How Does a Federal Student Loan Work?

Many students rely on federal student loans to help finance their education. But how do these loans work? We break it down for you.

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What is a Federal Student Loan?

A federal student loan is a loan for eligible students and parents to help pay for college or career school. Each type of loan has different terms and conditions, including when the loan has to be repaid. Federal student loans are made by the U.S. Department of Education’s Direct Loan Program. You can learn more about how these loans work and what options might be available to you.

How Does a Federal Student Loan Work?

Federal student loans are funded by the U.S. government and managed by the Department of Education. Private student loans are options for students who do not qualify for federal aid or who need additional funds to cover their educational costs.

There are two types of federal student loans: subsidized and unsubsidized. Subsidized loans are available to undergraduate students with financial need, as determined by the Free Application for Federal Student Aid (FAFSA®). Unsubsidized loans are available to all eligible students, regardless of financial need.

With a subsidized loan, the government pays the interest while you’re in school, during your six-month grace period, and during deferment periods. With an unsubsidized loan, you’re responsible for paying the interest from the time the loan is disbursed until it’s paid in full (including during any grace, deferment, or forbearance periods). If you don’t pay the interest while you’re in school and during your grace period, it will be added to your principal balance (capitalization), and increase the amount you have to repay.

What are the Benefits of a Federal Student Loan?

There are many benefits to taking out a federal student loan. For one, federal student loans offer flexible repayment terms, so you can choose a plan that works best for you. Additionally, federal student loans don’t require a credit check, so they’re available to everyone — even if you have bad credit.

Another great benefit of federal student loans is that they offer lower interest rates than private loans. Plus, the interest on federal student loans is tax-deductible, so you can save even more money. Lastly, if you can’t afford your monthly payments, you may be able to defer or forbear your loan, which means you won’t have to make payments for a period of time.

If you’re considering taking out a loan to help pay for college, be sure to explore all of your options — including grants, scholarships and federal student loans — before turning to private loans.

What are the Disadvantages of a Federal Student Loan?

There are a few disadvantages of federal student loans to be aware of before you decide to take out a loan to help finance your education.

First, federal student loans can have higher interest rates than private loans. This means that you will end up paying more money in the long run if you have a federal student loan.

Another disadvantage of federal student loans is that they may not be available for as much money as you need. If you are looking for a large loan to help finance your education, a federal student loan may not be the best option.

Lastly, federal student loans have strict repayment terms and conditions. If you miss a payment or are late on a payment, you may be subject to late fees or other penalties. This can make it difficult to repay your loan on time.

How to Apply for a Federal Student Loan?

There are two types of federal student loans: direct loans and PLUS loans. You can apply for both types of loans by completing the Free Application for Federal Student Aid (FAFSA®) form.

A direct loan is a loan made directly to you by the U.S. Department of Education. A PLUS loan is a loan made to your parent or legal guardian by the U.S. Department of Education.

If you’re a dependent student, your parent or legal guardian will need to sign your FAFSA form before it can be processed. If you’re an independent student, you’ll sign your own FAFSA form.

Once your FAFSA form is complete, you’ll receive a Student Aid Report (SAR). The SAR will list the types and amount of aid you’re eligible to receive.

To apply for a direct loan, you’ll need to complete a Master Promissory Note (MPN). The MPN is a legal document in which you promise to repay your loan and any accrued interest and fees to the Department of Education.

You can complete an MPN online at www.studentaid.gov or by completing a paper MPN, which you can get from your financial aid office or loan servicer. If you’re taking out a PLUS loan, your parent or legal guardian will need to complete an MPN for that loan as well.