Category: Federal Student Loans

While an important piece in determining your eligibility for financial aid, Expected Family Contribution, or EFC, is often misunderstood.

Here’s what you need to know about Expected Family Contribution for FAFSA purposes.

What is Expected Family Contribution?

Expected Family Contribution, or EFC, is a number used to determine how much financial aid you are eligible to receive, including grants and federal student loans.

EFC is calculated using a formula established by law. The formula uses information such as:

1. Your/Your family’s income
2. Your/Your family’s assets
3. Your/Your family’s benefits
4. The number of family members in college during the same year

This information is then used to estimate the amount of money you and your family would be able to contribute to one year of college costs. By doing so, financial aid programs are able to estimate what your financial need may be when it comes to paying for college.

Note that this number does not indicate how much you will receive in financial aid or how much you will have to contribute, but rather, how much you are eligible to receive and how much you could contribute. 

>> MORE: The four types of financial aid for students

Why Your Expected Family Contribution Matters

Your EFC is important because it contributes to how you are evaluated for financial aid overall, including federal student aid.

Expected Family Contribution and Federal Student Aid

When calculating your overall federal student aid eligibility, the federal government uses a formula that takes into account several factors such as:

1. Your EFC
2. Student enrollment status (full-time, part-time, etc)
3. Your year in school
4. The cost of attendance each respective school

Federal student aid has limits, and thus, your overall federal student aid eligibility helps determine how much of each type of aid you are eligible for. 

>> MORE: Student loan eligibility: Private & Federal Student loans

How Does My Expected Family Contribution Impact My Federal Aid?

Your EFC will help determine how much aid you will be eligible for. If your EFC is $0, you will be eligible to receive the maximum amount of federal aid. If your EFC is over a certain threshold, you will receive no aid at all. 

Note that these numbers may fluctuate annually to reflect changes in your/your family’s income.

Your Expected Family Contribution’s Impact on Financial Aid Overall 

Each piece of this overall aid eligibility equation helps paint a bigger picture regarding your finances, and therefore, helps schools understand where you may need financial aid.

How much of your financial need is covered by federal aid may impact how schools fill the remaining gap with aid such as university scholarships and grants.

Why Your Expected Family Contribution Changes 

Your EFC will likely change year-to-year as you or your parent’s/parents’ income changes. Therefore, the amount of aid you are eligible for each year will also change.

Be sure to resubmit your FAFSA each year to ensure that you maintain access to the maximum amount of aid you are able to receive.

>> MORE: FAFSA requirements: Everything you need to know

How Can I Calculate My Expected Family Contribution?

Let us say this before we give you the breakdown: While you can calculate your own EFC at home, be careful not to get overly attached to this number. At-home estimates are just that: estimates. 

Calculating the Parental Contribution to the EFC¹

1. Add up the total parent income (both taxed and untaxed income)
2. Subtract allowances for federal and state taxes, as well as any Social Security paid
3. Subtract an Income Protection Allowance (IPA)
   1. This number is intended to estimate how much a family would need for necessities such as housing and food based on its size. This number would be taken out of the overall income when calculating how much a parent would be able to contribute to a child’s education.
4. Subtract an Employment Expense Allowance
   1. This will only apply for households where all parents are working, and will equal 35% of earned income or $4,000 — whichever is less. This amount is intended to cover the expenses that working parents have such as commuting.

After doing this calculation, you will reach what’s called your Available Income (AI). This represents how much of the parental income can be considered for college costs.

Calculating the Student Contribution to the EFC

1. Add up the total student income
2. Subtract allowances for federal and state taxes, as well as any Social Security paid
3. Subtract an IPA
4. Figure out the Student Contribution from Available Income (50% of the current total)

Finally, add the Parental Contribution to the Student Contribution to result in your family’s EFC.

Commonly Asked Questions About Expected Family Contribution

What is the Expected Family Contribution for an independent student?

When you are a dependent student, your EFC is calculated based on both your parent’s/parents’ income and your own.

However, as an independent student, your family’s income will not be used to calculate your EFC. Rather, your own income and assets will be factored into the calculation, minus some deductions.

If you are an independent without dependents, your EFC will be based on your income (and your spouse’s if you are married) minus taxes and basic living expenses.

If you are an independent with dependents, your EFC will be based on your income (and your spouse’s if you are married) minus taxes, basic living expenses, and an employment allowance. The employment allowance is available if you are a single working parent or a working student with a spouse.

>> MORE: How to fill out the FAFSA as an independent student

What is a good Expected Family Contribution?

There is no one specific number that makes your EFC “good.” Generally speaking, however, the lower your EFC, the more financial aid you may qualify for. 

Why is my Expected Family Contribution so high?

Your EFC can be high for a variety of reasons, however, it is often high due to having a high income or a lot of assets. Assets are resources that can produce positive economic value such as:

1. Cash
2. Real estate
3. Stock holdings

When calculating your EFC, both liquid and illiquid assets are taken into account. Liquid assets are ones that can be sold quickly without losing a lot of their value, such as the money in your bank account or stocks. Illiquid assets, on the other hand, are ones that do lose value when sold quickly, such as cars and real estate.

If you/your family has a low income but a lot of assets, your EFC may be higher than you expected. If this does not seem to be the case, however, consider filing a financial aid appeal to have your EFC recalculated.

>> MORE: How to fill out a financial appeal letter

Final Thoughts from the Nest

Your EFC is one piece of how your financial aid eligibility is calculated. While it isn’t the whole bit, it is important. By estimating your family’s EFC, you can determine what financial gaps may arise after receiving financial aid.

If scholarships and federal student aid don’t cover your financial need completely, it may be time to explore a student loan to fill the gap. When you’re ready, Sparrow is here to help.

Filing the FAFSA application (Free Application for Federal Student Aid) is the first step to receiving federal financial aid. Though it may seem like a daunting task, all it takes is a little bit of preparation, time, and focus.

To save yourself from making any FAFSA errors, here are the most common mistakes that are made when filling out the FAFSA application.

What is the Most Common Mistake Made on the FAFSA?

#1: Not Using the IRS Data Retrieval Tool (DRT)

The FAFSA offers a convenient tool called the IRS Data Retrieval Tool that fills out all your tax information to your FAFSA so you don’t have to. It’s a quick and convenient way to save you time and avoid making any errors on the application. Take advantage of it!

#2: Not Reading the Directions Carefully

Some of the terminology on the FAFSA application can’t be taken at face value. The application has very specific definitions for the following words that you should be aware of.

• Household size: Your family’s household size consists of: 1) Yourself; 2) Your parents; 3) Your parents’ children who receive more than half of their support; 4) Individuals who live with your parents and receive more than half of their support.
• Number of family members in college: Enter the number of individuals who will be attending college for at least half-time during the same time as you (including yourself). Do not count your parents even if they are attending college.
• Net worth of investments: The net worth of your parents’ investments is found by subtracting the debt amount from the investment’s value.
• Taxable college scholarships and grants: When the FAFSA asks for the total amount of taxable college scholarships and grants, report any scholarship and grant amounts that are reported to the IRS as income. Use the amount reported on your tax return.

#3: Mistaking Dependency and/or Marital Status

Complex family dynamics can make completing the FAFSA a bit tricky. If your parents’ marital status is ambiguous, use the following chart provided by the Federal Student Aid (FSA) office as a guide. 

If your dependency status is unclear as well, you’ll want to double-check that you are putting down the right information. Even if you fully support yourself, you may be considered a dependent student by the Office of Federal Student Aid. 

To determine your dependency status, answer the following questions. 

1. Will you be 24 or older by Jan. 1 of the school year for which you are applying for financial aid?
2. Are you married or separated but not divorced?
3. Will you be working toward a master’s or doctorate degree (such as M.A., MBA, M.D., J.D., Ph.D., Ed.D., etc.)?
4. Do you have children who receive more than half of their support from you?
5. Do you have dependents (other than children or a spouse) who live with you and receive more than half of their support from you?
6. Are you currently serving on active duty in the U.S. armed forces for purposes other than training?
7. Are you a veteran of the U.S. armed forces?
8. At any time since you turned age 13, were both of your parents deceased, were you in foster care, or were you a ward or dependent of the court?
9. Are you an emancipated minor or are you in legal guardianship as determined by a court?
10. Are you an unaccompanied youth who is homeless or self-supporting and at risk of being homeless?

If you answered “yes” to any of the questions above, you are considered an independent student. If you answered “no” to all of the questions, you are considered a dependent student.

