Student loan experts and borrowers usually agree that federal loans are the best student loan option available. However, while there are many advantages to federal loans, they are not without their warts.

For this review, we will assume that a student has determined that borrowing money is essential. Before selecting any student loan, the first step is to determine if any student loan is necessary.

Federal Student Loan Basics

To get federal student loans, borrowers need to fill out the FAFSA. Unlike private loans with a strict credit evaluation, qualifying for a federal loan is much easier. Additionally, there is no cap on income for federal loan borrowing. Financial need is only a factor in determining federal interest assistance.

Once approved for a loan, the funds are sent directly to the school’s financial aid office. If the borrower is getting the money to pay for housing, books, or food, the school’s financial aid office will normally issue a refund. The exact process varies from school to school.

Federal student loan borrowing limits depend upon the student’s education level. A college senior can borrower more than a freshman, and graduate students can usually borrow as much as they need. Additionally, independent students will have higher borrowing limits than dependants. Full details on student loan borrowing limits are available here.

Federal Student Loan Interest Rates

Congress sets the rates on federal student loans. Current interest rates are on the Department of Education’s Student Loan Page. Generally speaking, federal student loan rates are slightly higher than the best rates offered by those in the private sector. Graduate student loan interest rates will also be higher than undergraduate loan rates.

All federal student loan interest rates are fixed-rate loans. This means that the interest rate will not go up or down during the life of the loan.

However, each year interest rates on new loans are recalculated based upon market conditions. The loans borrowed in your first year of college may have a different interest rate than the loans borrowed in your third year.

Federal Student Loan Fees

One of the big downsides to federal student loans is the origination or disbursement fees. For all direct subsidized and unsubsidized loans, the fee is just over 1%. This means that if you borrow $5,000, your initial balance will be approximately $5,050. The fee for PLUS loans is much higher, currently starting at over 4%.

We hate to see fees associated with student loans. Any private lender would lose major points in a review due to fees of this nature. However, we still think borrowers should willingly accept these fees due the unique advantages that go with federal student loans.

Overview of the Federal Student Loan Advantages

There are two main advantages to having federal student loans instead of private loans.

The first advantage is that borrowers can select repayment plans based upon their income rather than how much they owe. Most borrowers can get their payments lowered to 10% of their monthly discretionary income. This perk is not offered by any private lender. If you finish school and cannot find work or lose your job at some point, you will not have to worry about defaulting on your student loans.

The income-driven repayment plans are a valuable protection for all borrowers. This is especially true considering the fact that each year about a million college students will drop out, many more will graduate, and be unable to find a job. Nobody heads off to college expecting to fail, but success is far from a certainty. The robust federal protections set themselves apart from all other student loans.

The second advantage is the student loan forgiveness programs. Borrowers on income-driven repayment plans can have their loans forgiven after 20 to 25 years of payments. While this is a long time to be paying an extra portion of your income to the government, it is a valuable resource to people who find themselves overwhelmed by student debt.  Additionally, borrowers who work in public service can have their loans forgiven after ten years. This allows graduates the opportunity to pursue jobs in the public interest without having to worry that they will not be able to pay off their student loans.

The benefits of fed loans go beyond the huge advantages of income-driven repayment and forgiveness. Federal loans have the most borrower-friendly terms. These terms include protections for borrowers who become disabled. The federal government has also offered excellent relief to borrowers during the Coronavirus pandemic. Private student loan lenders usually are not as borrower-friendly.

Federal Student Loan Disadvantages

Even though we do think the federal student loans are by far the best option, there are a couple significant downsides that all borrowers should understand before they sign up.

Problem number one is our elected representatives. Repayment plans, forgiveness programs, and borrower options are all at the mercy of Congress and the President. In just the past couple of years, we have seen a new repayment plan created and seen forgiveness programs called into question. If you borrow federal loans, you are at the mercy of the federal government and any changes they wish to make to the program. However, there are protections in place to ensure that programs like Public Service Loan Forgiveness will not be eliminated.

Problem number two is the companies hired to service these loans. Government contracts normally go to the lowest bidder, and the quality of service that borrowers get often leaves much to be desired. Getting answers to simple questions or having payments properly processed can be a real challenge. In addition to the headaches that these servicers can cause, their incompetence can often result in late fees and other charges.

The combination of a moving target and poor loan servicing can make things difficult for borrowers. The recent issues with the public service loan forgiveness program illustrate the point.

Federal Student Loan Review Final Thoughts

Even though there are genuine concerns with Federal student loans, they are unquestionably the best option for student loan borrowing, especially at the undergraduate level. The borrower protections are so strong that they outweigh the many problems.

For this reason, we suggest that students opt for federal loans, borrow the absolute minimum necessary, and expect a few headaches along the way.

