Most students take out loans.
Most college students these days take out student loans to pay for the cost of higher education. In fact, about 65% of graduates in 2019 had borrowed student loans, according to U.S. News data. But not all terms and conditions for student loans are the same, and borrowers should consider the various types of loans available. Here are 13 benefits of taking out a federal student loan.
No credit history needed
Most loans from financial institutions, such as a bank or credit union, require a credit history, but federal student loans don't. To apply for a federal student loan, a student's family needs to fill out the Free Application for Federal Student Aid, or the FAFSA. Experts say it's a lot easier to be eligible for a federal student loan than a private one.
Must Read: Learn more about FAFSA requirements
No co-signer needed
Federal student loans aren't based on credit, which college advisers say allows the student to take on the responsibility without asking a family member or friend to co-sign. Scott Weingold, co-founder of College Planning Network, an Ohio-based college advising firm, says most students probably aren't eligible to qualify for a private student loan without a co-signer. "If a student has a lot of credit in their name and job, they may qualify."
Fixed interest rates
Federal student loan interest rates are fixed, which means they do not change over the life of the loan. Private loans can have fixed or variable rates. Experts say the main advantage of a fixed-rate loan, as opposed to a variable-rate loan, is that the borrower is protected from sudden or significant increases with their monthly payments if interest rates rise.
Lower interest rates than private loans
For undergraduates whose new federal student loan was disbursed on or after July 1, 2020, and before July 1, 2021, the interest rate is 2.75%. Experts say private higher education loans tend to have higher interest rates because they are considered risky to the lender. "The federal government is offering a discount to consumers on that risk," says Andrew Josuweit, a consultant at LendingTree, an online marketplace where borrowers can connect to lenders.
Interest accrual may begin after college
Students with demonstrated financial need who receive a subsidized federal student loan do not pay interest as long as they are enrolled in school on at least a half-time basis. In these cases, the government pays the interest on behalf of the student. Private lenders, however, often do not offer subsidized loans to students, meaning students are responsible for the full interest amount from the time the loan is disbursed.
Forbearance and deferment options
Applying for forbearance or deferment postpones student loan payments. Both of these are available under the federal student loan program. "Usually you get up to three years on federal student loans and typically with private lenders it will be around a year of forbearance or deferment unless in the promissory note there were different terms and conditions," Josuweit says. The U.S. Department of Education pays the interest on subsidized federal loans during deferment.
A repayment grace period
Some federal student loan borrowers do not have to begin repaying their loans until after leaving college or dropping below half-time enrollment. Once a student leaves college, whether by graduating or otherwise, he or she has a six-month grace period before repayment must begin. This grace period is available to students who borrowed direct subsidized loans and direct unsubsidized loans, but borrowers should be aware that interest does begin to accrue during the grace period, after the student leaves school. For subsidized loans, the Department of Education pays the interest during the grace period.
Income-driven repayment options
Federal student loan borrowers are known to have more flexibility, and there are plans for different income circumstances, experts say. In fact, four different income-driven repayment plans are offered under the federal student loan program. The Pay As You Earn Repayment Plan and the Revised Pay As You Earn Repayment Plan, for example, cap payments at 10% of the borrower's discretionary income.
Takes longer to default
Federal student loans give borrowers more time to make payments, even if they have missed more than one payment. According to the Department of Education, a federal student loan is only considered delinquent after three missed payments, which is roughly 90 days past due. It is considered in default after nine months of missed payments, whereas private student loans are typically considered delinquent as soon as a payment is missed.
Consolidation available with poor credit
Borrowers with multiple federal student loans can consolidate them into one direct loan with one monthly payment. "It's easier to consolidate with the federal government," says Josuweit, adding that credit isn't a factor for that type of consolidation. "But you won't be able to cherry-pick certain loans for refinancing and that could end up costing you in the long term."
Loans can be discharged
According to the Department of Education, if the borrower dies, the loan is automatically canceled and the debt is discharged by the government. Experts say more private lenders are starting to offer this protection on private student loans. Federal loans can also be discharged if the borrower can prove total and permanent disability.
Student loan forgiveness options
Federal student loans offer forgiveness opportunities under some programs. The Public Service Loan Forgiveness program allows borrowers to have loans forgiven after at least 10 years of public service and 120 qualifying monthly payments. Loan forgiveness is also available to borrowers after they have been enrolled in an income-driven repayment plan for 20 or 25 years, depending on the plan. But the forgiven debt under an income-driven plan is currently considered taxable income by the IRS.
No standard limit on parent borrowing
Unlike other types of federal student loans and some private loans, there is no standard limit on the amount parents can borrow when taking out a Parent PLUS loan, a type of federal loan available to parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. This type of loan can be used to fill a gap between the amount of financial aid a student receives and the cost of college. The loan amount can be as much as a student needs to pay the remainder of his or her college expenses, which are determined by the student's school. Parents should note, however, that there is a required credit check on these loans.
Learn more about student loans.
The quest to learn more about student loans shouldn't end here. Follow the Student Loan Ranger blog, which offers guidance on the options that may forgive, discharge or pay for all or a portion of a borrower's student loans. You can also follow U.S. News Education on Facebook and Twitter to join the conversation and stay informed about the latest tips and advice on paying for college.
The benefits of borrowing federal student loans
No credit history needed
No co-signer needed
Fixed interest rates
Lower interest rates than private loans
Interest accrual may begin after college
Forbearance and deferment options
A repayment grace period
Income-driven repayment options
Takes longer to default
Consolidation available with poor credit
Loans can be discharged
Student loan forgiveness options
No standard limit on parent borrowing
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