>> MORE: How to fill out the FAFSA as an independent student

#4: Only Listing One College

Unless you’re already in school or know what school you will be going to, don’t list only one college on your FAFSA. Add all the colleges you are considering applying to (even if you don’t know if you will be accepted or attend).

List as many schools as you want on your FAFSA application. There is no harm in doing so. If you don’t apply or are not accepted to a school you listed on your FAFSA, the school will simply disregard your FAFSA.

You can add up to 10 schools at a time. If you want to add more schools, you can replace the ones you already have.

Note: The school(s) you remove from your list will not have automatic access to any new updates or information you add to your FAFSA after removal.

#5: Not Signing the FAFSA Form

Signing the FAFSA form is probably the easiest step of the application, but it is the most commonly forgotten. Don’t let this happen to you. You will need to know your FSA ID and password (as well as your parent’s FSA ID and password) to sign.

Other FAFSA Application Errors to Avoid

Forgetting Account Information

You will want to keep your FSA ID and password in a safe place that you will be able to access. You’ll need it for every important step, whether it be starting a new application or submitting your finalized one. 

Not Using Your Legal Name

You must use your legal name, or the name written on your government documents, when filling out the FAFSA application. Nicknames or other versions of your name are not allowed.

If you used the wrong name for your application, you should submit a name change for your Student Aid Report (SAR) and contact your school’s financial aid office.

Leaving Answers Blank

Having too many blank spaces on your application can result in a rejected application or a miscalculation. Instead, experts recommend putting “0” or “Not applicable” in spaces that you cannot fill out. 

If you use the IRS DRT, know that the tool will not fill out the entire application for you. You will still have to fill out items like “Payments to tax-deferred pension and retirement savings plans”, which are not automatically filled out by the DRT.

Before submitting, be sure to double-check that all required information is provided and that all of your answers are accurate.

Not Ranking Your Schools Properly (State Schools Only)

Some states require you to rank a state school within your top three choices to be considered for state grants. You may not receive a state grant because you did not rank a state school you are considering “high enough” on your FAFSA. 

If you’re unsure about your state’s grant requirement, rank your top choice for state schools first on your FAFSA application.

Not Filling out the Special Circumstances Section

If you had any special circumstances that impacted your family’s income, report it. Colleges offer a form you can fill out to report any special circumstances, which may help you receive more financial aid.

What Happens if There is an Error on the FAFSA?

Thankfully, it won’t be the end of the world if you make an error or two on your FAFSA application. Here are some steps you can take to remedy the mistake.

Step 1: Contact Your School’s Financial Aid Office

Reach out to your school’s financial aid office (or all the financial aid offices of the schools you’ve applied to) to alert them about the mistake. It’s probably not the first time that the office has dealt with FAFSA issues, so you’ll be in good hands.

Step 2: Make FAFSA Corrections

You can make direct changes to your FAFSA by logging into your account online. Select the option, “Make FAFSA Corrections” on the MY FAFSA page and adjust accordingly. 

Step 3 (Optional): File An Appeal

You should only file an appeal for the FAFSA if you feel that your household financial situation is not reflected accurately. Individuals usually appeal the FAFSA if they feel as though they haven’t received enough financial aid or faced a drastic change in their financial situation since submitting the form. 

You will need substantial evidence to prove that your FAFSA does not reflect your current finances. Reasons to appeal the FAFSA include: 

• Divorce
• Serious illness
• Death
• Sudden layoff

>> MORE: How to write a FAFSA appeal letter

Closing Thoughts From the Nest

While filling out the FAFSA may seem tedious, filling out the form carefully and as early as possible is key to maximizing federal financial aid. To avoid any FAFSA errors, read the directions carefully and ask for help when you need it.

The Free Application for Federal Student Aid (FAFSA) is open for next school year. The earlier you submit it, the better.

If you have divorced parents, navigating the FAFSA might be a little more difficult. It has its own set of guidelines on who you can report as your “custodial” parent on the application. 

No matter what your family situation may be, we’re here to help. Keep reading for information on how to fill out the FAFSA with divorced parents. 

Who Counts as a Parent on the FAFSA?

Only legal parents count as a parent on the FAFSA. Grandparents, foster parents, and legal guardians do not qualify unless they have legally adopted you. 

Even if you don’t live with either of your legal parents, you will still need to report their financial information on the FAFSA. If you have lived with a remarried legal parent for the majority of the past 12 months, you will also have to put your stepparent’s information down. 

If you are legally emancipated, were a ward of the court after the age of 13, or have deceased parents, the FAFSA considers you as an independent student. There is a separate process for filing the FAFSA as an independent. 

Which of the Divorced Parents Should Complete the FAFSA?

Depending on your living circumstances, there are two options for completing the FAFSA with divorced parents:

If Your Parents Live Together

If your parents do live together, you can indicate their living status as “unmarried and both legal parents living together” on the FAFSA.

If Your Parents Don’t Live Together

If your parents do not live together, the FAFSA will ask you which parent you have lived with for the majority of the past 12 months. 

If you have lived with each parent equally, you will be asked about which parent gave you the most financial support during the past 12 months.

Steps to Complete the FAFSA with Divorced Parents

There are three main steps you will have to take: 

Step 1: Determine Your Custodial Parent

To figure out who your custodial parent is, ask yourself the following questions:

#1: Are your parents married?
If yes, report both of your parents’ information on the FAFSA. If not, ask yourself the following question.

#2: Do your parents live together?
If yes, report both of your parent’s information on the FAFSA (even if they have never been married, divorced, or separated).  If the answer is no, ask yourself the following question.

#3: Have you lived with one parent more than the other within the past 12 months?
If yes, report the information of the parent you have lived with more on the FAFSA. If the answer is no, go to the next step (#4).

#4: Report the information of the parent who provided you with more financial support over the past 12 months.
If this parent is remarried, you will also have to report the information of your stepparent on the FAFSA.

The following infographic from Federal Student Aid (FSA) can also serve as a visual guide for determining your custodial parent.

After determining your custodial parent, keep in mind that you should only report their information when prompted on parent information (and your stepparent if you have lived with them for over 12 months). 

For example, when the FAFSA asks about your parent’s highest education, you should only report your custodial parent’s information (and your stepparent’s information if applicable), and not your other parent’s information. 

Step 2: Gather the Correct Information

Gather the following information to complete the FAFSA. You will most likely have to work with your determined custodial parent to collect the necessary documents.

1. Your social security card 
2. Your custodial parent’s social security card
3. Any form of self-identification (driver’s license, real I.D., passport, etc.)
4. Your custodial parent’s 2021 tax returns 
5. Your custodial parent’s 2021 untaxed income records 
6. Your custodial parent’s 2021 W-2 forms 
7. Your custodial parent’s current bank statements 

Step 3: Include Child Support (If Applicable)

The FAFSA requires you to report any child support your custodial parent receives. Alimony is considered taxable income and is already reported on your custodial parent’s tax information, so it does not have to be reported again.

Do You Get More Money on the FAFSA if Your Parents Are Divorced?

It depends who your custodial parent is.

If your divorced parents live separately, you have to report the custodial parent’s income on the FAFSA, not the other parent’s. If you live with the parent who has a lower income, your estimated family contribution (EFC) will be lower, which can lead you to receive more aid. 

That being said, child support and alimony are taken into account on the FAFSA, so there isn’t a guarantee that you’ll get more money simply because your parents are divorced.

Closing Thoughts From the Nest

As you navigate the FAFSA with divorced parents, don’t forget to ask for help. The school’s financial aid office has dealt with situations like yours and more, so don’t be afraid to reach out.

If you’re a parent looking for an alternative to private student loans, consider applying for Parent PLUS loans. Parent PLUS loans are a type of federal loan offered to parents of dependent college students. Known for varied repayment plans and strong borrower protection, they’re a great option to finance your child’s education.

In this article, we’ll tell you everything you need to know about how to apply for Parent PLUS loans.

Complete the FAFSA

To determine whether you’re eligible for the Parent PLUS loan, complete the Free Application for Federal Student Aid (FAFSA). The FAFSA checks your eligibility for not just Parent PLUS loans, but for general student financial aid. The application must be filled out annually if you want your child to be considered for federal aid. 

How to Complete the FAFSA

Each year, the FAFSA opens on October 1st and closes on June 30th. Experts recommend submitting the FAFSA as close to the opening date as possible. This is because some financial aid is distributed on a first-come, first-served basis. 

Make sure that filling out the FAFSA is a collaborative process with your student. It’s important that they understand how their education is being financed and how to navigate the FAFSA process.

