Federal Student Loans and You: What You Need to Know

Intro to Federal Student Loans

            Few of us are able to afford college without federal student loans. There are other options, like scholarships and grants, but even with those, it’s hard to completely cover the cost of attendance, room, board, books, and every other cost that comes with college. Most of us will end up taking out some loans to go to college, and that’s okay.

            But, before we go crazy with using money that isn’t ours, it’s important to understand everything that comes with federal student loans. There are definitely risks to taking out loans of any kind, and there are requirements that must be met when it comes time to begin paying them back. Before we start grabbing federal student loans to fill all the gaps in our bill, let’s talk about the basics.

What kind of Federal Student Loans can you take out?

            There are a few options for federal student loans. The two most common are the Direct Subsidized loans and the Direct Unsubsidized loans. They commonly go together if a student is proven to have eligible financial need for the direct subsidized loans.

            Direct Subsidized Loans:

            These loans are given by the federal government to students who meet certain criteria for financial need. The amount that you are given is determined by your school based on your remaining need.

What sets this loan apart from others is that the U.S. Department of Education pays the interest on these loans while you are in school (at least half-time student) and for the 6-month period after you graduate or leave school (grace period). If there is a deferment (a postponement of loan payments), then they pay the interest during that time period as well.

Because interest doesn’t compound for you, the student, while you are in school, this is the preferred loan. Basically, if you have to take out loans, this is the one to lean on the most. I’ll explain that in a minute.

            Direct Unsubsidized Loans:

            Unsubsidized loans begin charging you interest right away. So, while you don’t technically have to start paying them until you graduate and finish your grace period, the interest begins compounding for you right away. Basically, from the moment you take out the loan, you already owe more than you’ve taken.

            For unsubsidized loans, there isn’t a required financial need for eligibility, but your school will still decide how much you can take out. You don’t have to take out the amount they say you can, but you can’t take more than that—and you shouldn’t, anyway.

            Now, before I said that subsidized student loans and unsubsidized student loans often go together. When your school determines your remaining need after scholarships and grants, they will recommend federal student loans to fill it. They may call these Stafford loans, though that is not the official name for them.

            If you are eligible for both loans, your college will combine them up to certain maximums, which depend on your determined need and your year.

            The typical loan limits for these loans are as follows:

• Dependent undergraduates (most students under the age of 24):
  • Freshmen: maximum $5,500 (with up to $3,500 as subsidized)
  • Sophomore: maximum $6,500 (with up to $4,500 as subsidized)
  • Junior and beyond: maximum $7,500 (with up to $5,500 as subsidized)
• Independent undergraduates (students age 24 or older) and dependent students whose parents are ineligible for PLUS loans:
  • Freshmen: maximum $9,500 (with up to $3,500 subsidized)
  • Sophomore: maximum $10,500 (with up to $4,500 subsidized)
  • Junior and beyond: maximum $12,500 (with up to $5,500 subsidized)

The current interest rate for both loans is 6.39% which is fixed for the life of the loan (meaning that it won’t change while you’re paying it off, even if the economy does).

(Visit The Institute for College Access and Success for more specific information)

            Parent PLUS Loans

            Parent PLUS loans are given to parents of students who may need additional financial assistance, even with or instead of other federal student loans. Some requirements for these loans include:

• The student being paid for must be enrolled at least half-time
• The parents must be the biological or adopted parents of the student. Legal guardians and stepparents are not eligible (unless they legally adopt the child).
• The parents must have acceptable credit

For these loans, there isn’t necessarily a limit, but, like all loans, they should be taken out only if needed, and only to the amount needed. The interest rate for these loans is currently 8.94%, which will be applied to the lifetime of the loan.

PLUS loans are also given as Graduate PLUS loans, with similar terms. However, these are only given to graduate students, so for now, we won’t worry about those.

            Private Loans

            There is also the option to take out private loans, which are not related to the government or the Department of Education. The terms for these will vary depending on the lender that you choose, your credit, and how much you need to borrow. Private loans are not usually advised, as they typically have much higher interest rates and can be harder to get approved for.

Student Loan Repayment Options

            Now that we have a basic understanding of what loans we can have, let’s talk about what’s expected as far as student loan repayment. This information will mostly apply to any federal student loans, as private loans and lenders will have their own requirements and terms when it comes to paying off the loans.

Student Loan Repayment typically begins after the grace period ends. The grace period is the six-month window after you have either graduated or stopped attending college. After you graduate, if you decide to continue your education, your loans will be deferred, which means that you don’t have to pay them during the deferment period. However, you must be enrolled at least half-time, and you’ll still accrue interest in the unsubsidized loans.

There are two main repayment “plans” for federal student loans. One is considered the default or “standard repayment plan” and the other you may have to apply for. In both cases, you will have a minimum monthly payment.

