The federal government offers two major types of student loans: Perkins and Stafford. Perkins loans are awarded by schools that receive an allocation from the federal government and are typically given to students with the most financial need. Stafford loans are available for students regardless of financial need, although students with more financial need are often offered subsidized Stafford loans.
The main draw of government student loans as opposed to private student loans is their low interest rates. Perkins loans have an interest rate of 5 percent and are subsidized by the government while the student is in school. Subsidized Stafford loans for undergraduate students have a 4.5 percent interest rate for loans obtained for the 2010-11 school year and a 3.4 percent interest rate for the 2011-12 school year. All other Stafford loans are set at a 6.8 percent interest rate.
Students must complete the FAFSA, or Free Application for Federal Student Aid, in order to obtain government student loans. Submit the FAFSA online or by paper as early as January 1 of the year in which the school year begins. Most states have deadlines around March 1, and Fin Aid recommends submitting the FAFSA by February 15. Even if the formulas show that the student has no financial need, any student can obtain an unsubsidized Stafford loan.
Government student loans have a 10-year repayment period after the student graduates from college. Students who continue in higher education can defer their loans while in school, although interest accrues during this time. Consolidating government loans allows for a longer repayment plan or one with lower initial payments that increase over time or as the graduate's income increases.
Graduates can deduct up to $2,500 of interest paid on federal student loans each year, even if they do not itemize deductions on their tax returns. Government loans are also eligible for loan forgiveness, which cancels all or part of the student loans for graduates who perform specific types of work. These include military service, teaching in schools in low-income areas, serving in medicine or law in some public interest capacities, and volunteering through Peace Corps, AmeriCorps and Volunteers in Service to America.