The federal government provides various types of student loans to help promote access to higher education. The common goal among the different loans is that they allow students to obtain financing for higher education at better terms than those available in the private market. In this regard, the federal government subsidizes the cost of loan for the borrower. Students usually have little or no credit or employment history and no collateral with which to secure a loan to finance a higher education. In response, the federal student loan programs entitle virtually all students to loans with below-market interest rates and flexible repayment options. Furthermore, loans are available to borrowers without respect to income, choice of institution, field of study, or academic performance (except in limited cases). Loans are available for two- and four-year undergraduate study, and graduate study.
Program Structure: Direct Lending
All of the federal student loan types listed below - except Perkins Loans - are provided through the Direct Loan program. Loans are issued directly by the U.S. Department of Education to the institutions of higher education that borrowers attend. The loans are administered (i.e. serviced) by the Department of Education and private companies with whom the Department has contracted to process loan disbursements and handle loan repayments and collections.
Types of Federal Student Loans
Stafford loans are available to all undergraduate and graduate students. Interest rates on loans taken out after July 2006 are fixed at 6.8 percent. Loans originated earlier carry variable interest rates. Dependent undergraduate students can borrow up to the cost of attendance, but no more than $5,500 in their first year, $6,500 in the second year, and $7,500 each year thereafter, and cannot borrow more than $31,000 in total. Independent borrowers are eligible to borrow $9,500 in the first year, $10,500 in the second, and $12,500 in the third, with the aggregate limit set at $57,500. In order to qualify as an independent borrower, the individual must meet one of the following criteria: over the age of 24, served or serves in the military, is married, has legal dependents, was an orphan until the age of 18, or unusual circumstances. Graduate students may borrow no more than $20,500 each year and $138,500 in total. Borrowers do not need to make payments (principal or interest) on the loans while in school. Loans generally must be paid back over 10 years once a borrower leaves school, but extended repayment plans are available.
Stafford Loan - Subsidized
Subsidized Stafford loans are the same as unsubsidized Stafford Loans, except interest rates are lower, interest does not accrue while the borrower is in school, and the borrowing limit is lower. Both undergraduate and graduate students were historically eligible for Subsidized Stafford loans, but legislation enacted in 2011 (the Budget Control Act) made graduate students ineligible for newly issued loans as of July 2012. A dependent undergraduate student qualifies for a Subsidized Stafford loan if his or her parents meet financial eligibility requirements. Independent undergraduate students qualify if they themselves meet financial eligibility requirements. For both dependent and independent undergraduate students, the limits for borrowing are $3,500 for the first year, $4,500 for the second year, and $5,500 for the third year with the aggregate limit set at $23,000.
Beginning in academic year 2008-2009, interest rates on Subsidized Stafford loans for undergraduates were reduced each year until rates reached 3.4 percent in 2011-2012. The lower interest rates apply only to new loans originated each year and not to previously issued loans. The table below illustrates the scheduled interest rate reductions. Subsidized Stafford loans originated in academic year 2013-2014 and thereafter will carry an interest rate of 6.8 percent. This policy was adopted in the College Cost Reduction and Access Act of 2007, a budget reconciliation bill. The 3.4 percent interest rate was extended for one additional year in 2012.
|Subsidized Stafford Loan Interest Rates|
|Academic Year Disbursed||Interest Rate|
|2013-14 and thereafter||6.8%|
|Loans originated in each year carry the interest rate for entire repayment period.|
Parents of undergraduate students who attend college are eligible for federal PLUS loans and may borrow an amount up to the cost of the student’s attendance – which includes tuition, housing, and other expenses. PLUS loans are not subject to a specific dollar limit like Stafford loans. PLUS loans carry a fixed 7.9 percent interest rate. Unlike Stafford loans, parents must satisfy a limited credit check. Loans generally must be paid back over 10 years.
Grad PLUS Loan
Graduate students may borrow PLUS loans for themselves under the same terms that the loans are provided to parents of dependent undergraduates. Grad PLUS loans are meant for borrowers who exhaust eligibility for Stafford loans.
All federal student loans can be consolidated into one loan after a borrower leaves school. The interest rate on the loan is fixed, and is set at the weighted average of the interest rates on the underlying loans. Consolidation loans also offer extended repayment terms depending on the total value of the loan.
The Perkins Loan program is separate and distinct from Stafford loans. Loans are made to students from lower income families by a participating college or university. Schools have some discretion in determining which students receive a Perkins loan and the size of the loan offered.
Funding for Perkins loans is provided by the federal government directly to colleges and universities, which must match one-third of the funding. The funding establishes a revolving loan fund, from which new loans are made as older loans are repaid. Repayment can be no longer than 10 years, interest rates are fixed at 5 percent, and annual borrowing limits are set at $4,000 for undergraduates and $6,000 for graduate students. The federal government also provides separate funding to forgive Perkins Loans if borrowers are employed in certain high-need jobs.
|Federal Student Loan Statistics 2012|
|Program||New Loans (millions)||New Loan Volume
|Average New Loan Size ($)|
|Source: Congressional Budget Office 2012 Baseline Budget Estimate; U.S. Department of Education|