To fill out the FAFSA, gather the following materials: 

• You and your child’s social security card 
• You and your child’s driver’s license (if applicable) 
• Tax returns from two years prior
• Untaxed income records from two years prior
• W-2 forms from two years prior
• Current bank statements

While you may know some of the above information by heart, never go off memory. It is crucial that your submission is accurate. Typically, it takes around an hour to complete, including time to double check your answers.

Around 4 to 6 weeks after submission, your student will receive their financial aid summary. The financial aid summary will detail what and how much aid your child qualifies for. It will also show whether you’re eligible to borrow Parent PLUS loans. 

Check Your Eligibility for the Parent PLUS Loan

Even if Parent PLUS loans are included in your child’s financial aid summary, you’ll need to apply again to re-check your eligibility.

You must meet the following requirements to be eligible for the Parent PLUS loan:

• Be a U.S. citizen or eligible non-citizen.
• Be the biological or adoptive parent (stepparents may be eligible in certain cases) of a dependent college student who is enrolled at least half-time at a qualifying institution.
• Have a decent credit history or add an endorser (also known as a cosigner) to the loan. 
• Have not defaulted on previous federal loans.

Unlike some other forms of aid, you do not need to demonstrate financial need in order to be eligible for a Parent PLUS loan. 

Determine How Much to Borrow

The maximum amount you can borrow in Parent PLUS loans is the total cost of attendance (COA) minus any financial aid received.

The COA and borrowing limits are determined by your student’s institution. Contact the school’s financial aid office to address any questions that you may have on Parent PLUS loans, to determine your borrowing limit, and to clarify any application processes.  

How Much Should You Really Borrow in Parent PLUS Loans?

A good rule of thumb when it comes to determining the amount of money you should borrow is to borrow the least amount of money possible to cover your child’s cost of attendance. The more you borrow, the more you will end up paying. Parent PLUS loans have relatively higher interest rates than most loans, and interest can capitalize very quickly. 

Complete the Application

Most schools will require you to submit your Parent PLUS loan application through the Federal Student Aid website, though certain schools may have their own application processes. To begin the application, create your own Federal Student Aid (FSA) ID. Your FSA ID will be used to log in and out of your account.

Gather the following materials to complete the application:

After submitting the application, an automatic credit check will incur. If you have a qualifying credit score, the page will refresh to a confirmation page. Then, the institution will review your application to determine your eligibility.

If you do not have a qualifying credit score, the Parent PLUS loan application will not go through. Fret not if this is the case for you – you can either add an endorser to the loan or complete the PLUS Credit Counseling module.

Sign the Master Promissory Note

If you are approved by your student’s institution for a Parent PLUS loan, the last step you will need to take is signing the Master Promissory Note (MPN). Keep in mind that you must sign into your personal FSA account and complete the MPN in one sitting. 

The Master Promissory Note is a legal contract that outlines the repayment terms of the loan. By signing, you agree to repay your loan, including any accrued interest and fees. To complete the MPN, you’ll need to provide the same information from the Parent PLUS loan application, as well as the names and contact information of two references.

After signing, you’re done. The loans will be disbursed to your student’s institution in a few weeks.

Note: You can borrow additional federal loans of the same type without having to sign multiple MPNs — MPNs last up to 10 years. 

FAQs About Applying for a Parent PLUS Loan

How long does it take to be approved for a Parent PLUS loan?

It may take several weeks for your Parent PLUS loan to be approved. Contact your student’s institution if you have not received any communication for an extended period of time. 

What is the deadline to apply for a Parent PLUS loan?

The deadline for applying for a Parent PLUS loan is June 30th, when the FAFSA closes. 

Why would a Parent PLUS loan be denied?

A Parent PLUS loan could be denied for the following reasons:

• Adverse credit history
• Recent bankruptcies
• Debt delinquencies
• Tax liens
• Wage garnishment

Closing Thoughts From the Nest

Before applying for a Parent PLUS loan, be sure to explore all loan options so you can be confident a Parent PLUS loan is truly the best option for you. Oftentimes, private loans offer more competitive interest rates, which would save you money in the long run.

If you want an easy way to see all of the private loans you qualify for, consider submitting a free application with Sparrow today.

Borrowing federal student loans is a popular, oftentimes necessary practice to finance the cost of college. In 2022, 43.4 million borrowers carried federal student loans. 

Applying for federal student loans is fairly simple – all you need to do is submit the Free Application for Federal Student Aid, and the U.S. Department of Education determines which federal student loans you qualify for. You only need to submit an individual application outside of the FAFSA if you are applying for federal PLUS loans, which are for parents and graduate students. 

In this article, we’ll cover everything you need to know about applying for and accepting federal student loans. Let’s dive into it. 

Collect Necessary Paperwork

First off, you’ll need to collect the necessary paperwork to fill out your FAFSA. If you are submitting your application as a dependent, you will need your parents’ financial documents. 

1. Your Social Security Number (never go off memory!)
2. Your parent(s)’ Social Security Numbers 
3. Tax Information (ie. Tax Returns, IRS W-2 Parent(s) tax information)
4. Family income
5. Records of untaxed income. This includes items such as child support and/or Veteran benefits. (Gather only what applies to you.)
6. Information on any financial assets your parents have. This includes items such as cash in your checking and/or savings account, investments like stocks and bonds, business assets, mortgages. (Gather only what applies to you.)

Fill out the FAFSA

It is strongly encouraged that you submit your FAFSA as close as you can to the application opening date, which is October 1st. Some financial aid is distributed on a first-come, first-served basis, so submitting the FAFSA as soon as possible will increase your chances of receiving more aid. 

If you are a first-time applicant, you will need to make an account on the Federal Student Aid website. If you are a returning applicant, log into your account. 

It can take anywhere from 45 minutes to 1 hour to fill out the FAFSA if you have all the necessary materials on hand. Try not to rush through the application, as the information needs to be accurate. Fixing your mistakes now will be a lot easier than having to remedy them after submission. 

Double Check Your Student Aid Report

After submitting the FAFSA, you will receive your Student Aid Report (SAR). Your SAR will have all of the information you submitted in your FAFSA, as well as your Expected Family Contribution (EFC). The EFC is how much you and your family are expected to pay out of pocket. 

You will receive your SAR after two weeks of submitting your FAFSA. After receiving your SAR, double-check that all the information you submitted is correct.

Review Your Financial Aid Letter

Soon after, you will begin to receive financial aid letters from the schools you were accepted into — typically around March or April. These letters will detail how much financial aid you are receiving and whether it is work-study, federal loans, grants, etc. This will give you a solid idea of how much you’ll need to pay out of pocket. 

Compare your financial aid letters to see which institution is offering the best financial aid package. You can do so by creating a table to organize your offers:

Keep in mind that most institutions will not meet 100% of the student’s demonstrated financial need, meaning you will most likely have to pay out of pocket or take out student loans. Compare your financial aid awards to see which one is more suitable to your needs as a student. 

Accept Your Loans

You’ll want to accept financial aid in this order: Free, Earned, and Borrowed (FEB). 

After accepting all of your free and earned financial aid (grants, scholarships, work-study), it’s time to accept your federal student loans.

You will want to accept your federal loans in this order:

1. Subsidized loans
2. Unsubsidized loans

Subsidized loans don’t accrue any interest if you are enrolled at least half-time in school, during your grace period, and during any deferment periods. Interest will only begin accruing once your repayment begins, saving you significant amounts of money. Unsubsidized loans, on the other hand, do accrue interest from the first disbursement of the loan. This means that interest will accrue during your academic enrollment, grace period, and any deferment periods. 

Because we want to be in debt for the least amount of money possible, accept your subsidized federal loans first. 

Note: To be eligible for subsidized federal loans, you must demonstrate financial need and meet the income requirements.

Closing Thoughts From the Nest

Be sure to get your FAFSA in as soon as the application opens on October 1st. This will increase your chances of maximizing the amount of federal aid that you will receive. 

If you’ve already received your federal student loans and find that it doesn’t quite fill the financial gaps in your tuition, consider borrowing private student loans.

Sparrow can help you compare private student loans that you qualify for across 15+ private lenders. Consider submitting a free application with us today.

On August 24th, President Joe Biden announced his comprehensive student loan relief plan, complete with up to $20,000 in student loan forgiveness per eligible borrower.

Now, as the application is nearing its release, it’s time to prepare. Here’s what you should do before the application comes out to make sure you’re ready.

Stay Updated on Any Changes

Details regarding student loan forgiveness are changing frequently. To ensure you’re up-to-date with the latest information, subscribe to the Department of Education’s email updates.

