Federal Student Loans: What are the Benefits
Understanding the pros of federal student loans is important when deciding how to finance your education. Read about them here.
Federal student loans are provided by the Department of Education.
There are actually different kinds of federal loans, including Direct Subsidized and Unsubsidized Loans, as well as Direct PLUS Loans.
Virtually all federal student loans have some advantages compared to other types of educational financing -- such as private loans. However, Direct Subsidized and Unsubsidized Loans generally provide the best benefits to borrowers.
Here are some of the key reasons students going to school should usually max out federal loans before looking at other borrowing options.
Federal student loans have low fixed interest rates
With federal loans, every borrower taking out loans qualifies for the same low rate, which is based on loan type and academic year rather than credit score or financial credentials. And because the rate is fixed, it will not change for the life of the loan.
Federal Direct Loans have low fixed interest rates and low origination fees. They can be much more affordable than other types of educational financing.
This isn't always the case with Direct PLUS Loans, which come with higher fixed rates and up-front origination fees. These loans sometimes cost more than private loans for well-qualified borrowers.
Qualifying for federal student loans doesn't rely on credit or income
There are certain minimum requirements you must meet to qualify for federal student loans, such as attending an accredited school at least half time. But eligibility for Direct Loans doesn't rely on either good credit or proof of income.
Borrowers with no credit scores or low scores, and with little to no income, can get approved for Direct Loans. And, unlike with private loans, no cosigner is ever required.
With Direct PLUS Loans, borrowers with adverse credit aren't generally eligible. Still, the credit standards set by the federal government are less stringent than those set by many private lenders. For example, adverse credit has a specific definition such as recent foreclosure; repossessions or tax liens; or being 90 or more days past due on more than $2,085 in combined debt.
Borrowers also have the option of getting an endorser or documenting extenuating circumstances to get approved for PLUS Loans despite adverse credit.
Some federal student loans offer subsidized interest
Direct Subsidized Loans offer subsidized interest costs while loans are in deferment. Deferment occurs while the borrower is in school, as well as for six months after graduation. Borrowers can also apply for deferment after graduation based on specific criteria, such as economic hardship.
When interest is subsidized, it does not continue to accrue when the borrower isn't making payments. As a result, a student can go years without paying Direct Subsidized Loans while they complete their degree and they will graduate with the same balance they started with.
This is not the case for Direct Unsubsidized Loans, Direct PLUS Loans, or private loans. With all other types of financing, interest starts accruing once you begin borrowing and it continues to be charged even if you are in school or otherwise not making payments. If you don't make payments that at least cover the interest cost, your loan balance will grow.
You can easily change your federal student loan repayment period
With all federal student loans, you have a choice of repayment options including a standard 10-year repayment term as well as extended payoff times that allow you to make lower payments by stretching out your repayment time (although doing so costs more in interest over time).
The ability to change your payoff time as needed allows you more flexibility with regards to your monthly budget and total costs. If you need more wiggle room in your budget, you can change your payment plan to a longer payoff timeline to get it.
By contrast, private student loans have a predetermined repayment timeline you agree to when you borrow. You can't change your repayment time or monthly payments without refinancing.
Income-driven payment options are available
Some of the repayment plans offered by the federal government cap payments based on income. This helps to ensure that loans are affordable since you always have the option to limit how much of your earnings go to your debt.
Income-driven payment options are available for all federal loans, although parents with Direct PLUS Loans have only one income-driven option and must consolidate their loans to get access to it.
You have more flexibility in pausing payments
Federal loans provide many options for loan deferment and loan forbearance, both of which pause your payments. However, interest always continues accruing for all loans in forbearance, while the federal government covers interest costs on Direct Subsidized Loans during deferment.
Private lenders do allow borrowers to put loans into forbearance under limited circumstances. However, no deferment is available, so interest is always charged on all private loans while payments are paused. There's also less flexibility in terms of when and how long payments can be paused through forbearance with private loans.
You can miss more payments before defaulting
Federal student loans aren't reported as delinquent until you have missed three months of payments. This provides time for you to get back on track if you're struggling to cover loan costs.
By contrast, private lenders often report loans as delinquent as soon as you've fallen behind on paying what you owe.
There are several options for loan forgiveness
The federal government provides several ways for borrowers to get loans forgiven. For example:
- Borrowers can get any remaining balance of their loans discharged after paying on an income-driven plan for between 20 and 25 years (depending on the plan).
- Borrowers who work in a qualifying public service job can get Public Service Loan Forgiveness after making 120 payments on a qualifying income-driven payment plan.
These options are available with Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
Loans are discharged upon death
If you die or become permanently disabled, federal student loans are always discharged. While some private lenders provide for discharge upon death, not all do.
The government may provide more borrower relief
The government's primary purpose isn't to make money with federal student loans, so they have more options to provide help to borrowers during times of crisis. For example, loan payments on federal loans were set to 0% and payments were paused during the Covid-19 pandemic. Private lenders don't have as much flexibility to offer this type of help.
Loan consolidation is easy to qualify for
Borrowers with federal loans have the option to secure a Direct Consolidation loan, regardless of credit score or income. This allows them to combine multiple loans into one, making payoff easier -- regardless of their financial credentials.
Loan consolidation does not change the interest rate on loans, though -- although it can open up the door to more repayment terms.
Private loans, on the other hand, can be consolidated if a borrower refinances them by getting a new loan to pay off all existing loans. But borrowers will need to qualify for a refinance loan, which means having good credit and proof of income.
The major benefit to refinancing, compared with loan consolidation, is that refinancing makes it possible to reduce your interest rate and get more favorable payoff terms. This can help you save money on repayment. Juno can help borrowers to qualify for loans at the best possible terms by getting groups of borrowers together and negotiating with lenders on their behalf.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.