8 Things to Know Before Getting Federal Student Loans

Federal student loans are a valuable lifeline to individuals who want to pursue higher education. The average cost of annual college tuition in 2018-2019 was $24,623. For the many individuals who don't have access to $100,000 for your average four-year bachelor’s program, student loans are likely the only way to pay for a college degree.

Still, student loans are a big decision that will impact your life for many years, and it's essential to fully understand what you're getting yourself into before you sign the fine print. Here are eight of the most crucial things you need to know before applying for a federal student loan.

1. Understand How Interest Works

When taking out any loan, you must understand how the interest rate will impact your loan. For example, in the statistic above, we mentioned that you probably need to borrow at least $100,000 to fully fund a four-year degree, but you also need to know that you'll be paying back a lot more than you borrow.

Both private and federal student loans come with interest rates. Currently, the federal student loan rates for 2021 are:

Direct Subsidized and Direct Unsubsidized Loans for Undergraduates: 3.73%
Direct Unsubsidized Loans for Graduate or Professional Degrees: 5.28%
Direct PLUS Loans for Parents and Graduate or Professional Students: 6.28%

After finding out your interest rate, you can use an online loan calculator to determine how much interest you'll pay over the life of the loan. Let's say your $100,000 loan has an APR of 3.73% and a 10-year repayment term. If you take the full 10 years to pay your loan off, you'll pay a total of $119,960. Individuals who don't want to pay a considerable amount of interest can try to pay their loan off early.

Now that you understand how interest works on federal student loans, it’s important to consider when interest on federal student loans starts to accrue. That depends on the type of federal loan you have. If you have a subsidized loan, the government will pay your interest while you're in school. This means your balance doesn't grow while you study, and you only start to pay interest when you graduate. However, you must qualify for subsidized loans by showing you need additional financial support.

If you have an unsubsidized student loan, the interest begins to accrue as soon as you receive your money. This means you'll graduate with a loan balance that's higher than what you took out. If you can afford to do so, consider paying your interest every month while you're studying. This will help keep your student loan down, so you don't graduate with more debt than necessary.

2. Don’t Overborrow

When you're researching “how to apply for a federal student loan,” you'll find many helpful tips on the process. However, what a lot of these guides fail to mention is what not to do.

For many people, getting a student loan can feel like a fun payday. You suddenly get access to a lot of money all at once. When applying for student loans, it can feel tempting to take out more than you need. However, it's not a good idea to overborrow. Your federal student loans are just that — a loan with interest and fees —not free money. When you graduate, you'll be expected to make the student loan payments for many years. Do your future self a favor and only borrow what you need. You don't have to take the maximum amount that's offered to you.

You can also reduce the amount of money you need to borrow by applying for grants and scholarships. Unlike federal student loans, grants and scholarships are free money. Every year, apply for all the grants and scholarships you think you may qualify for. Even if awards of a few thousand dollars can help to keep your borrowed amount as low as possible.

3. Know the Difference Between Private and Federal Student Loans

You have two options when it comes to getting a student loan: federal or private loans. Federal loans are given out by the government and need to follow federal regulations for loan details, such as the interest rate, repayment options and more. In comparison, private lenders can set their own terms for loans.

If possible, it's strongly encouraged you opt for a federal student loan. There are many benefits to federal student loans, including:

Payments aren't typically due until after graduation.
The interest rate is usually fixed.
The interest rate is also generally lower than it would be from private lenders.
Some individuals can qualify for subsidized federal student loans, so the interest is covered while they study.
You don't need a credit check.
There is no prepayment penalty fee.
There are multiple options when it comes to repayment plans.
You may qualify for student loan forgiveness, a benefit that isn't offered to individuals with private loans.

Compare your federal and private loan options and choose the lender that makes the most sense to you. Most people turn to private student loans if they don't qualify for federal loans.

4. Understand When Your Payment Begins

Part of being a responsible borrower is thinking ahead. You should be aware of when your payment plan begins, what type of repayment options are available and your upcoming monthly payment.

Most federal student loans come with a six-month grace period after you graduate. These six months are meant to give you time to secure a job and get ready for future payments. However, most loans start to accrue interest during this grace period. So, if you take advantage of these nonpayment months, your loan will continue to grow.

If you can, start paying on your loan right away. If interest is accruing, it means you can keep your loan from climbing higher. Alternatively, if your grace period is also interest-free, payments you make during this time will go entirely towards the principal balance.

Either way, you want to be prepared. If you can't make payments immediately, you need to know when you'll have to start making payments. This gives you time to prepare and find a job, so you can afford to make your payments as soon as they're due.

