Federal Student Loans
Student loan debt is a growing crisis in America. With over $1.7 trillion in outstanding student loan debt nationwide, many borrowers struggle to repay their loans. Federal student loans make up the bulk of this debt and provide borrowing options for students to pay for college. Understanding the types of federal student loans, repayment plans, forgiveness programs, and tips for managing this debt can help current and future student loan borrowers navigate this complex system.
Types of Federal Student Loans
The William D. Ford Federal Direct Loan Program offers four types of loans for students and parents. The U.S. Department of Education provides the funding for these loans through eligible schools.
Direct Subsidized Loans
Direct Subsidized Loans are available to undergraduate students with financial need. The school determines the amount you can borrow, and the federal government pays the interest on the loan while you are enrolled in college at least half-time.
These loans have a fixed interest rate set each year by the government. For loans disbursed between July 1, 2022, and June 30, 2023, the interest rate is 4.99%. Undergraduate students can borrow up to $3,500 for the first year, $4,500 for the second year, and $5,500 for subsequent years, up to the total allowed limit. Independent undergraduate students have higher limits on the amounts they can borrow.
Direct Unsubsidized Loans
Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need. The federal government does not pay interest on unsubsidized loans during in-school periods and grace periods. Interest accrues from the date of disbursement.
The fixed interest rates and annual loan limits are the same as the amounts for subsidized loans based on dependency status and grade level. Undergraduate students can receive both subsidized and unsubsidized loans up the total loan limits. Graduate students are only eligible for unsubsidized loans.
Direct PLUS Loans
The federal Direct PLUS loan program offers loans to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses. Eligibility is not based on financial need, but applicants must not have an adverse credit history.
Graduate or professional students can borrow up to the cost of attendance minus any other financial aid received. For parent borrowers, the loan amount is limited to the cost of attendance minus any other financial aid the student receives.
The fixed interest rate on Direct PLUS Loans is 7.54% for loans disbursed between July 1, 2022, and June 30, 2023.
Direct Consolidation Loans
A Direct Consolidation Loan allows you to combine multiple federal education loans into one loan. This results in one monthly payment instead of multiple payments. It may also allow you to extend the repayment period, resulting in a lower monthly payment.
Consolidating does not lower the interest rate but may make it easier to manage payments. The fixed rate is based on the weighted average of the interest rates on the consolidated loans, rounded up to the nearest one-eighth of one percent.
There are several repayment plans available for federal student loans. The standard repayment term is 10 years, but extended repayment plans up to 25 years are available. Longer terms mean lower monthly payments but greater interest paid over the life of the loan. Income-driven repayment plans base the monthly payment on income and family size.
The standard repayment plan has fixed monthly payments over 10 years. This results in the lowest total interest paid over the repayment term. Under the standard plan, your minimum payment must be at least $50 per month.
For example, if you have $30,000 in federal student loans at 4.53% interest, your monthly payment would be around $318 under the standard 10-year plan.
To qualify for extended repayment, you must have more than $30,000 in Direct Loans. Extended plans allow repayment terms from 12 to 25 years. Longer terms mean lower monthly payments but greater interest paid over the life of the loan.
With a repayment term of 25 years, the monthly payment on federal loans of $30,000 at 4.53% interest would be around $176. This is $142 less per month than the 10-year standard plan. However, you pay about $17,014 more in total interest with the 25-year extended term compared to the standard 10-year repayment.
Income-Driven Repayment Plans
Income-driven repayment plans base your monthly student loan payment on your income and family size. These plans help provide an affordable payment if you are experiencing financial hardship. The payment may be as low as $0 per month.
There are four income-driven plans:
- Revised Pay As You Earn Repayment Plan (REPAYE) – Payment is 10% of discretionary income.
- Pay As You Earn Repayment Plan (PAYE) – Payment is 10% of discretionary income.
- Income-Based Repayment Plan (IBR) – Payment is 10% or 15% of discretionary income based on when loans were first disbursed.
- Income-Contingent Repayment Plan (ICR) – Payment is the lesser of 20% of discretionary income or the amount you would pay on a fixed repayment plan over 12 years adjusted based on your income.
Remaining loan balances are forgiven after 20-25 years of qualifying repayment under these plans. The forgiven amount may be taxed as income.
Loan Forgiveness Programs
The federal government offers student loan forgiveness programs that provide borrowers a way to have all or part of their loans forgiven after meeting certain requirements.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) Program provides forgiveness of federal Direct Loans for borrowers working full-time in an eligible federal, state, local, or tribal public service job or with a qualifying nonprofit organization. Unique eligibility requirements must be met to qualify.
You must make 120 qualifying monthly payments under a qualifying repayment plan while working full-time for an eligible employer. After meeting the requirements, the remaining balance is forgiven tax-free.
Teacher Loan Forgiveness
If you teach full-time for five complete and consecutive academic years in certain elementary and secondary schools and educational service agencies that serve low-income families, you may be eligible for teacher loan forgiveness up to $17,500 on your federal Direct and Stafford Loans.
Additional requirements related to your teaching service apply. If eligible, the forgiveness amount will not be taxed as income.
Any remaining balance on federal Direct Loans is forgiven after 20-25 years of qualifying repayment under an income-driven repayment plan. The amount forgiven may be taxed as income unless you qualify for the insolvency exclusion.
Borrowers can combine eligible employment for PSLF during the first 10 years of an income-driven repayment plan and then apply for forgiveness of any remaining balance through the income-driven repayment plan.
Managing Federal Student Loans
Here are some tips for managing your federal student loans:
- Apply for income-driven repayment if you are struggling to afford your monthly payment. This can lower your payment to as little as $0 per month.
- Pay off loans with the highest interest rates first when making extra payments.
- Reevaluate your repayment plan each year and when your income changes.
- Stay up to date on requirements for loan forgiveness programs.
- Consolidate federal loans to streamline payment if beneficial but do not refinance federal loans privately or you will lose federal protections.
- Let your servicer know if you are having trouble making payments so they can explain options.
- Create a budget and track your spending to put as much money toward loans as possible.
- Pay more than the minimum each month to pay off debt faster and reduce interest.
Federal student loans provide options to help make college more affordable. But this debt can be burdensome if not managed proactively. Learn about federal loans and be strategic in repayment so you can reduce costs and work toward the goal of being student debt free.