What are the Advantages and Disadvantages of Federal Student Loans?

Abigail Eun
Abigail Eun

Abigail Eun is a freelance writer and personal finance expert. Through diligent research and continuous learning, she has honed her knowledge in budgeting, saving, investing, and debt management. Abigail is passionate about helping people get their finances in order. She believes that everyone should have access to the information they need to make sound financial decisions. Her goal is to provide clear and concise information that is easy to understand.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 10, 2023

In 2021, 43.4 million students in the United States were signed under a federal student loan. 

When it comes to filling the gaps in tuition that can’t be covered by scholarships and grants, federal student loans are a great option. Plus, most students are eligible for these loans because, unlike private student loans, federal student loans do not require a cosigner or a high credit score.

Let’s find out the advantages and disadvantages of federal student loans so that you’re best informed before making an important financial decision. 

Advantages of Federal Student Loans

Federal student loans are offered by the federal government and have interest rates, terms, and conditions set by law. Federal student loans are favorable options for students to consider for the following reasons:

No Credit History Needed

Unlike private student loans, which usually require an excellent credit score, steady income, and strong credit history for borrowers to be approved for the loan, most federal student loans don’t factor credit into your eligibility. 

To qualify for a federal student loan, you just need to meet the following requirements:

  1. Be a U.S. citizen or a qualifying citizen
  2. Have a Social Security Number (SSN)
  3. Be accepted or enrolled into a qualifying institution
  4. Prove qualifications to pursue a higher education
  5. Meet academic progress requirements
  6. Be enrolled at least half-time

No Cosigner Necessary

Because most students have little to no credit history after graduating high school, private student lenders usually require a cosigner to sign the loan alongside the borrower. 

A cosigner can be a parent, relative, or close family friend who agrees to take full responsibility for the loan if you miss any loan payments or default on the loan. 

With most federal student loans, a cosigner is not necessary to be approved for the loan. 

Lower Interest Rates

All student loans have interest rates, which are percentages of the amount of money borrowed that you must pay for an established time period.

For example, if you take out a $50,000 student loan with an annual 4% interest rate, you must pay an additional $2,000 on top of your loan payments each year. In general, the lower the interest rate, the better.

The interest rates for federal student loans are set by Congress and are usually lower than the interest rates for private student loans. 

Flexible Repayment Terms

Federal student loans offer a wide range of repayment options, including income-driven repayment plans, which set your monthly student loan payment at an amount based on your income and family size. Tailored repayment plans of this kind are not available for private student loans.

Most federal student loans offer anywhere between a six- to nine-month grace period after you graduate, are enrolled less than half-time, or drop out. This means that you won’t be charged with loan payments until after the grace period ends, giving you time to be financially prepared and settled.

Be sure to identify the kinds of repayment options that each federal student loan offers before signing for one. 

Borrower Protection Plans

Most federal student loans offer borrower protection plans designed to help the borrower if any financial difficulties arise that prevent them from making payments on time. 

Loan deferment and forbearance are two types of borrower protection plans offered by federal student loans, and both allow the borrower to temporarily stop their loan payments for an established period of time.

One key difference between loan deferment and forbearance is that interest continues to accrue while the loan is in forbearance, but while in deferment, it does not.

Federal loan deferment and forbearance plans usually go for three years, while private loans typically only offer around one year to pause payments.

Student Loan Forgiveness Options

Private student loan forgiveness does not exist, but federal student loan forgiveness does. 

This means that the federal government can forgive your student loan debt, erasing some or even all of your remaining balance so you do not have to make payments any longer. 

While this sounds like it should excite every federal student loan borrower, there are specific requirements that you must meet to qualify for federal student loan forgiveness.

For example, you qualify for federal student loan forgiveness if you’ve served in the military, have taught full-time for five years at a qualified primary or secondary school, or currently have an income-driven repayment (IDR) plan and have met a certain number of payments. 

For more information, visit StudentAid.gov to see what student loan forgiveness options exist. 

Disadvantages of Federal Student Loans

Origination/“Loan” Fees

Some federal student loans have origination fees, which are fees that must be paid for “starting” or signing for the loan. The federal government refers to these fees as “loan fees.”

The loan fee is charged from the amount of money you are borrowing, meaning that you will receive less money than what you actually borrowed. You are still responsible for paying the entire amount borrowed, not the amount disbursed by the loan. 

For example, let’s say that you are taking out $10,000 with a 2% origination fee. 2% of $10,000 is $200, and the $200 is going to be taken out of the $10,000 you borrow. This means that while you are borrowing $10,000, only $9,800 will be disbursed to your school. 

For federal Direct Unsubsidized loans and Direct Subsidized loans, the origination fee is 1.057%. For federal Direct PLUS loans, the origination fee is 4.228%.

Private loans usually do not have origination fees, so this is an important factor to consider.

Aggregate Borrowing Limits

Undergraduate and graduate students can only borrow as much as the federal government dictates. Undergraduate students can borrow only up to $57,500 total in all federal student loans, while graduate students can only borrow up to a total of $138,500. 

Private loans, on the other hand, tend to have much more flexible borrowing limits, often covering up to the total cost of tuition. 

Some Federal Student Loan Qualifications Are Based on Financial Need

To qualify for some federal student loans, you will need to be at or below a certain income threshold. If your family makes more money than what is outlined by the Department of Education, you will not be allowed to receive certain types of federal student loans.  

Private student loans, on the other hand, have much more flexible income thresholds to qualify. 

Disadvantageous Terms for Federal Direct PLUS Loan Borrowers 

Federal Direct PLUS loans are for graduate students, parents, and professional students. The origination fee for these loans is 4.228% and the interest rate is a set 7.54%. These may be unfavorable terms for the aforementioned borrowers, as other private student loans could offer better terms. 

Borrowers with excellent credit and a strong credit record should consider private student loans in lieu of the federal Direct PLUS loan. 

Which is Better: Federal or Private Student Loans?

This depends on who the borrower is and what the borrower is looking for.

Experts say that federal student loans are the preferable option for student borrowers who can demonstrate financial need and are pursuing an undergraduate degree. Federal student loans offer more favorable benefits, including flexible repayment options, lower interest rates, borrower protection plans, and loan forgiveness. 

Students who do not qualify for any federal student loans should apply for private student loans if they cannot cover the cost of college without them. These students should keep in mind that a cosigner with a strong credit score, long credit history, and steady income is recommended to be approved for a competitive private loan. 

Are Federal Student Loans Worth It?

Whether federal student loans are worth it will depend on the borrower. If there are tuition gaps to fill after exhausting all possible grants and scholarships, experts say that federal student loans should be the first option to consider.

Federal student loans offer more favorable terms than private student loans, but this option only applies to students who qualify for federal student loans in the first place.

Closing Thoughts From the Nest

Given the current astronomical college prices, taking out student loans is necessary in most cases for students. 

In order to fill in the gaps that scholarships and grants cannot fill, be sure to do your research on the different kinds of student loans that the federal government offers to find the best one for you. 
If federal student loans don’t seem like the right option for you, consider finding private student loans with Sparrow. Sparrow offers a free, online application that you can fill out to see all the loans that you qualify for, including interest rates, repayment options, and borrower protection plans.

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