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What are the benefits of federal student loans?


    The U.S. Department of Education offers students several different federal student loan options to help pay for college, which they make available to students based on the information they supply on the Free Application for Federal Student Aid (FAFSA®). These loans are designed specifically for students and can come with numerous advantages over private student loans, including potentially easier accessibility, set interest rates, and flexible repayment options.

    Let’s dive into some general benefits of federal student loans.

    You don’t need a cosigner

    One of the most significant benefits of federal student loans is that they don’t require a cosigner if you’re an undergraduate. As a student, you can apply and sign for loans independently, even if you’re still in high school. This means you don’t have to rely on a relative for financial help, which could make the process much easier, especially if you’re legally or financially independent.

    Those pursuing a graduate or professional degree and applying for federal student loans might need a cosigner for certain federal student loans if they have an adverse credit history.

    You don’t have to have a credit history

    Most loans require applicants to have a good credit history. If you don’t have much in the way of a credit history or a less-than-stellar credit history, you might not get approved for a loan.

    Fortunately, most federal student loans don’t require any credit history. As long as you’re an undergraduate student and meet the other eligibility requirements, you probably won’t be denied a federal student loan. Certain federal student loans for graduate or professional degrees might require a cosigner and credit counseling if you have an adverse credit history.

    You’re guaranteed a certain interest rate

    Interest rates can be high and unpredictable for many types of loans, but federal student loans offer fixed interest rates that can be more manageable than private student loans. Federal student loan rates are standardized across all borrowers, but they vary depending on the loan type and the date of disbursement.

    For the 2023-24 academic year, the interest rate on Direct Subsidized and Direct Unsubsidized Loans for undergraduate students is 5.5 percent. For the same academic year, for graduate and professional students, the interest rate for Direct Unsubsidized Loans is 7.05 percent, and the interest rate for Direct PLUS Loans for graduate or professional students and parents of dependent undergraduate students is 8.05 percent.

    You may be eligible for Direct Subsidized Loans

    If you’re eligible for Direct Subsidized Loans, the federal government will waive your interest payments while you’re in school, as long as you’re enrolled at least half-time. That can translate into significant savings while you focus on your college education. Keep in mind that not everyone can take out Direct Subsidized Loans, but undergraduate students who demonstrate financial need on their FAFSA® could qualify.

    They come with multiple repayment options

    When you take out federal student loans, you’ll usually have a few options for repaying your debt. Here are some of the repayment options offered:

    Pay as You Earn (PAYE) Plan

    You’ll generally pay up to 10 percent of your discretionary income for a term of 20 years. You may qualify for this based on your income, debt level, and whether you’re a new borrower. Discretionary income is the difference between your adjusted gross income (AGI) and 150 percent of the federal poverty guideline amount for your family size and the state you live in.

    Saving on a Valuable Education (SAVE) Plan

    The Revised Pay As You Earn (REPAYE) Repayment Plan has, as of October 2023, been replaced by the SAVE Plan. This plan is available to federal undergraduate and graduate loan borrowers. If you’re a borrower of undergraduate loans, you’ll pay no more than five percent of your discretionary income repaying your federal student loans, and if you’re a borrower of graduate debt, you’ll pay no more than 10 percent of your discretionary income repaying your loans. If you’re a borrower of both, your payment will be weighed accordingly.

    Income-Based Repayment (IBR) Plan

    Depending on when you borrowed and whether you’re a new borrower, you’ll pay ten or 15 percent of your monthly discretionary income for a term of 20 or 25 years. Your income level and debt amount determine eligibility.

    Income-Contingent Repayment (ICR) Plan

    You’ll pay no more than 20 percent of your monthly discretionary income for no longer than 25 years. As with other repayment plans, eligibility is determined by your income and debt level.

    To learn more about all the various repayment options, reach out to your federal student loan servicer if you’re a borrower or consult online resources provided on the Department of Education’s Federal Student Aid website.

    You may be eligible to defer payments

    Finding an extended repayment plan that works with your budget is great, but what if you can’t make loan payments due to unemployment or other unforeseen circumstances?

    If you have federal student loans, you may be able to defer the payments under certain circumstances, such as economic hardship, unemployment, if you’re continuing your education, or because of military service. This essentially pauses your payments and ensures you don’t incur late payment fees during the deferment period.

    Remember that your student loans might accrue interest even while your payments are paused. Interest doesn’t accumulate on subsidized loans during deferment in most circumstances.

    Here are the eight scenarios in which you’d be eligible to defer your federal student loans.

    • In-school deferment: if you’re enrolled at least half-time at an eligible school.
    • Graduate fellowship deferment: if you're enrolled in an eligible graduate fellowship program.
    • Rehabilitation training program deferment: if you're pursuing an eligible rehabilitation training program for individuals with disabilities.
    • Unemployment deferment: if you’re unemployed.
    • Economic hardship deferment: if you’re experiencing an economic hardship, for example, receiving welfare assistance.
    • Military service deferment: if you’re serving on active duty, including in the National Guard.
    • Post-active-duty student deferment: if you're an active-duty military member within the previous 13 months, remain on reserve, and are enrolled at least part-time at an eligible institution.
    • Additional deferments: if you meet certain criteria concerning Federal Family Education (FFEL) Loans.

    You can consolidate most federal loans

    If you take out multiple student loans over the course of your college career, you’ll have to repay each one separately after you graduate or leave school. Making multiple loan payments is a tough thing for many graduates.

    It’s nice to know that it’s usually an option to consolidate all your federal student loans into a single loan with one payment. Consolidation may streamline your loan payments and simplify your financial life. However, while consolidating your federal student loans may provide a convenience factor, consolidation could result in a longer repayment period, greater accrued interest, and the loss of certain borrower benefits, such as interest rate discounts or loan cancellation benefits, depending on the type of loans you consolidate.

    Your student loans might get forgiven

    While you should always have a plan for repaying your debts, one of the biggest perks of federal student loans is that they might be forgiven if you meet certain criteria. Under the Public Service Loan Forgiveness Program (PSLF), student-borrowers who are employed full-time by a government agency or qualifying non-profit organization, have Direct Loans or have consolidated other loans into a Direct Loan, repay their loans under an income-driven repayment plan, and make 120 qualifying loan payments, may qualify for loan forgiveness. Qualifying for PSLF can be complicated, so please consult your federal student loan servicer and the Department of Education’s “PSLF Help Tool” to learn more.

    If you enroll in one of the above income-driven repayment options, your loans might eventually be forgiven, too. You may qualify for forgiveness at the end of the repayment period of your plan for any remaining balance that hasn’t been repaid.

    Final thoughts

    Federal student loans are just one of the financial aid opportunities that college students can explore. While it’s recommended that students max out the grants and scholarships made available to them first (that’s money that, for the most part, doesn’t need to be repaid), federal student loans are often considered the next best option.