5. Federal Student Loan Payment Plan Options

One of the biggest advantages of federal student loans is that you have multiple payment plan options. The options consider factors, such as your income and the desired timeline for payoff. You can pick the plan that best fits your situation, so you can afford to stay on top of payments.

The payment plan options are:

Standard Repayment Plan: The standard repayment plan asks for a set monthly amount until your loan is paid off. This plan typically gives people 10 years to pay off their loans. The benefit of this plan is consistency. You know exactly how much you owe every month until you're totally paid off.
Graduated Repayment Plan: The graduated repayment plan has you start with a smaller monthly amount. Every two years, the monthly amount increases until the loan is eventually paid. This plan also typically gives people 10 years to pay off their balance. People who know that they're entering a field where the pay starts low but continues to rise can benefit from this plan.
Income-Driven Plans: An income-driven plan asks for a monthly payment in line with how much the borrower currently earns. Whenever your income increases, your monthly payment amount is reevaluated to match. These plans often can take between 20-25 years to pay off. Income-driven plans help people maintain a reasonable monthly payment to reduce the risk of missing payments and defaulting on the student loan.

The payment plan you choose will likely depend on the type of job and income you can get right out of school. It's important to prioritize paying off your loan without taking on more than you can reasonably afford.

6. Know About Student Loan Forgiveness

Another benefit of federal student loans is the student loan forgiveness program. Each program has specific qualifications and requires the borrower to apply for forgiveness.

The available student loan forgiveness programs are:

Closed School Discharge
Discharge Due to Death
Discharge in Bankruptcy (rare cases)
False Certification Discharge
Perkins Loan Cancellation and Discharge
Public Service Loan Forgiveness
Teacher Loan Forgiveness
Total and Permanent Disability Discharge
Unpaid Refund Discharge

The most popular forgiveness program is Public Service Loan Forgiveness (PSLF). Under this program, individuals with direct loans can have their remaining student loan balance forgiven after:

Making 120 qualifying monthly payments under a qualifying repayment plan
Working full-time for a qualifying public service employer

If you plan to pursue one of these programs, make sure to do your research first. You don’t want to rely on forgiveness only to find out that you didn’t qualify. For example, the PSLF requires that people reapply every year to remain eligible.

7. Student Loan Payments Can Help Your Credit Score

It's not fun graduating with debt and having an immediate obligation to make payments. Still, there are a few upsides to student loans. Along with allowing you to earn an education, student loans can help your credit score. If you make your payments on time and in full, you'll build up a positive debt repayment credit history, which can give your credit score a boost.

Having a student loan can also help you diversify your credit. Your credit score is made up of five factors, one of which is your credit mix. So, having different types of debts, such as a student loan, credit card and auto payment, can help your credit.

Having a solid credit score will be incredibly important in your post-college life. Healthy credit can open many doors, including helping you secure an apartment lease or a mortgage, approvals on loans, reduced interest rates and more.

However, your student loan can also harm your credit. If you make late payments or miss payments, your credit score can drop. And, if your loan goes into default, this transgression can stay on your credit report for up to seven years.

8. Consider Refinancing

If you have a federal student loan, you can't refinance with the federal government. However, you can refinance your federal student loan with a personal lender. Student loan refinance is a wise financial decision for many lenders. If you have a good credit score, refinancing may help you qualify for a lower interest rate, and even a miniature drop in interest can save you thousands of dollars over the life of your loan.

In the loan example we outlined in the first tip, the borrower would pay $19,960 in interest on a 10-year $100,000 loan. Now, imagine if they could refinance their interest rate from 3.73% to 2.73%. This 1% drop in interest would save the borrower a total of $5,577 over the 10 years.

Refinancing isn't an option for everyone. You typically have to have good credit, and you might have to sign onto a shorter loan term, which means larger monthly payments. It's also crucial to account for other factors when refinancing, such as refinancing fees or the fact that you'll be dropping out of forgiveness program eligibility. You'll have to review everything and determine if refinancing is the best option for you.

Prepare for Your Federal Student Loan

A federal student loan is a great way to secure the funding needed for your education, but borrowers should be careful and understand what they're getting into. One of the biggest complaints from borrowers is that they didn't fully comprehend what they were signing up for. Before you apply and get your federal loan, do your research. Make sure you understand what will happen when you get the money and when you graduate. This will help you make an informed decision that's best for you.

Get Financing With Lendzi

If you need student loan financing and don’t know where to start, consider using Lendzi. Our service allows people to compare their lending options and get funding as quickly as possible. You submit one loan application and we do all the work for you. We’ll find you the best option from our pool of more than 60 lenders. Get started today.

Kate Samano

Kate Samano is a copywriter and Head of Content at Lendzi. She believes in helping small businesses grow by providing access to viable financial advice.