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Federal Student Loans...What's Not To Like?

Federal student loans are a lifesaver given the average cost of college education today. Who can afford almost $33,000 a year* without taking out loans? (This statistic includes all types of colleges, with tuition, room and board counted in.)

Two-thirds of all undergraduates take out loans for college. And the loans of choice are federal student loans.

Since the government eliminated private lenders from playing any role in originating federal loans (in 2010) all students now have the same terms when they borrow Stafford loans (depending on whether they are subsidized or unsubsidized loans).

The federal government, state education departments, colleges and even private lenders all recommend federal loans for school.

Here's why:

Federal interest rates are the lowest.

There are no credit checks for students, so these could be considered bad credit education loans. Federal student loans are also college loans with no cosigner needed.

Loans are guaranteed by the U.S. Department of Education through the Direct Loan program

Federal loans can be used for costs at most accredited schools, including online schools.

Students are given a grace period before repayment begins.

Government loans include many forbearance, deferment and loan payment formula options.

These loans can be consolidated after you get out of school. (For FFELP borrowers during the 2011-2012 school year, a special Direct loans consolidation rate is available.)
You can check the student loan consolidation calculator to see if this will reduce your interest rates.

With these easy terms, it's also easy for another lender to identify someone who defaults as the worst possible credit risk. No one should ever have to default on a federal loan.

Okay, so this sound like your best loan choice, right? Well yes, except for one thing...

Federal College Loans Won't Be Enough

...except if you go to a state university or a community college (and community college student loans are by no means a sure thing). If you were hoping to finance college using only government loans, you will need to come up with substantial funds to make up the difference between what a private school costs and what the government will lend you.

These are the maximum federal amounts allowed:

Dependent Students
1st year	$5,500 ($3,500 subsidized)
2nd year	$6,500 ($4,500 subsidized)
3rd, 4th years	$7,500 ($5,500 subsidized)
Grad programs	$20,500 ($8,500 subsidized)

Independent Students
1st year	$9,500 (of which $3,500 may be subsidized)
2nd year	$10,500 (of which $4,500 may be subsidized)
3rd, 4th year	$12,500 (of which $5,500 may be subsidized)
Grad programs	$20,500 (of which $8,500 may be subsidized)

These limits are for federal Stafford loans. Unsubsidized Stafford loans are the most widely used federal student loans. If you can qualify though, a subsidized Stafford loan will save you interest. (And now, all Stafford loans are federal direct student loans.)

And if you are a first-year, first-time borrower of federal student loans, there is an additional obstacle- a mandatory thirty day (after courses start) delay before these funds can be disbursed. This means that if you are relying on a credit balance (refund) to finance books or living expenses for that thirty days, you will not get it in time from the loan funds.

Federal Perkins Student Loans

These loans are typically awarded to students whose FAFSA shows extreme financial need- usually ones who would qualify for a Pell grant. The benefits of having a federal Perkins student loan are less than they were in the past, but there are still some advantages.

And Perkins loan forgiveness programs are now comparable to the Stafford federal student loans forgiveness programs.

Okay so, unless you have one of these...

federal student loans1

...you have a large gap between what the federal government is willing to give you and what you're going to need to go to college.

So, you and your family need to make a decision. You can:

choose to go to a state university or community college
take out a private loan

Find College Loans

you can use one other type of federal student loan...

College Loans For Parents

Direct Parent Plus Loans can make up the gap. Parents are allowed to borrow up to the difference between the cost of attending college and all other financial aid received. You need to be very, very sure before you commit to this loan. It does not have many of the user-friendly features that other federal loan choices have.

Some things you will want to consider before taking this step are:

Can you afford to make the payments now, while your child is in school? (Congress passed a law two years ago that allowed parents to defer payments until after graduation, but this is scheduled to end soon.)

Will getting a degree from a more expensive college add to the value of a college degree as far as future earnings?

Does your child have a defined major and a chosen career path?

Is your child fully committed to going the distance towards a four year degree?

If any of these issues are in doubt, rethink parent college loans. Parent PLUS loans can be applied for at the new Direct loan center, direct loans gov.

If you take out college loans of any kind, make sure you have a plan for paying off student loans even before your grace period ends. And federal loan refunds are generally not available as soon as the funds are applied to your tuition. Schools are allowed some time before they have to give students the rest of their money. "Where is my refund?" is a common question by freshmen.

With all types of college loans (including federal student loans) it is possible to make interest payments while in school, and you should try to do this. Check the accrued interest calculator to see how this can reduce your college loan debt.

Learn which student financial aid office to contact about your federal loan questions.

*National Center for Education Statistics

Federal student loans are a necessary part of your college financial plan, but ultimately they are only one piece of the college funding puzzle.

Return from federal student loans to home

Federal Student Loans...What's Not To Like?

Federal College Loans Won't Be Enough

Federal Perkins Student Loans

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College Loans For Parents

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