Most Students Take Out Loans
Most college students these days take out student loans to pay for the cost of higher education. In fact, 68 percent of college seniors who graduated from a public or nonprofit college in 2015 had student loans, according to a study by the Institute of College Access and Success.
But not all terms and conditions for student loans are the same. Here are 10 benefits of taking out a federal student loan.
1. No Credit History Needed
Most loans from financial institutions, such as a bank or credit union, require a credit history, but federal student loans don’t.
To apply for a federal loan, a student’s family needs to fill out the Free Application for Federal Student Aid, commonly known as the FAFSA. Experts say it’s a lot easier to be approved for a federal student loan than a private one.
2. You Don’t Need a Co-Signer
Federal student loans aren’t based on credit, which college advisers say allows the student to take on the responsibility without asking a family member or friend to co-sign.
Scott Weingold, co-founder of College Planning Network, an Ohio-based college advising firm, says most students probably won’t qualify for a private loan without a co-signer. “If a student has a lot of credit in their name and job, they may qualify.”
3. Fixed Interest Rates
Federal student loan interest rates are fixed; private loans can have fixed or variable rates.
Experts say the main advantage of a fixed-rate loan, as opposed to a variable-rate loan, is that the borrower is protected from sudden or significant increases with their monthly payments if interest rates rise.
4. Lower Interest Rates Than Private Loans
For undergraduates who took out a federal student loan during the 2016-2017 school year, the interest rate is 3.76 percent. Experts say private higher education loans tend to have higher interest rates because these loans are considered risky to the lender.
“The federal government is offering a discount to consumers on that risk,” says Andrew Josuweit, CEO of Student Loan Hero, an online platform that helps borrowers pay off student debt.
5. Can Postpone Payments
“Usually you get up to three years on federal student loans and typically with private lenders it will be around a year of forbearance or deferment unless in the promissory note there were different terms and conditions,” Josuweit says.
6. Income-Driven Payment Options
Federal loan borrowers are known to have more flexibility and typically there are plans for different income circumstances, student loan experts say.
In fact, there are nine different income-driven payment plans offered under the federal student loan program. Most of these programs cap payments at 10 percent of the borrower’s discretionary income.
7. Takes Longer to Default
Federal loans give borrowers more time to make payments, even if they have missed more than one payment.
According to the Department of Education, a loan is only considered “delinquent” after three missed payments, which is roughly 90 days past due. Loans are considered in default after nine months of missed payments.
8. Consolidation is Available With Poor Credit
Borrowers with multiple federal loans can consolidate their loans under the Department of Education’s Direct program into one payment.
“It’s easier to consolidate with the federal government,” says Josuweit from Student Loan Hero, who adds credit isn’t a factor for that type of consolidation. “But you won’t be able to cherry pick certain loans for refinancing and that could end up costing you in the long term.”
9. Loans Can Be Discharged
According to the U.S. Department of Education, if the borrower dies, the loan is automatically canceled and the debt is discharged by the government. Experts say more private lenders are starting to offer this protection on private student loans.
Federal loans can also be discharged from a total and permanent disability.
10. Student Loan Forgiveness Options
Federal student loans offer forgiveness opportunities under some of its programs.
The Public Service Loan Forgiveness program allows borrowers to have loans forgiven after 10 years of public service and 120 on-time payments. Loan forgiveness is also available to borrowers with undergraduate loans after being enrolled in an income-driven payment plan for 20 years. But the forgiven debt under an income-based plan is considered taxable income.
Learn More About Student Loans
The quest to learn more about student loans shouldn’t end here. Follow the Student Loan Ranger blog, which offers guidance on the options that may forgive, discharge or pay for all or a portion of a borrower’s student loans.
More from U.S. News