If and when information changes, you’ll receive an automated email complete with everything you need to know. (Don’t worry. You can pick exactly which newsletters you want to subscribe to, so your inbox won’t wind up packed with emails you don’t care about.)

Prepare Necessary Documentation

When the student loan forgiveness application is released, thousands of borrowers will flock to the site. While the Department of Education has been preparing for this exact moment, there’s a good chance the massive uptick in traffic will cause the site to get overloaded and even crash.

If you’re halfway through your application and the site goes down, you’ll likely lose your progress and need to restart when it comes back up. So, instead of memorizing certain details then having to recall them later, compile the documents you’ll need and have them at-the-ready, right in front of you.

You may need certain information, such as:

1. Your tax returns from 2020 and 2021
2. Proof of your address
3. Proof you received Pell Grants while in school

It’s best to also have scanned copies of these documents in case you need to upload them.

Start Saving for a Potential Tax

While the amount forgiven isn’t taxable at the federal level, it may be taxed at the state level depending on where you live. Based on current information, Arkansas, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin are expected to apply a state income tax to student loan forgiveness.

That said, several states have made an alteration to their tax rules, making discharged debt temporarily exempt from state income tax. So, there is a chance the above states follow suit.

While it’s unclear just how much you could be taxed, experts have estimated anywhere from a couple hundred to a couple thousand dollars. Due to how wide that range is, it’s important to start preparing for a potential tax as soon as you can.

Commit to sending a chunk of money to savings each time you’re paid. That way, covering the payment come tax time won’t be as much of a burden.

Remember Other Aspects of Biden’s Relief Plan

The focus of President Biden’s student loan relief plan has been on forgiveness, but there are other parts to be aware of, such as the end of the forbearance period.

Forbearance Ending

If forgiveness won’t be wiping out your entire balance, you’ll need to prepare for payments to restart on January 1st, 2023 when the forbearance ends. 

To estimate your monthly payment amount, log into your loan servicer’s account. In some accounts, there is an option to view your projected monthly payment for each individual loan. While the number will likely drop due to a portion of your balance being forgiven, it’ll give you a solid estimate for what to expect once the forbearance ends.

This is a good time to look at your budget and make adjustments to your spending to accommodate a loan payment.

Sign Up for AutoPay

It’s been quite a while since borrowers have been required to make payments on their federal student loans. If you’re worried that the change of pace may cause you to miss a payment once the forbearance ends, now is a good time to opt in to autopay. This will automatically withdraw your payments from your account each month, so you never miss a payment.

Make Sure Your Contact Information is Updated

If you’ve recently moved or changed email addresses, log into your account and ensure the contact information is updated. Important information regarding your loans, the forgiveness application, and changes to the program will be sent to the information on file. If the information isn’t current, you could miss out on key details.

Look at Other Forgiveness Opportunities

If you don’t qualify for President Biden’s student loan relief, don’t fret. There are other programs you may be eligible for:

Public Service Loan Forgiveness

Also known as PSLF, this program eases the burden of federal student loan debt for eligible public service workers. If you work in a qualifying role, such as a teacher or law enforcement officer, you may qualify to have your entire loan balance forgiven.

Teacher Loan Forgiveness

If you are a highly-qualified teacher with federal student loan debt, this program is for you. To qualify, you must have taught at a low-income school or educational service agency for at least five consecutive school years.

Nurse Corps Loan Repayment

If you’re a nurse working in a critical shortage facility, you may be eligible to have up to 85% of your nursing school debt forgiven.

Income-Driven Repayment Forgiveness

After making qualifying payments on an IDR plan for 20-25 years, your entire remaining balance can be forgiven. While this option requires a lengthy commitment to receive relief, it is a great option for those committed to remaining on an IDR plan for that length of time.

Beware of Student Loan Forgiveness Scams

While student loan scams aren’t new, they’re increasing in number since the Biden Administration’s plan was announced. To prevent falling prey to a scam, here are a few red flags to look out for:

1. Language that suggests urgency. You will never be asked to decide quickly when it comes to student loan forgiveness. Plus, most student loan forgiveness programs will require you to have made a certain number of payments. That requires preparation and, therefore, can’t be a decision made in a moment’s notice.
2. Saying the program ends soon. Federal student loan forgiveness programs have been running, and will continue to run, for many years to come.
3. Promising immediate loan forgiveness. Loan forgiveness programs all have a variety of criteria you need to meet. Plus, you’ll usually need to apply to even be considered. So, in any case, your loans won’t automatically be forgiven.
4. Asking for your FSA ID or password. Neither the Department of Education nor a Federal Student Aid representative will ask for your personal information over the phone.
5. Requesting a fee to discharge your debt. Legitimate student loan forgiveness programs do not require a fee to participate.

Remember, scammers are smart. Some may even utilize telemarketing services that place their location at Washington, DC to make the call look more reputable. Be wary of any call you receive in relation to student loan forgiveness. Always contact your loan servicer directly if you’re unsure whether something is real or a scam.

Final Thoughts from the Nest

As the application release date approaches, it’s important to start preparing. Make sure to gather all necessary documentation, ensure your contact information is up-to-date, and prepare for the potential loan forgiveness tax.

President Biden’s student loan forgiveness will relieve federal student loan debt for qualifying borrowers. Now, it’s just a matter of figuring out which loans are eligible for cancellation and when student loan forgiveness will materialize on borrowers’ accounts. 

While detailed information about student loan forgiveness is yet to be released, here’s what we know about when your loan amounts will be wiped out. 

Who Qualifies for President Biden’s Student Loan Forgiveness?

Federal student loan borrowers who make less than $125,000, or $250,000 as a married couple, are eligible for President Biden’s student loan forgiveness. 

Pell Grant recipients qualify for $20,000 in loan forgiveness, while non-Pell Grant recipients qualify for $10,000. Loan cancellation will be capped at the borrower’s amount of outstanding debt. 

Only federal loans that were suspended from the COVID-19 forbearance in March 2020 qualify for student loan forgiveness. The following loans are eligible for student loan forgiveness:

• Direct Loans
• FFEL Loans held by the federal government
• Perkins loans held by the federal government
• Direct, FFEL, Perkins, and HEALs loans in default

To determine whether your loans qualify for student loan forgiveness, log in to your Federal Student Aid account and look for the ‘My Loan Servicers’ tab. If the loan servicer’s name is ‘DEPT OF ED’, the loan is held by the federal government and qualifies for student loan forgiveness. 

For borrowers who have commercially held federal student loans, fret not. According to a White House spokesperson, the Education Department “will work with private lenders to ensure that commercially held federal student loan borrowers can also benefit from relief, including privately held FFEL loans, Perkins, and Health Education Assistance Loans that are consolidated into the Direct Loan program.”

(Commercially held federal loans are loans that were issued by private lenders, but were guaranteed by the federal government.)

If you do not meet the income requirements, are not a federal student loan borrower, or do not have an eligible federal loan, you will not qualify for student loan forgiveness. However, there are still other options that you can consider for student loan debt relief. 

Which Year’s Income Will Be Used to Evaluate Eligibility?

According to a White House official, your income for either the tax year of 2020 or 2021 must meet the income requirements to receive federal student loan forgiveness. The Department of Education has not yet released information about how to provide proof of or submit any income documentation.

How Long Will it Take to Receive Forgiveness?

The timeline for receiving your student loan forgiveness depends on the borrower information that the U.S. Department of Education has on file. 

If Your Income is Already on File

According to the Federal Student Aid (FSA), around 8 million borrowers will receive their loan forgiveness automatically because their income is already on file. 

For example, the U.S. Department of Education already has the income data of federal borrowers with income-driven repayment plans. Therefore, these individuals are most likely to receive their loan forgiveness automatically. 

If Your Income is Not On File

For federal borrowers whose income is not on file, the Department of Education will release an application in early October to be filled out and submitted. To be notified when the application is open, subscribe to the Department’s email list. 

The deadline for this application is December 31st, 2022, however, you should fill it out as soon as you can after it’s released. In fact, experts advise borrowers to fill out and submit the application before November 15th to receive their student loan forgiveness before the COVID-19 payment pause ends on December 31st, 2022. 

FAQ About Student Loan Forgiveness

Will Loans Be Forgiven Before the Payment Pause is Over?

Borrowers are strongly encouraged to submit their student loan forgiveness application before November 15th, 2022 to have their debt canceled before the payment pause ends on December 31st, 2022. If your application is not submitted prior to November 15th, there is a higher chance that your student loan amount will not be forgiven before the end of the forbearance. 