            Standard Repayment

            The standard repayment plan consists of fixed monthly payments based on a designated timeline. You’ll have to talk with your loan servicer—that is whoever the government designates you make your payments to—about what timeline you’d like to pay back your loans in. If you don’t, the default timeline is 10 years, and your monthly payments will be based off completing payments within that timeline.

            For example, let’s say your federal student loans amount to $30,000. That means, over 10 years, you need to be paying $3,000 per year, which is roughly $250 per month. Now, this example isn’t completely accurate, because interest compounds as you go, so your actual monthly payments plus interest will likely be more.

            If your debt is smaller, then your student loan repayment may not take 10 years, and that’s great. Regardless of the amount that you owe and how long it will take to pay it off, you will have a minimum monthly payment of $50.

            Repayment Assistance Plans (formerly Income-Driven Repayment)

            Repayment Assistance Plans (RAP) are the replacement for Income-Driven Repayment (IDR) plans, which took into account your income, expenses, and dependents. Depending on your income, with IDR you could have little to no monthly payments if you didn’t make enough money and had children or people that you were legally taking care of (dependents). With IDR, your student debt could be forgiven, and therefore no more payments needed, after 20-25 years.

            RAP operates similarly, with monthly payments dependent on how much you make, and dependents taken into account. However, the discount that is given for dependents is $50 off a month per dependent. That said, regardless of dependents or income, there is a required minimum monthly payment of $10. Even if you report no income, you are still required to pay $10 a month.

            Additionally, the amount of time before you can potentially be forgiven of your loan is 30 years, instead of 20-25. That means that for 30 years you are required to pay 10$/month, regardless of income or dependents, and after that you may be able to apply for loan forgiveness.

            There were several loan repayment options under the IDR umbrella, and they are all going to be replaced by the RAP. Unless you are already paying through an IDR, those options are going to be unavailable after July 2026. This means that any loans you are currently taking out or take out from there on will be transferred to an RAP, should you require much lower monthly payments due to income or financial hardship. To find out what that looks like in your case, you’ll have to talk to your loan service provider before you start repaying them.

            It’s important to note that the standard repayment will remain an option and is the most common way to repay your federal student loans. Additionally, if you are able, at anytime you can make larger payments than your monthly payments and cut time off your student loan repayment timeline. Some loans have penalties if you pay them off too soon because loan servicers are counting on the additional money you pay from interest. Federal student loans have no penalties for paying them off early.

What are the Consequences of Not Paying Debt from Federal Student Loans?

            The consequences of not paying off your federal student loans varies from mild to somewhat extreme. The penalties start right away, with your first missed payment, but only in the form of more interest being charged on your missed payment.

            After 90 days of not paying your student loans, you’ll be considered delinquent. Loan servicers report delinquency to the national credit bureaus, which will begin to affect your credit score negatively. The lower your credit score gets, the harder life gets.

            A poor credit score can have huge consequences, both immediate and down the road for future important purchases. Purchases like the following become very difficult (and some impossible) with a low credit score:

• Obtaining credit cards
• Buying a house
• Buying a car
• Leasing an apartment
• Obtaining any type of loan at all.

If you still don’t make payments after 270 days, your loans are considered defaulted. As if the tanked credit wasn’t bad enough, the consequences for defaulting can rip the ground out from under you. The following is a list of consequences for defaulting on your student loans:

• The entire remaining amount of the loan including interest will become due immediately.
• Any refund that you have on your taxes or any federal benefit payments may be withheld and put towards your defaulted loan.
• Portions of your wages may be withheld and sent to your loan servicer to repay your loan. This is called wage garnishing.
• You will no longer receive deferment or forbearance (given for times of financial hardship and you need to take a break from making loan payments temporarily), your loan will always be considered due. You won’t be allowed to choose a repayment plan.
• You will be ineligible for additional federal student aid
• Your credit rating will plummet, and it may take years to recover a decent score.
• You may not be able to purchase or sell things like real estate
• You can be taken to court by your loan provider, and you may be charged court costs, collection fees, attorney’s fees, and any other costs for the process.
• Your school may withhold your official transcript (if you took a break from school but plan to go back/transfer). You can request an unofficial transcript if this happens and they are required to provide one for you, but it isn’t guaranteed it will be accepted anywhere else.

While not every one of those punishments is a guarantee, all of them are options for loan servicers when someone defaults on their student loans. Recovering from the consequences of a defaulted loan and from tanked credit can take years, and potentially lead to bankruptcy. Save yourself the trouble and build your student loan payments into your budget after graduation.

Conclusion

            Federal student loans are a great tool to fill in gaps in tuition and college that we couldn’t fill with grants or scholarships. They are a great way to make college possible for those who can’t afford it outright; most students have to take federal student loans out at some point. The benefits of student loans are clear—but so are the risks.

Because they must be paid back, they should always be a last resort, not a first option. Use them sparingly and rely on scholarships and grants, looking everywhere you can. If you take on federal student loans wisely, they can be an excellent way to get you to the finish line.

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