When young people are considering higher education, they often can have contradictory feelings about the opportunity weighed against the cost. Typically, post-secondary education is an investment that will take years to pay off. It can be hard to weigh things like potential lifetime profits against the money that you’ll borrow to land that gainful employment and many young people have no idea how much money to ask for or what kind of terms they should accept on a loan. Federal loans make the process easier and more equitable for the average student to get the money necessary for their post-secondary education.
What Is a Federal Student Loan?
A federal student loan is a loan offered by the United States Government. On average, over 90 percent of all student loan debt is federal. This is because, as a general rule, the federal government wants to give prospective students this money and so the opportunities to obtain it are rife. It is typically when students have a need for more money than the government is willing to give that they will then apply for private student loans from banks, credit unions or other types of agencies.
There are four types of federal loans available for prospective students: direct subsidized loans, direct unsubsidized loans, direct PLUS loans and direct consolidation loans. It is important to note that the first step to obtaining any federal student loan is the completion of the FAFSA (Free Application for Federal Student Aid) document. The FAFSA is the singular form that you need to fill out before being considered for any type of financial aid.
What Is a Direct Subsidized Loan?
These loans are available to eligible undergraduate students with demonstrated financial aid. This need is determined using a formula with the information provided by the FAFSA. This loan has slightly better terms than other federal loans because the government will cover the interest during certain periods, including when a student is enrolled at least half-time, during the six-month grace period after leaving school and during periods of deferment.
What Is a Direct Unsubsidized Loan?
With direct unsubsidized loans, the borrower is responsible for the interest that accrues during all periods, even when the loan is not in active repayment. These loans are available to both undergraduate and graduate students and eligibility is not based on financial need. The interest rate, original fee and eligibility for repayment and forgiveness options for unsubsidized loans are the same as subsidized loans for undergraduates.
What Is a Direct PLUS Loan?
These types of loans are made to either graduate or professional students (Grad PLUS loans), or parents of dependent undergraduate students, which are known as ParentPLUS loans. These loans are meant to fill the gap between the cost of attendance and available resources if you still need money to pay for your education after borrowing your maximum limit of subsidized or unsubsidized loans. The terms for PLUS loans are somewhat less favorable than subsidized or unsubsidized loans, often featuring higher interest rates.
What Is a Direct Consolidation Loan?
Consolidation loans are different than the other types of federal loans in that they allow borrowers to combine all federally eligible student loans into one single loan without an application fee. The interest rate on a new consolidation loan is a weighted average of the current interest rates on the student loans that will be consolidated. These loans are also eligible for income-driven repayment plans and other options, such as loan forgiveness programs.
93 percent of college debt financing is via loans. Getting a student loan could be a scary proposition because it means that you’re paying for something expensive that you might not be sure is going to work out the way you think. Life, though, is a leap of faith and applying for a student loan is effectively investing in yourself. If you’re considering higher education, you might consider filling out the FAFSA and investigating your options as far as federal loans are concerned.
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