Will the Student Loan Forbearance Be Extended Again?

According to the Biden Administration, the student loan forbearance will not be extended again. This is the final extension, and the payment pause will end on December 31st, 2022. 

Will More Student Debt Be Forgiven?

Currently, there is no evidence that President Biden will forgive more student loan debt than what is already outlined. 

Closing Thoughts From the Nest

President Biden’s student loan forgiveness is a win for federal borrowers. As the prospect of having your student loan debt wiped out approaches, it is crucial to stay on top of the news and follow every update that the federal government releases.

Under President Biden’s latest student loan relief actions, millions of borrowers can receive a refund of any student loan payments made since the forbearance.

In fact, according to Federal Student Aid (FSA), “[borrowers] can get a refund for any payment (including auto-debit payments) you make during the payment pause (beginning March 13, 2020).”

Now, many federal student loan borrowers are requesting refunds for their payments to maximize their student loan forgiveness eligibility. If you are a borrower who is unsure of whether you qualify for a student loan refund, or if requesting a refund is the right decision for you, keep reading. 

Who Can Get a Refund? 

Whether you qualify for a refund of student loan payments depends on the loan type you have. Here is a list of which loans do qualify, and which loans don’t.

Should You Apply for a Refund?

Whether you should apply for a loan refund depends on your financial situation. 

Recently, President Biden released his three-part student loan forgiveness plan that will cancel up to $20k for federal student loan borrowers who make less than $125,000 annually. If you have received a Pell Grant in the past, you are eligible for $20k in debt cancellation. Individuals who have not received a Pell Grant are eligible for $10k in debt cancellation. 

Apply for a Refund If…

You are eligible for Biden’s loan forgiveness and you have paid down your debt to an amount less than how much you qualify for in loan forgiveness.

For example, let’s say you are eligible for $10,000 in student loan cancellation. You paid down your balance to $9,000 during the COVID-19 payment suspension. If you request a refund, you will receive $1,000, bringing your balance back up to $10,000. Then, your balance of $10,000 will be wiped out with loan forgiveness. 

This way, you are maximizing your forgiveness eligibility while pocketing some cash. 

Don’t Apply for a Refund If…

You are not eligible for Biden’s loan forgiveness. 

If you do not qualify for loan forgiveness, you will not benefit from requesting a refund. 

You have not paid your debt down to be below the amount of loan forgiveness you qualify for.

If you do qualify for loan forgiveness, but have not paid your loan balance down to be lower than the amount you can have forgiven, you will also not benefit from requesting a refund.

For example, if your initial balance was $30,000 and you paid $5,000 during the forbearance, you will have a remaining balance of $25,000. Regardless of the amount of forgiveness you qualify for, neither will bring your balance to 0. In this case, requesting a refund of the $5,000 you already paid would not make sense.

Note: The Department of Education has yet to release more information about Biden’s student loan forgiveness. Until then, it is uncertain whether a student loan refund could impact your eligibility for student loan forgiveness. In fact, some experts have advised waiting until more information is released, as a refund may impact how much you are able to receive in forgiveness.

It may be wise to wait until additional information is provided before requesting a refund on your student loan payments, especially if you want to benefit from student loan forgiveness. 

How to Apply for A Refund

To apply for a refund, you will need the following information:

1. The contact information for your loan servicer
2. Your Social Security Number
3. A list with the number of payments you’ve made since forbearance, the date the payment was processed, and the amount you paid
4. Your billing address
5. Bank information

First, you’ll want to call your loan servicer. Once you’re in contact with a representative, ask for a loan refund for payments made during the forbearance. 

Specify which loans you want a refund for, and be ready to share any information on your loan payments if necessary. Your loan provider may ask you for your billing address, social security number, and banking information. 

While you are on the line, be sure to ask your loan servicer about the estimated timeline for when you will receive a refund on your loans. After providing them with the requested information, you should be good to go. Your loan servicer will send a confirmation email that validates your loan refund request. 

How Long Will It Take for the Refund to be Issued?

The loan refund can take anywhere from six to twelve weeks to be processed. Check your loan statements proactively to track the status of your loan refund. 

If 12 weeks have passed since you have requested your refund and you have not heard back, contact your loan servicer to follow up. 

What to Use the Refund For

Once you’re confident that requesting a refund for student loan payments is a financially beneficial decision for you, consider using the extra cash to better your financial situation in another way. 

Pay off High-Interest Debt

Use the extra cash to pay off any high-interest debt you have, such as auto loans, private student loans, your mortgage, or any other form of debt. 

To prevent interest from accruing rapidly, put your extra cash towards the principal of the loan (the principal of the loan is the initial amount borrowed, not including the interest that accrued) – especially if your interest rate is in the double digits.

Contribute to Emergency Fund

Over 50% of Americans can’t cover a $1,000 emergency charge with the amount in their savings account. 

To be financially prepared in the face of an emergency, add the refunded money into your savings account. If you don’t have a savings account or are looking for a new place to store your money, consider opening a high-yield savings account (HYSA). A high-yield saving account allows you to earn interest on the amount of money that you have in your account without doing anything.

Pay Off Your Overdue Bills

If you have any payments or bills you need to catch up on, now is the time. Use the extra money to relieve your financial debts and cancel any overdue fees. 

Closing Thoughts From the Nest

Requesting a refund of student loan payments made since the COVID-19 forbearance is a win for many borrowers, especially in combination with student loan forgiveness. 

However, it’s important to note that President Biden’s student loan forgiveness plan is being updated regularly. Experts do not have all the answers yet, and staying up-to-date on any changes that may affect you as a borrower is crucial.  

You can subscribe to the Department of Education’s mailing list to receive email updates on any new changes on student loan forgiveness.

On August 24, President Joe Biden announced broad student loan relief actions, forgiving up to $20,000 in federal student loan debt for eligible borrowers. While the much-needed relief has been celebrated by many, it’s left others —especially married couples— somewhat in the dark. Here’s what married couples need to know about student loan forgiveness:

To qualify, there are a variety of eligibility criteria you’ll need to meet, including earning below a specific income limit. However, if you are married and filed taxes jointly, you’ll be subject to different income criteria, which could leave you ineligible for forgiveness. Learn more about the student loan eligibility requirements for married couples:

Eligibility Criteria for Biden’s Student Loan Forgiveness Plan

To qualify for Biden’s student loan relief, you’ll need to meet the following requirements:

(1) You must have federal student loans disbursed on or before June 30, 2022.

Most federal student loans qualify, such as Direct Loans and Parent PLUS Loans. It is currently unclear whether Federal Family Education Loans (FFEL) will qualify.

>> MORE: Parent PLUS loan forgiveness

(2) You must make less than $125,000 per year, if single. Couples who file taxes jointly must earn less than $250,000 per year, combined.

Heads of households who earn less than $250,000 per year are also eligible.

If you meet the above criteria, but did not receive a Pell Grant while in school, you are eligible for $10,000 in student loan forgiveness. If you did receive a Pell Grant, you are eligible for $20,000 in student loan forgiveness.

>> MORE: Student loan eligibility requirements: Private vs Federal loans

What Biden’s Student Loan Forgiveness Means for Married Couples

If you and your spouse filed taxes jointly, you’ll need to have made less than $250,000 combined to qualify for student loan forgiveness. If your combined income was above that threshold, neither of you will be eligible.

Your 2020 and 2021 tax returns will be used as proof of income. If you filed jointly in either of those years, and your combined income was above the threshold, you may not be eligible.

However, if you are married but did not file jointly in 2020 or 2021, your eligibility for relief will be evaluated based on your income alone.

Will Both Spouses Be Eligible?

If you filed jointly, both spouses will be eligible in cases where your combined income is less than $250,000 per year. If you are married, but did not file jointly, both spouses will be eligible in cases where your individual income is less than $125,000 per year.

Common Scenarios

Here are a few scenarios to illustrate how this will work:

Scenario 1:

Sarah and John are married and filed a joint tax return in 2021. Together, they make a combined income of $300,000. John earns $200,000 per year, and Sarah earns $100,000 per year. Sarah has federal student loan debt, while John does not.

While Sarah makes below the $125,000 individual income threshold, their combined income makes Sarah ineligible for student loan forgiveness.

Scenario 2:

Kate and Jane are married and filed taxes jointly in 2021. Together, they make a combined income of $280,000. Kate brings in $110,000 per year, while Jane brings in $170,000 per year. Both Kate and Jane have federal student loan debt.

While Kate is below the individual income threshold, because they filed jointly, Kate is ineligible for student loan forgiveness.

