private loans. 
    • You don’t need to begin paying back the loan until after you graduate, though interest may or may not accrue during your college years based on the type of loan you apply for.
    • The federal government pays the interest on your loans while you are in school if you demonstrate financial need. 
    • Multiple repayment programs may lower your payment. These programs can eventually lead to forgiveness depending on your employment type, income, and ability.
    • Your credit history does not matter to get a federal student loan. (The exception is Direct PLUS loans available for graduate students and parents of undergraduate and graduate students).
    • You can choose to temporarily postpone your payments if you’re facing economic hardship at some point during your loan period. You can apply for deferment or forbearance.
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StellarFinance, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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