Right off the top, let’s get something straight: When you’re wondering “do you have to pay back FAFSA loans?” what you’re really wondering is whether you have to pay back your federal student loans that you may be eligible for after filling out your FAFSA.
Completing the Free Application for Federal Student Aid (FAFSA®) allows you to apply for three types of student aid, and only one of them is an actual loan:
• Grants and scholarships (this is money you don’t have to repay)
• Work-study jobs (usually part-time and usually right on campus; it’s also money you don’t have to repay)
• Loans (money you will need to pay back after you graduate)
Drilling down further, there are three general types of federal student loans:
Direct Subsidized Loans
The government (more specifically, the U.S. Department of Education) pays the interest on these while you are still in school at least half-time . That’s what makes them “subsidized.”
You can borrow up to $5,500 every year, at 5.05% interest (through July 1, 2019—interest rates can and do change).
Not everybody qualifies for a subsidized loan. You have to be an undergraduate only (not a graduate student) with a specific financial need and attending a school that participates in the Direct Loan Program. And the academic program in which you are enrolled must lead to a degree or certificate.
Note: You also need to check on how your school defines the term “half-time.” The meaning varies from school to school. Contact your student aid office and make sure your definition and your school’s definition match completely. The status is usually based on the number of hours and/or credits in which you are enrolled.
Direct Unsubsidized Loans
You will have to pay back all the interest that accrues here, because these loans are “unsubsidized.” That means the government doesn’t cover your interest while you’re in school like they do with a subsidized loan.
However, Direct Unsubsidized Loans are usually lower interest and relatively affordable. For undergraduates: 5.05%; graduate and professional degrees: 6.6% (again, these interest rates are good through July 1, 2019). The other potential plus: You do not have to prove a financial need in order to qualify for a Direct Unsubsidized Loan.
Direct PLUS Loans. There are two types of these loans:
• PLUS Loans for graduate or professional degree students
• Parent PLUS Loans, which can be taken out by parents for as long as their qualifying child is a dependent or undergraduate student
Unlike most other loans, PLUS loans require a credit check and you cannot have an adverse credit history . This may not be an option if you or your parents have bad credit. In this case, a cosigner on the loan application is an option.
The good news: you can borrow as much as you need (subtracting the other financial aid you’re getting). The bad news: the interest rate is currently 7.6% . That’s higher than the other types of federal student loans.
Note: Federal Student Loan Rates change on July 1 of every year (and in 2018, they increased).
Do I Get a Grace Period on My Federal Student Loan Repayment?
It depends. Not all federal student loans offer one. A grace period is the time you get after you graduate (or drop below half-time enrollment) to not have to make loan payments. If your loan does offer a grace period, during this time, you are expected to reconfigure your life, career, and finances before your repayment plan kicks in (no sweat, right?).
In many cases, a grace period on a federal student loan could be six months, which is true for Direct Subsidized and Unsubsidized Loans. Direct PLUS loans don’t offer a grace period at all. Keep in mind that grace periods are usually not interest-free.
A word about grace periods: they are not the free ride that many people think they are. As we said, grace periods are meant to give you time to find a job and organize your finances before you have to start making loan payments.
They are usually one-time deals; in most cases, you often can’t get a second grace period once the initial one ends. Not all grace periods are exactly alike. Different loans may offer different grace periods. Policies vary. Check with your loan servicer so that you know for sure when your grace period begins and ends.
Some loans accrue interest during grace periods. That means that the interest will “capitalize:” the interest is added to the principal when the grace period ends. Many students subscribe to the strategy of making interest payments even during the grace period. Doing this can ultimately lower the amount of what you owe, and interest payments are generally more affordable to handle than principal payments.
Also keep in mind that loan servicers are paid by the government (again, the Department of Education) to handle billing and other services for federal loans. The government gives you a loan servicer; you don’t get to choose one yourself. The loan servicer you get is the one you should contact if you have questions regarding your loan.
Federal Student Loan Standard Repayment Plan
Once you graduate, your repayment plan will depend on various factors, but most of the time the government will place you on their Standard Repayment Plan . The general rule here is that you’re expected to pay off your loan over the course of a decade and your payments remain the same for the duration.
Before you are placed on that Standard Repayment Plan, the government gives you a chance to choose a few other repayment options. If you don’t choose one, you’ll automatically be placed on the Standard Repayment Plan.
Additional Repayment Options
One of these alternatives is the Extended Repayment Plan , which can extend your term from the standard 10 years to as long as 20 or 25 years. To qualify, you must have at least $30,000 in outstanding Direct Loans. As a result, your monthly payments are reduced, but you could be paying way more interest.
Another option, the Graduated Repayment Plan , lets you pay off your loan within 10 years, but instead of a fixed payment, your payments start low and increase over time. You’ll also be paying more interest, just like if you had the Extended Repayment Plan, but you’ll still be paying off your loans in just ten years, as opposed to 25 or longer.
Keep in mind that although you can choose these repayment options, you cannot refinance a federal student loan with the government on your own (you can, however, consolidate them).
That’s because those interest rates are set by federal law , and they can’t be changed or renegotiated. However, you can refinance your federal student loans with a private loan company.
Difference Between Refinancing & Consolidating Student Loans
Before you consider refinancing, be sure to know the difference between refinancing and consolidating student loans:
Refinancing means taking out a brand new loan so that you can pay off your existing loans. In order to refinance, you’ll choose the loan company you feel is best, with (hopefully) better interest rates and repayment terms. Refinancing can be done via a private lender and can be used for both federal and private loans.
Consolidation, on the other hand, means placing all of your current loans into one big loan. Doing this typically extends your loan term so that your monthly payment is lowered. Sounds good in theory (who doesn’t like the idea of one payment per month as opposed to multiple payments?).
The problem with consolidating student loans is that it could mean you wind up paying additional interest. How? When you consolidate multiple federal student loans, you’re given a new, fixed interest rate that’s the weighted average of the rates from the loans being consolidated.
A great reason to refinance (as opposed to consolidating) your school loans: if you have high-interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans. Refinancing your existing loans with a longer term can reduce your monthly payments. Alternately, you may be able to lower your interest rate or shorten your term.
Before you apply for that refinancing plan, it’s a good idea to check your credit score, as it is an important factor lenders consider. Many lenders require a score of 650 or higher. If yours falls below that, you may consider a cosigner on the loan.
Lenders typically offer fixed and variable interest rates, as well as a variety of repayment terms (which is often based on your credit score and many other personal financial factors). The loan you choose should ultimately help you save money over the life of the loan or make your monthly payments more manageable.
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