Federal student loan debt is money that is owed to the federal government in the form of student loans.
As of June 30, 2020, the total amount of outstanding federal student loan debt was more than $1.6 trillion dollars. This figure includes both Direct Loans and FFELP (Federal Family Education Loan Program) loans, which make up roughly half of the student loan market.
These numbers don’t include private student loans, which represent another $1.5 trillion in outstanding debt.
Most student loans (about 92%) are owned by the government, according to a July 2021 report by MeasureOne, an educational data firm. This includes both federally backed and privately held loans.
As of June 30, 2020, total federal student loan borrowers numbered 43 million, up from 39 million a year earlier, while total outstanding federal student loan debt reached $1.62 trillion, compared with $1.58 trillion a year ago.
In 2018, President Donald Trump signed into law the Bipartisan Student Loan Certainty Act, which capped interest rates on subsidized Stafford Loans at 3.86%. This was an effort to reign in college costs, but borrowing still rose.
The types of federal student loans available
The U.S. Department of Education’s William D. Ford Federal Direct Loan (Direct Loan) Program is a federal student loan program where the Department of Education is your lender.
There are two types of direct loans offered by the Federal Government: subsidized and unsubsidized.
Differences between Direct Subsidized and Unsubsidized Loans
Direct Subsidized Loans have better terms to help out students with financial need.
Direct Subsidized Loans are available to undergraduate students who show financial need, as determined by the FAFSA. Meaning that the government considers your financial information when determining how much money you can borrow. These loans usually have lower interest rates and don’t accrue interest while you’re in school.
Direct Unsubsidized Loans are available to undergraduate and graduate students; there is no requirement to show financial need so the FAFSA won’t need to consider your financial information when determining how much money you can borrow. These loans have higher interest rates and begin accruing interest as soon as the loan is disbursed.
There are four types of Direct Loans available:
1. Direct Subsidized Loans
Subsidized loans are offered to students under some circumstances. A federal program called Direct Subsidized Loan offers lower rates than most private loans. These loans are available to undergraduate and graduate students who meet eligibility requirements. Students should apply early to take advantage of these great rates.
There are different types of subsidized loans, including Stafford, PLUS, GradPlus, and Perkins. Each type of loan offers different benefits and repayment options.
For example, some loans let you pay no interest while others require you to make payments during school.
The best part about subsidized loans is that there are no prepayment penalties. This means that you don’t lose money if you decide to borrow less than what you need. In fact, it could actually save you money over the long term.
For undergraduate students with financial need you can borrow up to $5,500 annually depending on your grade level and dependency status. For total lifetime limit, go to StudentAid.gov/subunsub
Who Pays The Interest?
The interest is paid by the U.S. Department of Education while you’re in school at least half-time, for the first six months after you leave school (referred to as a grace period), and during a period of deferment (a postponement of loan payments).
For loans first disbursed on or after July 1, 2022, and before July 1, 2023, the interest rate is 4.99%
You’re not usually charged interest on the loan during certain periods, such as when you’re in school at least half-time
2. Direct Unsubsidized Loans
Direct Unsubsidized Loans are available to undergraduate and graduate students. You don’t have to show financial need to get this kind of loan but parents must co-sign for these loans.
Many parents choose to apply for direct unsubsidized student loan programs to help their children pay tuition costs, even if their child doesn’t qualify for federal financial aid. The reason many families choose this option is because it won’t affect their eligibility for federal grants and scholarships.
You can borrow up to $20,500 (less any subsidized amounts received for the same period) depending on grade level and dependency status, regardless of your family size or income level. This amount includes interest payments.
The best part about these loans is that they aren’t subsidized by the government. So, unlike most other types of student loans, you don’t have to repay what you borrowed while you’re still enrolled in school. Instead, you’ll start making monthly payments once you graduate.
Who Pays The Interest?
- You will be responsible for paying the interest during all periods.
- The interest rate for loans made to undergraduate students will be 4.99% for loans first disbursed on or after July 1, 2022 and before July 1, 2023.
- The interest rate for loans made to graduate and professional degree students will be 6.54% for loans first disbursed on or after July 1, 2022 and before July 1, 2023.
- If you don’t pay the interest on your loan while you’re in school, or during grace, deferment, or forbearance periods, the interest will build up and be added to the principal amount of your loan.
3. Direct PLUS Loans
Direct PLUS loans are a type of financial aid that can help cover education expenses not covered by other forms of aid.
Direct PLUS loans can be used to cover costs such as tuition, fees, room and board, and other expenses.
You don’t need to have financial needs or pass a credit check to be eligible. And, even if you have an adverse credit history, you may still be able to get the loan, if you meet additional requirements- like having an endorser or extenuating circumstances.
