Federal Student Loan Programs

A federal student loan is a loan that is supported by the US government created specifically to help cover the costs of receiving a higher education. Federal student loans come with some significant benefits over privatized loans; they also come with some restrictions on what you can apply the funds toward. There are four main sub-categories of federal student loan programs, you should learn as much as you can about each loan type so that you are able to take advantage of all the programs you are eligible for.

Federal student loan programs are administered through the college a student will be attending. You may see the program referred to as the Direct Loan Program. You will also see one or more of these labels as you work through your financial aid set up: a Stafford loan, a PLUS loan, a Perkins loan and a Consolidation loan. These are the main sub-categories your federal student loan will fall into. Each of these programs will offer a low interest rate, flexible and generous re-payment schedules, and deferment options. You will also have to abide by the general parameters in place for using federal student loan funds. They are: using the funds for tuition, room and board, books and other required supplies and sometimes for travel expenses.

A run down on the differences you will find in federal student loans will start with the Stafford loan. Stafford programs offer low fixed interest rates you may qualify for a subsidized Stafford loan where the government will pay the interest on your loan while you are enrolled in college. The next option would be an unsubsidized Stafford loan, where the interest will accrue normally during the deferment of loan repayment while you are enrolled in college.

A federal PLUS student loan program is one that allows parents to take out a loan in their name. The interest on this loan is a little higher than a Stafford loan and re-payment is usually required to start within 60 days of receiving payment.

A Perkins loan is a program that is college specific. This type of program is funded with a finite amount given to a college. The college then has discretion in awarding these programs. One main stipulation about the Perkins loan is that it is awarded to students who have extreme financial hardship. They are usually awarded on a first come – first awarded basis. They maintain a fixed 5% interest rate, and receive government subsidy through interest payments made on behalf of the student while they are in school, similar to the subsidized Stafford loan.

The Consolidation loan program allows the students and/or parents to combine multiple federal student loans they may have. They can consolidate them into one loan that will require just one monthly payment. A huge warning about consolidation loans: you can’t wrap a private loan that you may have had to take out to supplement your federal student loan into a consolidation program. Further, while you may be able to negotiate with a private loan bank or credit union to consolidate your federal student loan into your private student loan, if you do this, you will lose all of the flexibility and benefits that are offered with federal student loan programs. So you need to understand clearly when you are talking about a federal student loan program and when you are talking about a private lender’s loan (a regular commercial loan, such as from a bank or credit union).

Because approximately ¾ths of college freshmen will need to take out some type of loan to cover their education costs, students will face competition for some programs that have limited funds or number of spots. Therefore, the sooner you start the process to apply and secure your federal student loan, the more likely you will receive the best financial aid package your college can offer to you.
The first action you must take to submit an application for a federal student loan program is to submit an application for a Free Application Federal Student Aid (FAFSA). You should complete the FAFSA online at www.fafsa.ed.gov. You should do this right after you have decided on your top college choices, as part of the FAFSA form is to fill in the schools that you may be attending. The FAFSA is long and detailed; however, it is not difficult.

Colleges use the FAFSA for more than federal student loan programs, so realize you may need to complete and submit this form if you want scholarships, grants, eligibility for work study programs and other perks that your college may wrap up in your financial aid package. You will not be able to determine your complete semester cost for college until you get your financial aid package, the sooner you do this, the sooner you will know if you will have to supplement your federal student loan with a private loan to cover the full costs of your education. The moral of this story is that you can’t afford to procrastinate on this step of preparing for your higher education.