Scenario 3:

Luke and Miranda are married and filed taxes jointly in 2020. Together, they earn $80,000 total, with Luke bringing in $35,000 and Miranda bringing in $45,000. Both Luke and Miranda have federal student loan debt.

Because their combined income is below the income threshold for married couples, both Luke and Miranda are eligible for student loan forgiveness.

Scenario 4:

Bryce and Joe are married but did not file a joint return in 2020 or 2021. Bryce earns $110,000 per year, and Joe earns $127,000 per year. Both have federal student loan debt, however, only Bryce is eligible for student loan forgiveness as Joe’s income is above the individual income threshold.

Can I File Separately to Be Eligible for Forgiveness?

Unfortunately, you cannot retroactively file separately after filing jointly. While you can amend prior tax returns to change from married filing separate to married filing joint, you cannot do the opposite.

So, in this case, if you previously filed taxes jointly, you cannot change it. This may include instances of divorce, where you previously filed jointly in 2020 or 2021 with a now ex-spouse. However, it’s best to contact Federal Student Aid representatives directly for more information, as divorce is a special circumstance.

How to Prepare for Biden’s Student Loan Forgiveness

While the application for student loan relief has not yet been released, you can begin the process by collecting the documentation you’ll need to apply, such as:

1. Proof of income, such as previous tax returns;
2. Accurate address information;
3. And, loan records.

You may also want to take a screenshot of your current federal loan balance prior to forgiveness. Then, after the forgiveness is said to have taken place, you can verify the amount to ensure the proper portion was forgiven.

What to Do If You Don’t Qualify for Biden’s Student Loan Relief

While President Biden’s plan, particularly the income level requirements, are intended to help families most in need of relief, it can be frustrating if you don’t qualify.

If the income requirements for married couples leaves you ineligible for student loan forgiveness, there are a few other relief options to consider:

Other Forgiveness Programs

While you may not qualify for this forgiveness program, there are others such as Public Service Loan Forgiveness, Teacher Loan Forgiveness, and Income-Driven Repayment Loan Forgiveness that you may qualify for.

Federal Direct Consolidation

If managing multiple loan payments is challenging, consolidating may help you. Direct Consolidation loans allow you to combine multiple federal loans into one, leading to one interest rate and one payment, as opposed to several. While only available for federal student loans, consolidation can simplify your payments.

Private Student Loan Refinancing

If your interest rate is of concern, refinancing with a private lender may be your best option. Be sure to weigh the pros and cons of refinancing federal student loans before doing so. If you’re interested, compare refinance rates across multiple lenders today.

>> MORE: Best student loan refinance rates

Final Thoughts from the Nest

Due to the unprecedented nature of Biden’s sweeping student loan relief, many details are still unclear, particularly as it pertains to married couples. However, in leading up to the application release, more information is sure to arrive.

To receive updates on any changes to the program, sign up for the U.S. Department of Education’s email updates.

President Biden’s recent student loan forgiveness actions are a win for many borrowers. However, as the relief gets closer, many are left wondering whether the discharged debt will be considered taxable income.

This isn’t a new concept. In fact, discharged indebtedness has been classified as taxable income for years. However, the unprecedented nature of broad loan forgiveness may warrant some exceptions to the rules.

If you’re left asking, “Is student loan forgiveness taxable?,” here’s what we know so far.

Will The Student Loan Forgiveness Be Taxed?

Section 9675 of the American Rescue Plan states that student loan forgiveness granted between 2021 and 2025 will not be considered taxable income at the federal level. However, it may be subject to state income tax depending on which state you live in.

States that mirror federal income tax guidelines will likely exclude student debt forgiveness from state income tax. However, other states may maintain their current tax code, making debt forgiveness taxable.

Which States Will Tax the Student Loan Forgiveness?

In the last few weeks, several states have instituted a temporary exemption in their tax rules for discharged debt. Given that other states may follow suit, it isn’t entirely clear which states will ultimately tax student loan forgiveness. However, based on current tax rules, there are predictions:

Arkansas. Under its current tax code, this southern state doesn’t allow tax exemptions for discharged student loan debt. Thus, if you live in Arkansas, your forgiven student loan debt will be subject to state income tax.

Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin are also expected to tax student loan forgiveness and have not said otherwise (as of yet).

Some states, such as California, previously had rules in place to classify discharged debt as taxable income but are implementing changes. According to a recent Twitter post from Anthony Rendon, California Assembly Speaker for District 63, California is awaiting finalized details from the federal government to better understand if “relief is tax exempt under current California law.” If not, the state will be instituting a temporary change to state law to make it exempt from state income tax.

Massachusetts has followed suit, announcing that student loan forgiveness will not be taxable in the bay state. Pennsylvania and New York have made similar announcements.

How Much Will I Be Taxed?

The exact amount you may be taxed depends on a variety of factors, such as your income and tax bracket, state income tax level, and any exemptions you’re eligible for. Based on some estimates, however, your tax liability could range from a couple hundred to a thousand dollars.

When Will I Be Taxed?

Even if you planned to pay your federal loan debt off over a certain period of time, the debt cancellation will be taxed the year it was forgiven. For example, if you have $10,000 in federal student loan debt and planned to pay it off over a 10-year repayment period, it will still be taxed in 2022 once forgiven. 

Given the unexpected nature of this tax, it’s crucial to prepare for what you may owe come tax season.

Is Student Loan Forgiveness Usually Taxed?

Taxing student loan forgiveness isn’t entirely new. In fact, some established debt forgiveness programs, such as Income-Driven Repayment (IDR) Forgiveness, are taxable at the federal level. This is because debt cancellation is considered income, and income is taxable. 

Whether it’s taxed at the state level, however, depends on the state itself. For example, some states believe student loan forgiveness should be tax-exempt in certain situations. In fact, many states do not typically tax discharged debt for public servants who received forgiveness through Public Service Loan Forgiveness. However, they may tax discharged student debt in other instances, such as IDR Forgiveness.

Is There a Way to Avoid Being Taxed on Student Loan Forgiveness?

Not quite. When filing your 2022 taxes, you’ll need to report your gross income, which includes the amount of debt you had canceled within the tax year. Then, you will be subject to taxes on that total amount.

Final Thoughts from the Nest

While most states won’t be taxing student loan forgiveness, others are firm in their stance to do so. Others are still in limbo, crafting their official perspective on the issue.

If you are concerned about your potential tax liability due to student loan forgiveness, it’s best to contact a professional tax preparer. However, it’s important to recognize that this information is still new and changing frequently as states announce exemptions, so even the professionals might not have all the answers.

This article was last updated 9/13/2022. Information regarding the tax liability of student loan forgiveness recipients is changing quickly. This information is intended for educational purposes only and should not be taken as tax advice. Please consult your tax advisor for recommendations based on your unique circumstances.

As students, exploring student loan options can be tricky. Understanding and knowing all the types of loans, both federal and private, can be overwhelming. That’s before knowing the intricacies of each loan type, eligibility requirement, and even loan structure. 

Let’s look at one of the most popular types of student loan, the Federal Stafford Loan. 

What is a Federal Stafford Loan?

Stafford Loans are a subset of federal student loans that can either be subsidized or unsubsidized. Rather than borrowing from a private for-profit institution, students borrow directly from the U.S. Department of Education. 

These loans are also more commonly referred to as Direct Loans as they come directly from the government and are a common way to help pay for college. Approximately 30% of undergraduate students borrow from the federal government, however, the total amount of debt borrowed in federal student loans represents over 90% of the total U.S. student debt. Of that 90%, over 50% of student loan debt is in Stafford Loans. This further breaks down as 18.6% in subsidized Stafford loans and 34.2% in unsubsidized Stafford Loans. 

Before moving further, let’s quickly discuss the difference between subsidized and unsubsidized Stafford Loans. 

Subsidized vs. Unsubsidized

Subsidized Stafford Loans are offered to undergraduate students that demonstrate financial need. For this type of loan, the federal government is responsible for paying any interest while you are in school or during a period in which you aren’t required to make payments.

On the other hand, unsubsidized Stafford Loans are offered to both undergraduate and graduate students and don’t have any requirement to demonstrate financial need. With this type of loan, students are responsible for paying any and all interest while it accrues.

While this is a quick summary, a more detailed article explaining the difference between them can be found here.

Who is Eligible for a Federal Stafford Loan?

As Stafford Loans are administered by the U.S. Department of Education, they are among the most accessible to obtain. This is because Stafford loans don’t have an eligibility requirement that assesses your creditworthiness or ability to repay them.

