Chapter 10 – Student Loans

College can be a rewarding experience, but the high cost means that student loans are needed by most people.

Federal education loans are made available through the William D. Ford Federal Direct Loan program. Fund from this program are provided through the US government department of education. As of July 1, 2010, all federal education loans are distributed through this program. All schools that are eligible for the Free Application for Federal Student Aid (more commonly known as FAFSA) are part of the Direct program.

Characteristics

Federal student loans are loans issued by the government directly to the student. They have several different characteristics that make them ideal for paying for college. The different types of loans have different combination of these characteristics.

1. Subsidized loans do not accrue interest while the student is in school. As long as you are in school, the government will pay the interest for your subsidized loans. Subsidized loans are common, but not everyone will qualify for one. They are given out based upon the student’s financial need. The more financial need a student has, the more likely they are to be offered a subsidized loan.

2. Unsubsidized loans DO accrue interest while the student is in school. Interest is charged to unsubsidized students loans regardless of whether or not the borrower is still in school. Unsubsidized loans are offered to students regardless of their level of financial need. These are different from subsidized loans because the interest accrues from the day the loan is issued. The balance of an unsubsidized loan will increase every month if the student does not make payments school. Unsubsidized loans also usually have higher interest rates than subsidized loans.

3. A deferred loan does not require payment while the students is still in school. This is helpful because few students have the money to make a loan payment while they are dedicating so much of their time to study instead of paid work.

4. The grace period extends the deferral of payments after the student graduates. Most federal student loans have grace periods of at least 6 months. This means that students do not have to make payments for 6 months after they graduate. This allows people time to find a job and get settled before they begin making payments on their student loans.

Types of Student Loans

Private student loans are loans from private banks to students. Many of the rules discussed here about federal student loans do not apply to private loans. These can be useful loans if federal funding is not sufficient to cover the costs of the student’s costs. They are relatively easy to obtain and far cheaper than using credit cards to get through school. Lenders have a lot of freedom to offer a variety of terms on these loans. Read the fine print carefully if you are considering a private student loan.

There are three types of federal student loans: Stafford loans, PLUS loans, and Perkins loans.

1. In order to be eligible for a Stafford loan, the student must be a US citizen or an eligible non-citizen with a valid social security number. The student must also have completed high school or their GED, be working towards a degree or certificate in an approved program, maintain good grades, and must not have a drug offense. Males age 18-25 must also be registered with the selective service.

The amount of money you are eligible to borrow for a Stafford loan depends on your student standing and dependency. Dependency describes whether or not you are capable of taking care of yourself.

If you answer ‘yes’ to any of the following questions, then the government considers you to be an Independent Student.

• Are you 24 years of age or older?

• Are you married?

• Are you considered a Ward of the State?

• Do you have any children?

• Are you a veteran of the U.S. Armed Forces?

• Are you enrolled in a Masters or Doctorate Degree Program?

Stafford loans can be either subsidized OR unsubsidized. All Stafford loans are deferred and offer a grade period of 6 months after graduation. Additionally, all Stafford loans become deferred again if specific qualifying events such as returning to school, economic hardship, or disability occur. All Stafford loans now carry a 1% origination fee.

2. Perkins loans are loans provided to students with exceptional financial need. These loans are subsidized and deferred. They have a grace period of 9 months. This is longer than the grace period on Stafford loans. Perkins loans have no origination fees and have lower interest rates than Stafford loans. Perkins loans also have higher borrowing limits than Stafford loans.

3. PLUS loans are federal education loans that can be issued to either parents of students, or graduate students. These loans are more expensive than Stafford of Perkins loans. They are unsubsidized and have higher interest rates than Stafford or Perkins loans. They also have higher origination fees of 4%. Repayment on these loans is not typically deferred. Repayment begins 60 days after the loan is issued. It is possible to get a PLUS loan deferred, but the borrower must file a special application.

Parent loans area type of PLUS loan loan given to the parents of students. 40% of all student loan debt in the U.S. is held by people over the age of 40!

Repayment

There are several ways in which student loans may be repaid.

1. The standard approach is to make equally monthly payments over 10 years. This is the default repayment plan. You will automatically get this repayment plan if you do not select another repayment plan.

2. The graduated repayment approach begins with small payments, but the payment gradually increases over time. The idea is that your payment rises as you gain experience in your career and make more money.

3. The income-based repayment method charges a payment based upon a percentage of your gross monthly income. The idea here is that your payment will always be affordable because it changes with y our income. The danger is that repayment can take an unknown amount of time. this makes it impossible to know how much the loan might ultimately cost.

