Ibrahim Gardner
Student loans are a common way for students to fund their education. The US Department of Education funds federal student loans but does not act as a direct servicer once the loans are dispersed. Instead, the government selects private companies to collect payments and provide borrowers with help. There are two types of federal student loans: subsidized and unsubsidized. The key difference is that for subsidized loans, the US government pays the interest on the loan while the student is in school and during the grace period, whereas for unsubsidized loans, the student is responsible for paying the interest during these periods.
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What You'll Learn
Federal Direct Student Loans
There are four types of Direct Loans, each with its loan cap and interest rate: Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Federal Direct Stafford Loans. The type of loan a borrower will get depends on their financial need and academic level. Direct Subsidized Loans are only available to undergraduate students who have demonstrated financial need. Direct Unsubsidized Loans are available to eligible undergraduate, graduate, and professional students. Direct PLUS Loans are available to eligible graduate or professional students or eligible parents of an undergraduate student. They are not need-based and require a credit check, but applicants with adverse credit may still be awarded funding if they meet specific conditions.
The borrowing limits for Federal Direct Loans vary depending on the loan type and student status. For example, dependent undergraduate students may borrow up to $31,000 in Direct Loans, while independent undergraduate students may borrow up to $57,500. Independent graduate or professional students may borrow up to $138,500 in Direct Unsubsidized Loans and up to the total cost of attendance with grad PLUS loans.
To apply for a Federal Direct Loan, borrowers need to complete entrance counselling and sign a Master Promissory Note, outlining the loan details and repayment information. The Department of Education then disburses the funds directly to the school, which applies them towards tuition, fees, and other costs. Any remaining loan funds are disbursed to the student or their parent if they received parent PLUS loans.
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Federal Family Education Loan Program
The Federal Family Education Loan (FFEL) Program was a system of private student loans which were subsidized, guaranteed, and insured by the United States federal government. The program was initiated by the Higher Education Act of 1965 and was funded through a public-private partnership administered at the state and local levels. Commercial lenders like Sallie Mae used their private capital to finance loans under the FFELP but received subsidies from the federal government. These subsidies were used to maintain interest rates, pay down fees, and cover expenses associated with collection and defaults. The government also guaranteed a large portion of the loans, insuring private lenders against default and reimbursing them in case of losses.
The FFELP offered four types of loans: subsidized Federal Stafford Loans, unsubsidized Federal Stafford Loans, the Federal PLUS Loan for graduate students and parents of dependent undergraduate students, and consolidation loans. The subsidized loans were for students who met a financial needs test, where the government paid all interest costs on behalf of borrowers while they were in school, and during grace and deferment periods. The unsubsidized loans were for students who did not meet the financial needs test or who needed to supplement their subsidized loans. Borrowers could defer interest payments during school, grace, and deferment periods, but they were responsible for all interest accrued.
The FFEL Program ended on July 1, 2010, following the passage of the Health Care and Education Reconciliation Act of 2010. Similar loans are now provided under the Federal Direct Student Loan Program, which are federal loans issued directly by the United States Department of Education. FFEL borrowers can gain access to loan forgiveness by consolidating existing loans with the Federal Direct Student Loan Program, although payments made before consolidation typically don't count toward loan forgiveness. However, a new limited waiver announced in October 2021 allows FFEL loans to be consolidated with previous payments made before consolidation, now considered qualifying payments.
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Subsidized Loans
Federal Direct Subsidized Loans are need-based loans for undergraduate students. The eligibility criteria for these loans are determined by the cost of attendance minus the expected family contribution and other financial aid (such as grants or scholarships). The US government pays the interest on the loan while the student is in school, during the six-month grace period, and during periods of authorized deferment. This means that subsidized loans do not accrue interest while the borrower is in school at least half-time or during deferment periods.
The maximum amount that can be borrowed each academic year depends on the grade level and dependency status. There are annual and aggregate (lifetime) borrowing limits. The loan eligibility and loan request amount must be greater than $200 for a loan to be processed.
