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Federal Student Loans- Pros and Cons

Advantages and Disadvantages of Federal College Student Loans

Oct 19, 2009 Asa Ghaffar

Are you trying to decide if a federal college student loan would be better than a college bank loan? Find out the advantages and disadvantages of federal student loans.

Federal student loans provide a way for post-secondary students to cover their living costs and tuition fees. The applicant needs to complete a Free Application for Federal Student Aid (FAFSA) so that the school can decide whether they qualify or not. The more favorable rates are offered to the most needy students, but federal student loan interest rates are still more favorable than on college bank loans.

Advantages of Federal Student Loans

No credit check. Individuals with no credit history or adverse credit are unlikely to qualify for a loan from a financial institution, unless they are able to get a cosigner. One of the main advantages of federal loans is that they are a no credit check student loan.
Repayment. Although the majority of federal student loans have a 10 year term, this can be amended to suit the borrower's financial situation.
Grace period. Repayments don't commence until six months after graduation. This provides a period of time to find suitable employment or renegotiate the terms of the agreement.
Loan forgiveness. Not only is the federal student loan interest rate lower, graduates could also qualify for a student loan forgiveness program. Those working as a teacher, nurse or in the armed forces may be able to clear up to 100% of their loan.
Low interest. The federal student loan interest rate is far lower than on college bank loans. For example, Perkins loans currently charge a fixed rate of interest of just 5% (subject to change).

Disadvantages of Federal Student Loans

Borrowing limitations. There is an upper limit to how much can be borrowed. With the cost of post-secondary education rising rapidly.
Multiple loans. A fresh loan needs to be applied for each year which means that each one will need to be paid separately. It may also be necessary to borrow money from an alternative source. Personal finances can become rather complicated.
Means testing. Those who wish to apply for federal college student loans will need to complete Free Application for Federal Student Aid (FAFSA). Whilst unsubsidized Stafford loans are available for all, Perkins loans and subsidized Stafford loans are means tested. This means that the most favorable rates are only available to the most needy applicants. A large percentage of the graduate population are dependent on unsubsidized Stafford and college bank loans.
Freedom. The funds from Stafford and Perkins loans are controlled by the school. This means that the student can only direct the funds for the payment of various tuition fees and miscellaneous bills. A college bank loan can be credited directly to a student's checking account.

Individuals who need financial help to attend college should consider a federal student loan as their first port of call. With low interest rates and no need for a credit check, the likelihood of receiving approval is far higher than for a college bank loan. Student loan forgiveness programs are an important consideration for those who intend to enter nursing, teaching or the armed forces.

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