4. The extended repayment plan allows the borrower to increase the term of the loan to up to 25 years. This gives a smaller monthly payment but will increase the total cost of the loan.

A consolidation loan is a loan that allows borrowers to combine multiple federal student loans into a single loan. This provides only on single monthly payment, and gives the option to extend repayment up to 30 years. Before you consolidate your student loans, be sure to carefully consider the cost of the loan before you apply. Once you consolidate, the decision is not reversible, so make sure the cost of the loan does not exceed the benefits of consolidating.

Major Federal Student Loan Changes Under the One Big Beautiful Bill Act (OBBBA)

Starting July 1, 2026, sweeping changes to federal student loans will take effect under a new law known as the One Big Beautiful Bill Act. This legislation introduces new borrowing limits, restructures repayment options, eliminates certain benefits, and increases accountability for educational institutions. Here's a breakdown of what students taking out loans after July 1, 2026 and anyone with a existing student loan after July 1, 2028 need to know:

1. New Loan Limits

Federal student loan borrowing caps have been significantly revised:

• Graduate students can borrow up to $20,500 per year, with a lifetime cap of $100,000.

• Professional degree students (such as those in law or medicine) are eligible for up to $50,000 per year, with a lifetime maximum of $200,000.

• The overall lifetime borrowing cap for all federal student loans is $257,500.

• Parent PLUS Loans are now limited to $20,000 per year and $65,000 total.

• Students attending less than full-time will have their annual borrowing limits prorated based on the number of credits they’re enrolled in.

  
  

2. Elimination of Subsidized Loans

One of the most significant changes is the elimination of Direct Subsidized Loans for undergraduate borrowers. For loans disbursed on or after July 1, 2026, the federal government will no longer pay the interest during:

• Periods of enrollment at least half-time

• Grace periods after leaving school

• Approved deferments (such as during economic hardship)

This means interest will begin accruing immediately upon disbursement for all federal loans, regardless of a student’s income or enrollment status. Individuals who return to school for advanced degrees or who join the military service will no longer have their payments paused or the interest on their loans paused while they are in school or serving.

3. Repayment Plan Overhaul

The current menu of income-driven repayment (IDR) plans will be replaced with a simplified structure:

New borrowers from July 1, 2026 forward will choose between:

• A Standard Plan, which requires fixed monthly payments over 10 to 25 years

• A new Repayment Assistance Plan (RAP), which bases payments on income (typically 1%–10%) and offers forgiveness after 30 years of payments

  
  

For existing borrowers (with loans prior to July 1, 2026), on any payment plan other than standard or extended - such as SAVE, PAYE, and IBR plans—will be phased out by July 1, 2028. Unless enrolled in IBR, these borrowers will be transitioned into RAP at that time.

4. Forbearance and Deferment Rules

Beginning July 1, 2027, the following changes will apply to deferment and forbearance:

• Economic hardship and unemployment deferments will no longer be available for new loans.

• Only discretionary forbearance will remain, limited to 9 months within any 24-month period.

• Forbearance will continue to accrue interest, regardless of loan type.

This means that in order to get a pause in your student loan payments, you will have to fill out an application and make your case to the government as to why you deserve relief. Prior to this bill, there were a number of situations in which payment forbearance was guaranteed, such as a major medical emergency, going back to school, entering the armed forces, or defined financial emergencies. Going forward, there will be no situations in which loan relief will be guaranteed to be available.

5. Additional Notes

• Pell Grant eligibility will expand to include more short-term workforce training programs.

  
  

These reforms represent a significant shift in how the federal government manages student lending. The impact will vary depending on when a borrower takes out their loans and the type of institution and program they attend. Students planning to enroll in the coming years should pay close attention to these changes and evaluate how they may influence their borrowing and repayment strategy.

Definitions:

Student loans: loans made by the government directly to the student, and consist of Stafford loans, PLUS loans, and Perkins loans

Parent loans: government loans given to the parents of students, and are a type of PLUS loan

Private student loans: loans from private companies and banks to students

Subsidized Stafford loan: the standard student loan that allows a 6-month grace period after graduation before payment is due

Unsubsidized Stafford loan: the standard student loan but does not give a 6-month grace period, yet may be requested

Perkins loan: loans provided to students with exceptional financial need. They are subsidized and there is no interest while in school and for 9 months following graduation

PLUS loan: federal education loans that can be issued to either parents of students, or graduate students

Consolidation loan: a loan that allows borrowers to combine multiple federal student loans into a single loan

Private education loan: a loan available from private lenders like banks and credit unions, usually to cover remaining costs of the student’s education if federal aid was not enough