The interest rate on PLUS loans is a fixed rate that is set annually. For Direct PLUS Loans first disbursed on or after July 1, 2022, and before July 1, 2023, the interest rate is 7.54%. This is a fixed interest rate for the life of the loan.
There are two types of PLUS loans:
- A ParentPLUS loan is for parents borrowing money to pay for their dependent undergraduate child’s education, one of several types of student financial assistance programs offered under the Federal Family Education Loan (FFEL) program.
This type of loan lets parents to borrow up to the cost of attendance minus other financial aid received. Borrowers do not have to begin repaying the loan until after the student graduates or leaves school.
- A GradPlus Loan is an unsecured personal loan for graduate or professional degree students. You will pay interest while you are enrolled in school. Your repayment period is ten years and repayment begins six months after graduation.
*You must apply for GradPlus loans online and you can apply for multiple loans at the same time.
4. Direct Consolidation Loans
Loan consolidation allows you to combine several student loans into one large loan.
This makes it easier to manage payments and avoid defaulting on your loans. You might even qualify for a lower interest rate on your consolidated loan.
But, there are some downsides to consolidation loans as well.
Here Are Three Things To Consider Before Taking Out A Consolidation Loan:
- What Are My Options?
There are two types of consolidation loans: Direct Consolidation Loans and Private Label/Guarantee Insurance Loans
If you choose to take out a Direct Consolidation Loan, you’ll pay off your existing loans and receive a single, larger loan. Your monthly payment will depend on how much you owe and what type of loan you’re applying for.
A Private Label Guaranteed Student Loan combines your federal student loans with a guaranteed private lender. You’ll still make regular payments toward your original loans, but you won’t have to worry about paying the private lenders’ fees.
- How Much Can I Save?
The most obvious benefit of consolidation loans is the potential savings. In fact, many students find that they can reduce their monthly payments dramatically.
For example, someone with $20,000 in outstanding student loans could potentially save over $100 per month by combining those loans into one larger loan. But, you’ll still have to pay the same amount each month.
So, if you want to save money, make sure that you compare all your options carefully.
- Will I Still Qualify for Federal Aid?
If you have borrowed from both the government and private sources, you may not be eligible for some financial aid programs like Pell Grants, Direct loans, PLUS Loans, or Federally subsidized private loans.
You could also lose access to tax benefits like the American Opportunity Tax Credit and Lifetime Learning Credit.
How To Apply For A Federal Student Loan
To apply for a federal student loan, you must fill out and submit a Free Application for Federal Student Aid (FAFSA®) form.
Depending on the results of your FAFSA form, your college or career school of choice will send you a financial aid offer, which could include federal student loans.
Your school will tell you how to accept all or some of the loan.
Before you can get your loan, you have to do two things first.
- You have to do something called entrance counseling, which is just to make sure you understand that you have to pay the loan back.
- You also have to sign a Master Promissory Note, which says that you agree to the terms of the loan.
If you want to know about this process, you can talk to the financial aid office at the school you’re planning to go to.
Steps In Applying For Federal Student Loans
- Make sure you’re eligible
You must meet one or more of the following criteria;
- You are currently enrolled in an accredited college/university
- You will be attending school full-time during the academic year beginning with fall semester 2009
- You are a U.S. citizen or permanent resident alien
- You are between the ages of 18 and 24 years old
- You are either a dependent child or parent of a deceased veteran who was entitled to benefits under Chapter 35 of Title 38 of the United States Code or, you are a member of the armed forces of the United States.
- Fill out and submit a Free Application for Federal Student Aid (FAFSA®) form
- Wait 2 weeks (or it could be up to 6 months). If you haven’t received a notification about your approved application, check your spam folder. If you still can’t find it, contact customer service at 866-974-8100.
Deadlines for Applying:
Federal
For the 2023-24 academic year, the FAFSA form must be submitted by 11:59 p.m. CT on June 30, 2024.
Any corrections or updates must be submitted by 11:59 p.m. CT on September 14, 2024.
College
Check with the college(s) you’re interested in attending for their deadlines.
You may also want to ask your college about its definition of an application deadline. Is it the date your FAFSA form is processed or the date the college receives your processed FAFSA data?
What Happens After You Send In The Fafsa?
The government sends you a Student Aid Report (SAR) after you complete the Free Application For Federal Student Aid (FAFSA). The SAR provides basic information about your eligibility for federal student loans and grants.
The colleges and universities you’ve applied to will receive this information, and they’ll use it to figure out how much money you might be able to borrow and what types of financial aid you might get.
The school’s award letter will outline the money you can get to help pay for college. This could include money from the government, scholarships, and work-study programs. The letter will say how much money you can get and how it will be used to help pay for your education. You can use this information to help you make decisions about how to pay for college.