First-time borrowers between July 1, 2013, and July 1, 2021, have a limit on the maximum period of time (measured in academic years) that they can receive Federal Direct Subsidized Loans. This time limit does not apply to Federal Direct Unsubsidized Loans or Federal Direct PLUS Loans. If this limit applies to you, you may not receive Federal Direct Subsidized Loans for more than 150% of the published length of your program.
To apply for a Federal Direct Subsidized Loan, students can scroll to Federal Direct Subsidized or Unsubsidized Loans in their aid summary and accept, reduce, or decline the loan using the "Take Action" button. Students should only borrow what they need and complete Entrance Counseling using StudentAid.gov.
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Unsubsidized Loans
Federal student loans (formerly known as "Stafford" loans) are provided by the government. There are two types of federal loans: subsidized and unsubsidized. Unsubsidized loans are federal loans available to both undergraduate and graduate students, regardless of financial need. The key difference between subsidized and unsubsidized loans is that with unsubsidized loans, the student is responsible for paying the interest accrued while they are in school, during the grace period, and during authorized periods of deferment. This means that interest will grow during school and grace periods, increasing the total amount owed.
With unsubsidized loans, you are responsible for paying the interest as it accrues from the moment the loan is disbursed. When you start paying back your unsubsidized loans, your payments will include the original amount you borrowed, plus the interest that has accrued. Unlike subsidized loans, unsubsidized loans do not require students to demonstrate financial need, so students can usually borrow more money. Unsubsidized loans can be used to pay for a graduate degree.
The maximum amount that can be borrowed each academic year depends on grade level and dependency status. The amount that can be borrowed through the Federal Direct Loan Program is determined by dependency status and classification in college. There are annual and aggregate (lifetime) borrowing limits for unsubsidized loans. For example, a first-year dependent undergraduate student with a cost of attendance of $8,600 may only receive up to their annual loan maximum of $5,500.
To apply for unsubsidized loans, students need to fill out the FAFSA (Free Application for Federal Student Aid) every year they are in school. Students should only borrow what they need and consider starting with money they won't have to pay back, such as scholarships, savings, and grants.
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Work-study programs
The Federal Work-Study Program is a need-based, government-funded program that helps undergraduate and graduate students secure part-time jobs to pay for their education expenses. Unlike federal student loans, work-study funds do not have to be repaid.
Work-study jobs are intended to be part-time, and students are paid by the hour at least once a month. The pay rate for work-study jobs varies depending on the type of work and the skills required. Undergraduate students can earn between $1,000 to $4,000 per year, while graduate students can earn up to $5,000 per year.
Work-study funds are typically used for day-to-day expenses such as food, transportation, and school supplies. However, some schools allow students to apply their work-study funds directly to their account for billed expenses such as tuition, fees, and housing. It is important to note that work-study funds are not guaranteed each year, and students must maintain their grades to remain eligible for the program.
To be considered for the Federal Work-Study Program, students must submit the Free Application for Federal Student Aid (FAFSA®) form. Once accepted, students can find work-study jobs through their school's job portal or by partnering with off-campus organizations such as non-profits.
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Frequently asked questions
The federal government does not pay for student loans in full. However, they offer subsidized loans where the government pays the interest on the loan while the student is in school, during the 6-month grace period, and during periods of authorized deferment.
With a subsidized loan, the government pays the interest on the loan while the student is in school and during the grace period. With an unsubsidized loan, the student is responsible for paying the interest accrued during these periods.
The U.S. Department of Education is the lender for Federal Direct Student Loans, which include Federal Direct PLUS loans and Federal Direct Stafford loans. They also insure loans under the Federal Family Education Loan Program, which are privately issued.
Yes, the federal government offers various benefits and programs to assist with student loan repayment. For example, the Work-Study program provides part-time jobs for students with financial needs, allowing them to earn money to cover education expenses. Additionally, agencies can provide student loan repayment benefits to their employees, and there are provisions for loan forgiveness or cancellation under certain circumstances.