Next Steps

• Complete the FAFSA – The only way to get federal student loans is to submit a FAFSA application.
• Don’t forget school requirements – Many schools have an additional financial aid form that must be completed. The exact requirements depend upon the school attended.
• Don’t borrow too much – Figuring how much a student can afford to repay isn’t an exact science. However, there is a simple approach that students can use to make sure they can afford their debt.

The post Federal Student Loans Review – The Pros and the Cons of Federal Loans appeared first on The Student Loan Sherpa.

One such text reads, “Your Student Loans have been Flagged for Forgiveness through the D.O.E. Call right away.” The number associated is not a valid lender or Department of Education number.

A similar scam text reads: “Student Alert: Your loans are now pre-qualified for student loan forgiveness.” Similarly, the phone number is not associated with a lender or the Department of Education.

Detecting Student Loan Scams in Text Messages

This scheme is somewhat harder to detect because a text message may seem more legitimate than a vague call about your student loans. Additionally, scams via text seem to be a newer approach, meaning not all consumers will expect this issue.

It is also easy for scammers to send out a ton of these. Unlike actual phone calls, they can send out many texts at the same time.

We have seen consumer alerts on scams of this nature from banks as well. This past week my bank homepage has warned customers that bank policy is not to contact people via text message.

Borrowers concerned that they might be in contact with a spammer should review this article on identifying and avoiding student loan scams.

Preventing this Student Loan Text Message Scam

For starters, most lenders don’t conduct business via text message. If they do, it is likely to be a simple notice, such as saying that your most recent payment posted. Sending out any personal information in response to a text message is likely a huge mistake.

The best protection against any student loan scam is to initiate contact with your lender in response to any call or text message. If you think there is even a slight possibility that the text or call you received is not legitimate, do not respond to it. Instead, go online to your lender’s website and call the number listed. Explain to the customer service representative the text you just received, and they will be able to tell you if it is valid or not.

Mistakes to Avoid

The worst thing you could do would be to provide personal info about you or your student loans. However, that is not the only mistake that can be made.

Even texting “Stop” to get them to leave you alone is a bad move. By texting stop, you give the scammers two critical pieces of information. First, they know the number they texted is a valid phone number with an active subscriber. Second, by texting stop, you are letting them know that you can send and receive text messages. Ignoring the message is the best response.

It is also worth noting that just being on the national do not call registry is not enough to prevent telemarketers and scammers from contacting you. Being on this list may be a proactive measure, but it doesn’t ensure that you will not be the target of these scams.

Next Steps

• The Federal Trade Commission has excellent resources for Reporting Spam Messages and Preventing Future Spam.
• Borrowers interested in legitimate student loan forgiveness should review our comprehensive list of student loan forgiveness programs.

The post Scam Alert: Text Messages About Your Student Loans appeared first on The Student Loan Sherpa.

This particular call is one of many student loan scam calls making the rounds.

Red Flags: The Signs the “Department of Education” Didn’t Actually Call

Although the recording lasted only about 15 seconds, there were several red flags that indicated to me that this was a scam.

The Department of Education made the call

The Department of Education does not directly service student loans. Companies like Navient, Great Lakes, Nelnet, and MyFedLoan have massive government contracts to manage federal student loans. There is no reason for the Department of Education to make the call directly. Anyone pretending to be the Department of Education clearly has bad intentions.

They didn’t use my name

If someone (including a robot) is calling about your student loans, they should know your name. If they don’t even know your name, how can they have accurate information about your student loans?

Press 5 if you are not interested

This is a common trick with telemarketing scams. Even if you don’t fall for the scam, pressing a button confirms your phone number is active. Marketers and scammers sell lists of in-use phone numbers. Hitting any button to answer any question is a good way to end up on one of these lists.

Even though the recording sounded somewhat official and relevant to my student debt situation, it was definitely not legitimate. Don’t just assume that someone calling about your student loans is legitimate. Over 40 million Americans have student debt. Scammers know that, with a population of 300 million, at least 10% Americans called at random will have student loans.

Moving Past Scams and Getting Real Student Loan Help

If you are having problems with your student loans, don’t waste your time or money on someone who randomly calls you. You can resolve the vast majority of student loan issues by simply contacting your student loan servicer.

Even though the student loan servicers are often guilty of lousy performance, they remain the best and only way to enroll in many federal student loan programs. These programs, such as income-driven repayment and student loan forgiveness, are your right as a borrower. Accordingly, there is no reason to pay anyone to assist you. The real Department of Education has a list of the services that are provided for free for all student loan borrowers.

If you are suspicious about a call or a company, be sure to check out our tips on avoiding student loan scams. If you think you may have fallen for a scam, learn how to prevent scammers from causing further damage.

The post Scam Alert: The “Department of Education” called me about my student loans appeared first on The Student Loan Sherpa.