This includes the amount of federal loans you’re going to receive based on your financial situation and the amount of Pell Grants you could receive based on your academic merit.
Repayment Options
1. Standard Repayment Plan
Available to all Federal Student Loan borrowers.
The Direct Consolidation Loan repayment plan saves you money over time because your fixed monthly payments may be higher than payments made under other plans, but you’ll pay off your loan in the shortest time (10-30 years). For this reason, you will pay the least amount of interest over the life of your loan.
Permitted Loans
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- all PLUS loans
- all Consolidation Loans (Direct or FFEL)
2. Graduated Repayment Plan
The Department of Education is offering a new one-time student loan debt relief option for those struggling to repay their loans or know their income will increase over time.
Under this plan, your monthly payments will;
- Start out low and increase every two years
- Be made for up to 10 years for all loan types except Direct Consolidation Loans and FFEL Consolidation Loans
- Never be less than the amount of interest that accrues between your payments
- Won’t be more than three times greater than any other payment.
This relief is available for up to 10 years for all loan types except Direct Consolidation Loans and FFEL Consolidation Loans which can be up to 30 years.
If you have a Direct Consolidation Loan, the length of your repayment period will depend on the amount of your total education loan indebtedness, which includes the amount of your consolidation loan and your other student loan debt.
Permitted Loans
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- all PLUS loans
- all Consolidation Loans (Direct or FFEL)
3. Extended Repayment Plan
The Extended Repayment Plan is a repayment option for Direct Loan borrowers who have more than $30,000 in outstanding Direct Loans. With this plan, your monthly payments may be fixed or graduated, and will ensure that your loans are paid off within 25 years.
Your monthly payments will be lower than if you stay with the 10-year Standard Plan or the Graduated Repayment Plan, but you’ll end up paying more money in the long run.
Permitted Loans
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- all PLUS loans
- all Consolidation Loans (Direct or FFEL)
4. Revised Pay As You Earn Repayment Plan (REPAYE)
If you have a Direct Loan, you may be able to choose the Income-Based Repayment Plan.
This plan means that your monthly payments will generally be 10% of your discretionary* income.
You will usually pay more money over time with this plan, but you may be able to get your loans forgiven if you work in public service jobs.
*Discretionary income is the money you have left after you pay your taxes and necessary living expenses. Your payments will be recalculated each year, based on your updated income and family size. You must update your income and family size each year, even if they haven’t changed.
If you’re married, both you and your spouse’s income or loan debt will be considered, whether taxes are filed jointly or separately (with limited exceptions).
If you haven’t repaid your loan in full after 20 years (if all loans were taken out for undergraduate study) or 25 years (if any loans were taken out for graduate or professional study), any outstanding balance on your loan will be forgiven.
Permitted Loans
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
5. Pay As You Earn Repayment Plan (PAYE)
If you have a high debt relative to your income, you may be eligible for the PAYE repayment plan for federal student loans. This repayment plan is based on your income, so your monthly payment will be affordable.
Under this plan, your monthly payment amount is generally 10% of your discretionary income. Discretionary income is the difference between your adjusted gross income (AGI) and 150% of the poverty line for your family size.
To be entitled to this repayment plan, you must be a new borrower as of Oct. 1, 2007, and you must have received a Direct Loan disbursement on or after Oct. 1, 2011.
Under this plan, your monthly payments will never be over what you would have paid under the 10-year Standard Repayment Plan.
Permitted Loans
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
6. Income-Based Repayment Plan (IBR)
The Income-Based Repayment Plan (IBR) is a repayment plan available to federal student loan borrowers.
IBR is based on the borrower’s income and family size, and is designed to make repaying student loans affordable. Payments are generally capped at 10%- 15% of the borrower’s income, and any remaining balance is forgiven after 25 years.
For borrowers with high levels of student loan debt, the IBR plan can provide significant relief. By capping monthly payments at a percentage of their income it can help borrowers manage their debt and avoid default.
If you file a joint tax return with your spouse, their income and loan debt will be considered when your taxes are calculated. This means that if your spouse has a high income or a lot of debt, it could impact the tax you owe.
Permitted Loans
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- all PLUS loans made to students
- Consolidation Loans (Direct or FFEL) that do not include PLUS loans (Direct or FFEL) made to parents
The Biden-Harris One-Time Student Loan Debt Relief Plan
The Biden-Harris Administration announced a Student Debt Relief Plan on Aug. 24, 2020.
The plan includes targeted student loan debt relief for low- and middle-income families.
The U.S. Department of Education will provide up to $20,000 in debt relief to Federal Pell Grant recipients and up to $10,000 in debt relief to non-Pell Grant recipients with loans held by ED if their individual income is less than $125,000 or $250,000 in 2021 or 2020.
