After exhausting sources of gift aid like grants and scholarships, students should always borrow federal first before turning to parent education loans and private student loans. Federal student loans, such as the Direct Loan, are cheaper, more available and have better repayment terms. Some of the many benefits of federal student loans include:
There are only a handful of downsides to federal student loans. Federal student loans have annual and cumulative loan limits, so students who are enrolled at high-cost colleges may need additional financing, such as private student loans, to bridge the gap between the annual cost of attendance (COA) or student expense budget and the expected family contribution (EFC). Borrowers must maintain satisfactory academic progress (e.g., a minimum 2.0 Grade Point Average (GPA)) to continue to receive federal student loans and other federal student aid. Federal and private student loans are almost impossible to discharge in bankruptcy.
Direct Loans offer a fixed interest rate. Direct Loans for undergraduates, including both Direct Subsidized Loans and Direct Unsubsidized Loans, have a fixed rate of 4.29% during the 2015-2016 award year. Direct Unsubsidized Loans for graduate students have a fixed rate of 5.84%.
Each year’s new loans will have different interest rates, but these interest rates will remain the same for the life of the loans.
These low interest rates do not depend on the borrower’s credit history and do not require a creditworthy cosigner.
Undergraduate students may borrow a combined $5,500 to $12,500 per year in Direct Subsidized and Unsubsidized Loans, depending on the student’s year in school and on the student’s dependency status. Students attending graduate school or professional school may borrow up to $20,500 per year in Direct Unsubsidized Loans.
No payments are required on a Direct Loan until six months after the borrower graduates or drops below half-time enrollment.
In addition, the federal government pays the interest on the Direct Subsidized Loan while the borrower is enrolled in college on at least a half-time basis. (Previously, the federal government also paid the interest during the six-month grace period after graduation. This benefit was suspended for loans made during the 2012-2013 and 2013-2014 award years.)
Similar to the in-school and grace period deferments, deferments and forbearances are temporary suspensions of the obligation to repay. They are good for short-term financial difficulty, such as during medical or maternity leave or while a borrower is between jobs. But because interest can continue to accrue, the loan balance may grow, digging the borrower into a deeper hole. If a borrower is experiencing a longer-term financial difficulty, he or she may be better off in an alternate repayment plan, such as income-based repayment or extended repayment.
Federal student loans offer several flexible repayment plans:
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