Whether you are a parent or student looking for ways to finance your college education, you may be interested in the various types of federal student loans available. Learn more about the various loan types, their repayment options, and how to avoid default.
Direct Subsidized Loans
Unlike other loans, subsidized loans don't accrue interest while you're in school. This allows students to defer their payments until after graduation. This can save a significant amount of money in the long run.
If you don't have a lot of financial resources to repay your student loan, you may want to consider applying for a Direct Subsidized Federal Student Loan. These loans offer very low interest rates and are designed for undergraduate students. If you qualify, you can borrow between $5,500 and $12,500 per year.
If you take out a subsidized loan, you will be able to defer your payments for up to 54 months. This is a great opportunity for you to study, earn a degree, and enjoy the benefits of a great college without worrying about your loan.
Direct Subsidized Federal Student Loans are available to undergraduate students, graduate students, and parents of undergraduate students. The maximum loan amount is based on the difference in cost of attendance between your educational program and the cost of your school.
The government pays interest on Direct Subsidized Student loans during deferment periods. The government will also pay interest during forbearances. There are also income-driven repayment plans that allow you to capitalize your interest each year.
For example, you may be eligible for a Direct Subsidized Student loan for up to 150 percent of the published length of your program. This is based on your financial need, as measured by your FAFSA. If you change programs, you can adjust your maximum eligibility period.
Interest on subsidized loans is paid by the government, making the loan more affordable. However, you'll need to pay back the loan in full by the end of your program.
Unsubsidized Loans
Whether you are an undergraduate or graduate student, you may have access to unsubsidized federal student loans. These loans function in the same manner as loans from banks. The difference is that the government pays the interest on the loan while the borrower is in school.
When the time comes to pay off the loan, the borrower can choose a repayment plan. These plans vary by monthly payment, the type of loan and the eligibility requirements.
The best way to determine which plan is right for you is to speak to a financial aid officer at your school. You can also use the Free Application for Federal Student Aid (FAFSA) to determine which plan will fit your needs best.
The federal government pays the interest on unsubsidized federal student loans while the borrower is in school. However, when the student leaves school, they must begin paying back the loan. The government also pays interest on subsidized federal student loans while the student is in school.
There are two main types of subsidized federal student loans. Subsidized loans are awarded based on financial need. You can apply for subsidized loans through the Department of Education, but you must prove you have financial need before you can receive the loan.
The other type of subsidized loan is the Direct Subsidized Loan. This loan is available to undergraduate students who are at least half-time in school. You do not need to have a cosigner or a credit check to qualify for this loan.
There are several repayment plans available, including the Standard Repayment Plan. This plan allows the borrower to pay their loan over a period of 10 to 30 years. There are also income-based repayment plans, such as the Pay as You Earn (PAYE) plan. These plans require the borrower to pay a certain percentage of their income each month.
Interest accrued during periods of deferment and while you are in school
During periods of deferment and while you are in school, interest will accrue on your federal student loans. However, the type of loan you have can affect the amount of interest you will pay. Subsidized loans do not accrue interest while you are in school.
Unsubsidized loans, however, do accrue interest during deferments. This interest is added to the balance of the loan at the end of the deferral period. The interest rate is set by Congress. The interest rate will be listed in your loan disclosure documents.
Interest will also accrue on deferred loans during grace periods. For example, if you have a $5,000 loan at a 10% interest rate, you will pay $500 in interest while you are in school and $700 during your grace period. However, the interest will be capitalized. The interest will be added to the principal balance of the loan.
Capitalizing interest on a loan can help lower your Total Loan Cost, but it also increases the amount of repayment you have to make. It is also a temporary solution, so it may not be right for you.
If you are facing a financial hardship, deferred payments may be the right solution. For example, if you are on active duty in the National Guard or in an internship or residency program, you may qualify for deferment. You may also qualify if you are enrolled half-time in a graduate or professional program.
Interest on subsidized loans is paid by the government during the grace period. In addition, the government pays interest on subsidized loans during authorized deferment. The interest rate on subsidized loans is set by the government.
If you are having difficulty repaying your loan, you may be eligible for a deferment. These deferments are authorized for up to three years when you are in school, seeking full-time employment, or if you are experiencing economic hardship.
Avoid default by requesting a pause in payments
Defaulting on a federal student loan can have a serious impact on your life. You could lose your tax refunds and Social Security benefits, and the debt collector may start taking action. Your credit report may also take a negative hit, making borrowing more expensive. There are a number of steps you can take to avoid a default.
You may want to check with your servicer to find out your options. There are different types of forbearance and repayment plans that are available to federal student loan borrowers. Whether you choose a forbearance or a deferment, you should act quickly.
Forbearance is a temporary stoppage of payments that allows you to pay off the loan over a period of time. This may be an option for borrowers who have missed a few payments. A forbearance also helps to bring your loan account current.
A deferment is a more permanent plan that allows you to pay off the loan at a later date. You will still make payments to your servicer, but you will have a longer period of time to pay off your debt. The payment amount may be based on your income.
An income-driven repayment plan is a repayment plan that combines monthly payments based on your income. You may choose to make payments of $0 or as much as you can afford. You must meet certain income requirements and update your financial information with your servicer.
Consolidation of student loans may be an option for returning students who are in need of financial aid. This option will not remove the default from your credit report, but it will make paying off your loan much easier.
Repayment options
Choosing the right repayment option for federal student loans can help you save money. The key to choosing the right plan is to know what type of loan you have, the amount of debt you owe, and your financial situation after graduation. Choosing the right plan for your situation can help you get the lowest monthly payments possible.
Income-driven repayment plans tie the monthly payment to your income. They can make payments more affordable and save you money in interest charges. These plans are available for most federal student loans.
There are four types of income-driven plans. PAYE, REPAYE, Graduated Repayment, and Extended Repayment. Each plan has specific eligibility requirements. You can get more information on each plan by visiting the U.S. Department of Education.
The PAYE plan is the best option for borrowers with a low income. It caps monthly payments at 10% of discretionary income. If you have a higher income, you may have to choose a different plan.
REPAYE is an income-driven plan that extends repayment to 20 or 25 years. It is available for graduate or professional loans. You can apply for this plan after you have submitted your annual income. It is possible to have zero payments if you are approved.
Graduated Repayment is similar to the standard repayment plan, but you make smaller payments at the beginning of your repayment period and gradually increase them. You will still have a repayment period of ten years, but you will make smaller payments each year. This plan is a great choice for recent graduates.
You can also use the Education Department's Loan Simulator to calculate monthly payments. The Simulator can also show you how much your total payments will be, based on your income.