With that being said, it is very easy to become unaware of the amount of money you borrow, and ultimately end up repaying with significantly more interest. Be sure to borrow only what you need to cover your tuition costs and not any other discretionary spending.

Although Federal Stafford Loans don’t have the same eligibility requirements like those that come from a private lender, there are certain criteria that a student must meet to qualify for the Direct Loan. These are:

• Citizenship Status: Be a U.S. citizen or an eligible non-citizen
• Enrollment Status: Be enrolled at least half-time in an eligible degree or certificate program
• Have a valid Social Security Number, with certain exceptions
• Show you are qualified to obtain a college or career school education. This can be shown through:
  • Having a high school diploma or equivalent
  • Enrolling in an eligible career pathway program
• Not in default on any existing federal student loans (You must file the Free Application for Federal Student Aid (FAFSA®) form)
• Meet general eligibility requirements for federal student aid

What Are the Interest Rates on Federal Stafford Loans?

The current federal Stafford Loan interest rate is based on the borrower type and loan type. Currently, for undergraduate students that borrow through either a subsidized or unsubsidized Stafford Loan, they will receive a 4.99% interest rate. As graduate and professional students don’t have access to subsidized loans, the unsubsidized loans are accompanied by a 6.54% interest rate. 

Note that all federal loans have a fixed interest rate. These figures are representative of any loans that are first disbursed on or after July 1, 2022, and before July 1, 2023. 

How Much Can I Borrow with Federal Stafford Loans?

Although Stafford Loans are provided by the U.S. Department of Education, the amount of money you are given through this program is determined by your school. They also decide if you are eligible for a subsidized loan or unsubsidized loan. 

In addition, Federal Stafford Loans have a “ceiling” on the amount of loan that can be provided. This amount varies based on what year of schooling you are in and whether you are a dependent or independent student. The following chart shows the exact amounts based on your specific situation.

Can Federal Stafford Loans be Forgiven?

Federal Stafford Loans can be forgiven through certain forgiveness programs. These programs are often dependent on your profession or loan type. Generally, professions that serve the wider community are eligible for student loan forgiveness programs. Examples of these professions include teachers, nurses, and any members of the military.  

What’s Next

Now, with the understanding of what a Federal Stafford Loan is, you can make a comprehensive, educated decision about the student loan you apply for. While applying and searching for student loans may still appear to be complex, using Sparrow will make your search much easier. Sparrow consolidates personalized loan offers from several lenders and displays all the required information that you need to make an informed decision.

According to the U.S. Department of Education, an estimated 42.9 million Americans have federal student loans. 

Federal student loans are a favorable option when it comes to paying for the cost of education. This is because federal student loans offer flexible repayment terms, borrower protection measures, and loan forgiveness options. Most federal student loans also do not require credit checks or cosigners to be qualified for a loan. 

If you’re a college student looking to take out federal student loans to pay for the cost of education, keep reading. In this article, we’ll cover everything that you need to know about federal student loans.

Jump Ahead > What is a Federal Student Loan? • Types of Federal Student Loans • Federal vs. Private Student Loans

What is a Federal Student Loan?

A federal student loan is a student loan that is offered by the U.S. Department of Education. Federal student loans can be taken out by both students who can demonstrate financial need and students who cannot. 

To receive a federal student loan, you need to submit your Free Application for Federal Student Aid (FAFSA). The FAFSA opens every year on October 1st and is due on June 30th of the following year. Once you submit your FAFSA, the schools that you applied to will send you a financial aid package that details which federal student loans you qualify for and how much you can borrow.

Three Types of Federal Student Loans

The U.S. Department of Education offers three types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans. The federal government also offers a refinancing option called Direct Consolidation Loans.

Direct Consolidation Loans

The Direct Loan Consolidation program is offered by the federal government and allows you to combine all of your federal loans into a single loan. The new loan will have a fixed interest rate that is based on the average of the interest rates of your current loans. 

Pros of Student Loan Consolidation

• Longest loan repayment term offered: You can receive a loan repayment term that is up to 30 years long, which is longer than most private loans can give you. This means that your monthly payments will be smaller and you won’t have to repay your loan hastily.
• One single loan payment: If you consolidate all of your federal loans, you only have to make one payment per month as opposed to making each payment individually. This makes payments easier to make. 
• No credit check: You do not need to have a strong credit history to consolidate your federal student loans.
• Some federal benefits: Some consolidated student loans can qualify for Public Service Loan Forgiveness or income-driven repayment. 

Cons of Student Loan Consolidation

• You cannot use a Direct Consolidation Loan to combine private loans. Only loans taken out from the U.S. Department of Education can be consolidated through a Direct Consolidation Loan. Note that private loans can be consolidated through refinancing with your individual private lender. 
• May have a higher interest rate: The interest rate on a Direct Consolidation Loan will be the average of the interest rates you currently have. As a result, your new interest rate may be higher than some of the individual interest rates you had previously.
• May lose certain federal benefits: Loan consolidation may take away from federal benefits, such as discounts on interest rates, student loan cancellation options, or credit for any payments before consolidation. 

What’s the Difference Between Loan Consolidation and Loan Refinancing?

You can only consolidate federal student loans through the Direct Consolidation Loan program that is offered by the federal government. Doing so allows you to combine multiple federal student loans into one, and the new loan’s interest rate is the average of your previous loans’ interest rates. 

However, it is possible to consolidate your federal student loans and private student loans via private loan refinancing. Loan refinancing is when you take out a new private loan to pay off the total debt of all of your loans combined. You receive completely new loan terms, such as a new interest rate and repayment plan. However, these loan terms are determined on your credit score, income, and credit history. 

Direct Subsidized Loans

Direct Subsidized Loans are for undergraduate students who can demonstrate financial need. In order to prove your financial need to the U.S. Department of Education, you will need to fill out your Free Application for Federal Student Aid (FAFSA). 

You do not need a cosigner or a credit check to receive a Direct Subsidized Loan.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are for undergraduate, graduate, and professional students. You do not need to demonstrate financial need to apply to receive a Direct Unsubsidized Loan; this loan is for students with all financial standings. 

Borrowing Limits for Direct Subsidized and Unsubsidized Loans for Dependent and Independent Students

While there are limits to how much you can borrow in subsidized and unsubsidized federal loans, there are also combined limits based on your dependency status and year in school.

Direct PLUS Loans

Direct PLUS Loans are federal student loans that graduate students, professional students, and parents can take out. 

These loans do not have a limit, meaning that you can borrow up to the net cost of your education, or the cost of education minus any financial aid. 

To qualify for a Direct PLUS Loan, you must not have adverse credit history and will have to receive a credit check. You may need “an endorser,” or a cosigner, with a strong credit history to qualify for the loan if you have a weak credit score.

Direct PLUS Loans have fixed interest rates (meaning that they do not change) that can be higher than the interest rates offered by private student loans. Furthermore, Direct PLUS Loans may have higher origination fees than private student loans, sometimes making private student loans a more feasible option for parents, graduate students, and professional students. 

Federal Student Loans vs. Private Student Loans

Federal student loans are offered by the U.S. Department of Education, while private student loans are offered by individual companies.

When you’re debating between private and federal student loans, experts recommend taking advantage of federal student loans first because they generally offer lower interest rates, more flexible repayment terms, and more borrower protection measures. 

Here are the key differences between federal student loans and private student loans. 

Closing Thoughts From the Nest

If federal student loans don’t seem like the best option for you, and you want to see which private loans you might qualify for, use Sparrow’s free online tool. If you submit the Sparrow application, you can compare private student loans and interest rates from more than 15+ different lenders to ensure that you’re getting the best rate on the market. 

While student loan forgiveness scams have been deceiving borrowers for as long as we can remember, Biden’s pending decision regarding student loan debt relief has created a new opportunity for scammers to take advantage of more borrowers. 

As borrowers, we want to keep you and your families safe from student loan forgiveness scams. When looking online to find out which federal student loan forgiveness programs you qualify for, be sure to trust information that is offered by the U.S. Department of Education or reputable sites. 

While real student loan forgiveness programs do exist, such as Public Service Loan Forgiveness and Borrower Defense to Repayment, there are a variety of common tactics used to convince you of other student loan forgiveness programs that ultimately don’t exist. 

To avoid falling for student loan forgiveness scams, here are the red flags to look for and what to do if you’re a victim of one. 

