9 Advantages of Federal Student Loans

FT Contributor
A hand holding a pen over a student loan application.
Reading Time: 4 minutes

If you’re planning to attend college or graduate school, you’re likely considering taking out student loans. In many cases, student borrowers are eligible for federal student loans, which have many advantages when it comes to securing low rates and paying back loans sustainably over time.

Federal student loans can be used to pay for tuition, housing expenses, school supplies, and other costs and fees. If you don’t qualify for federal student loans, private loans are also an option. However, you should try to secure federal student loans if at all possible because of their many benefits to student borrowers.

1. No Credit Requirements

Private loans require a hard credit check to look into your credit history, which can damage your credit score in the short term. If you have a poor credit history, this could automatically disqualify you from a lot of loan options. Federal student loans, by contrast, don’t have any minimum credit requirements. This means that even borrowers with poor credit are eligible for and can receive federal student loans.

2. Low Interest Rates

Another benefit of federal student loans is that the interest rates are generally lower than private student loans. This means that you’ll accumulate less interest over time, and it will be easier to pay off your student loans faster.

Especially when you’re borrowing large amounts for an expensive college tuition, interest payments pose a substantial burden that can make it much more difficult to pay off your student loans in full. While federal student loans still accumulate interest, they generally do so at a much lower rate than private student loans. For interest that does accumulate, borrowers are eligible for the federal student loan interest tax deduction.

3. Fixed Interest

In addition to low overall rates, another perk of federal student loans is that the interest rate is fixed, so it won’t increase over the life of the loan. Private loans, meanwhile, don’t always have fixed interest rates — meaning that your interest rate could increase even after you’ve taken out the loan and are in the process of repayment. Fixed-interest student loans provide a measure of safety and predictability, and ensure that your interest rate will remain the same until you’re finished paying off the loan.

4. Grace Period

After finishing school, student borrowers are eligible for a grace period during which they are not liable for payments on their student loans. The grace period generally lasts six months.

This gives recent graduates a chance to secure employment and get their finances in order before having to deal with the added burden of loan repayment. Once the grace period is over, student borrowers are eligible for a variety of different repayment plans based on their income and financial situation.

5. No Cosigner Requirements

Many private loans require cosigners, especially if you have poor credit or a short credit history. This means that you’ll have to find someone else to cosign your loans with you. Federal student loans, however, don’t require any cosigner, even if you have poor credit. This gives parents and student borrowers the flexibility they need to secure student loans regardless of their credit.

6. Repayment Flexibility

Private student loans usually come with a fixed repayment plan, under which borrowers are obligated to pay off a certain percentage of the loan each month regardless of their financial circumstances.

Federal student loans, however, give borrowers repayment flexibility and allow them to choose from a variety of different repayment plans. These include income-based repayment plans, which reduce monthly payments for borrowers with low incomes, and graduated repayment plans, which start off with smaller initial payments when students first graduate, and get larger over time.

7. Consolidation Options

Federal student loans also come with a variety of consolidation options. If you have several different federal student loans, you can consolidate them into a single monthly payment. This makes repaying loans simpler and less of a hassle, and can help you understand your total student loan balance and how much more you’ll need to pay it off.

Consolidation won’t change your overall interest rate — your new loan will be determined by an average of the interest rates of your previous individual loans.

8. Loan Forgiveness Options

Federal student loans also come with the option of loan forgiveness for borrowers who qualify. A common way to obtain federal loan forgiveness includes working for the government or at a qualifying nonprofit. If you participate in an income-based repayment plan, your loans will automatically be forgiven after a certain period of repayment, usually 20 to 25 years.

This means that borrowers with low incomes may end up having the majority of their loan balance forgiven after making qualifying payments for a certain amount of time. Private loans aren’t eligible for federal student loan forgiveness, so you’ll be stuck paying the balance in its entirety regardless of your income or employment situation.

9. Loan Cancellation

Another benefit when it comes to federal student loans is loan cancellation. If you pass away, your federal student loans are automatically canceled. This means that your family members won’t be on the hook for your student loans if you pass away unexpectedly. In contrast, death isn’t a guarantee of cancellation when it comes to private student loans.

When it comes to student loans, borrowers have a variety of options. Federal student loans offer many benefits to borrowers, including lower interest rates, repayment plans, and potential loan forgiveness.

If borrowers need additional funds or are not eligible for federal student loans, private loans are also an option. Borrowers should be aware of student loan scams, and contact their loan provider if they have any questions or need assistance with repayment.

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