Common Student Loan Forgiveness Scams

If you receive a call, email, or text message with one of the following messages, you are dealing with a student loan forgiveness scam:

1. “Act immediately to qualify for student loan forgiveness before the program is discontinued.” Note the aggressive language of the student loan forgiveness scam. Urgency is a major red flag and a straight giveaway of being a scam.
2. “Your student loans may qualify for complete discharge. Enrollments are first come, first served.” To avoid falling for these student loan forgiveness scams, conduct your own research on the federal Department of Education’s website to see which student loan forgiveness programs you qualify for. Most student loan forgiveness programs require a certain number of loan payments and employment in specified fields for your debt to be wiped out. There is no broad federal student loan forgiveness program, meaning that not all borrowers’ student loan debt will be cleared.
3. “Student alerts: Your student loan is flagged for forgiveness pending verification. Call now!” An urgent message is a dead giveaway that the solicitor is trying to conduct a student loan forgiveness scam.

The federal government will never ask you for an upfront or monthly fee to cancel your student loans in whole. It just doesn’t work like that. 

You will also never be asked to provide personal information, like your FSA ID and FSA password, over the phone.

If the person reaching out to you says anything akin to what was mentioned above, end contact immediately.

Red Flags to Look Out For

Calling from Reputable Locations

Scammers may call you from Washington, D.C. to create a false impression that the call is coming from a federal agency. 

One borrower reported that they received a call from Washington, D.C. from a scammer who made an exciting offer: “It looks like your student loan has been flagged eligible for the recent stimulus forgiveness and relief legislation, however, your application needs to be completed.”

The caller had even provided a name and agent number and emphasized the urgency of the loan discharge, saying it would be served on a first-come, first-served basis (red flag!).

Betsy Mayotte, president of the Institute of Student Loan Advisors, notes the location from where the call “came” from: “What’s interesting is that this number came in as a D.C. number, which I’m sure just adds credibility to their scam.”

If you receive a student loan forgiveness call from D.C. that doesn’t seem right to you, hang up.

Asking for an Upfront Fee

This is the number one giveaway of a student loan forgiveness scam. The federal government cannot and will not ask you to pay an upfront fee to cancel your student loan debt.

Saying You Need to Make a Choice Quickly

Scammers employ the scare tactic of urgency to pressure borrowers into giving up their personal information or paying nonexistent fees quicker. Time-sensitive phrases like, “First-come, first-served,” “Act immediately” or “[We need this] now” are major red flags to look out for. If the federal government is contacting you, they will not urge you to do anything.

Asking for Access to Your Account

If a scammer asks for access to your FAFSA account or any other personal information, do not give it to them. This is the easiest way to have your identity stolen or be robbed of your money.

By accessing your sensitive information, scammers put themselves in between you and your student loan servicer, making it more difficult for you to decipher the scam before it’s too late.

Promising Immediate Loan Forgiveness

Hearing that all your federal loan debt will be discharged in a short amount of time sounds too good to be true. This is another tactic that scammers employ to encourage borrowers to pay any upfront fee or give up information about themselves. 

If anything sounds too good to be true, it’s likely a scam. Your loan provider will be able to tell you whether or not you qualify for loan forgiveness, so reach out to them directly to obtain the correct information and not fall prey to scams.

Asking for your FSA ID Password

Your FSA ID password is on the same legal status as a legally binding signature. If you share your FSA ID or a Power of Attorney, you are giving the petitioner the power to take any actions they choose and act on your behalf. Never give your FSA ID password to anyone except yourself and family members that you trust. 

What to Do If You Were a Victim of a Student Loan Forgiveness Scam

If you were a victim of a student loan forgiveness scam, take the following steps as soon as possible. 

Contact Your Federal Loan Servicer

If you were a victim of a student loan forgiveness scam, contact your federal loan servicer as soon as possible. Make sure that no unauthorized actions were taken on your loans, and request to annul any authorization agreement that’s on file. 

Source: studentaid.gov

Contact Your Bank or Credit Card Company

If you provided any banking or credit card information to the student loan forgiveness scammer, contact your bank or credit card company immediately. You’ll want to dispute any payments that have been made to the company that is scamming you and cancel any payments that are scheduled to process.

Submit a Complaint to StudentAid.gov

Report the scam to the U.S. Department of Education so you can prevent any more scams from happening. You can submit a complaint at studentaid.gov and manage your cases through the portal they provide.

File a Complaint with the Federal Trade Commission

If you believe that your identity has been stolen by a student loan forgiveness scam, report this immediately to the Federal Trade Commission at identitytheft.gov. Identity theft is a dangerous, scary thing, so you’ll want to remedy the issue before matters worsen.

File a Complaint with the Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau is in charge of handling all complaints about questionable financial products and services. You can submit a complaint at consumerfinance.gov.

Closing Thoughts From the Nest

At Sparrow, we want to help protect you from becoming a victim of student loan forgiveness scams. 

With scammers taking advantage of people every day, it’s crucial to stay informed and take the necessary steps to prevent any student loan forgiveness scams from happening to you or your family members.

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.

A key factor to deciding whether to get a federal student loan or not is looking at the interest rate. Your federal student loan interest rate will add to how much you pay over the life of the loan. But what is student loan interest? And how is your interest rate determined? 

Here’s everything you need to know about your federal student loan interest rate. 

What is Student Loan Interest? 

Student loan interest is the cost of borrowing the loan and the way lenders profit off of lending you money. Interest rates are calculated as a percentage of your loan. So, if you have a 5% interest rate on a $100 loan, your interest is $5. Because interest accumulates on your loan, it raises the overall price of the loan. Additionally, the longer your repayment period, the more interest builds up, and the more you’ll pay. 

How Are Federal Student Loan Interest Rates Determined? 

Unlike private student loan interest rates, which are set by factors like your credit score, federal student loan interest rates are set by federal law. To calculate the interest rate, they’ll take the 10-year Treasury note yield and add a fixed increase. A 10-year Treasury note is a loan you lend out to the government. The yield is the amount of interest the government owes you expressed as a percentage. The 10-year Treasury Note is often used as a benchmark for other loan interest rates. 

Each type of federal loan will have its own interest rates. The interest rates for the year are decided in the spring and come into effect July 1st of that year. The rates will remain the same until June 30th of the following year.

(If this sounds confusing, don’t worry. All you need to know here is that federal student loan interest rates are set by federal law each year.)

All federal student loan interest rates are fixed and include rate caps. A rate cap is the maximum interest rate that they can charge you. 

The following are the formulas for federal student loan interest rate: 

1. Direct Unsubsidized Loans for Undergraduates – 10-year Treasury Note Yield + 2.05%, capped at 8.25% 
2. Direct Unsubsidized Loans for Graduate Students – 10-year Treasury Note Yield + 3.60%, capped at 9.50% 
3. Direct PLUS Loans – 10-year Treasury Note Yield + 4.60%, capped at 10.50% 

Current Federal Student Loan Interest Rates 

Due to the COVID-19 pandemic , the U.S. Department of Education has implemented a COVID-19 emergency relief program for federal student loans. The program offers 0% interest rate on your federal student loans until December 31, 2022. 

The current federal student loan interest rates for the 2022-2023 school year are: 

1. Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduates – 4.99% 
2. Direct Unsubsidized Loans for Graduate or Professional Students – 6.54% 
3. Direct PLUS Loans – 7.54%

These federal interest rates only apply for loans taken out on or after July 1, 2022 and before July 1, 2023. If you took out a loan before or after this time frame, you will have a different interest rate. 

Current Federal Student Loan Fees

In addition to paying interest on your federal student loan(s), you will also encounter fees. You won’t normally be charged extra for those fees. Instead, the fees will be taken out from the amount disbursed for federal student loan(s). Because of the fees, you will receive less money than you officially borrow. However, you are responsible for paying back the whole loan, not just the amount you received. 

The current fees are applicable to federal loans disbursed on or after October 1, 2020 and before October 1, 2023. For Direct Subsidized and Unsubsidized Loans, the fee is 1.057%. For Direct PLUS Loans, the fee is 4.228%. 

So, for example, if you borrowed $1,000 in a Direct Subsidized Loan, $10.57 would be charged in fees, and the remaining balance of $989.43 would be disbursed to your school. However, you would still be responsible for paying back the full $1,000.

Final Thoughts from the Nest 

Knowing interest rates before you take out a loan is important to figuring out the overall cost. The great thing about federal student loan interest rates is they’re fixed and capped, so you won’t be charged too much to borrow. 

While federal student loans are great, private student loans can be a big help, too. Some private student loan rates may be lower than federal loans. To get a jump start on your search for private loans, use the Sparrow application. Filling out this one application will match you with what you are qualified for from 15+ private lenders.