For many people, direct lending by the government is the only education option available. Federal (or some state) plans may be your only remaining options if parents can’t help pay, either from savings, 529 plans, tapping a home equity line of credit, or co-signing a bank loan.
A useful aspect of federal loans is that if you qualify, you will get the money. You cannot be refused access to funds if you qualify. Note that graduate PLUS loans are subject to a credit check.
In addition, federal loans are extremely flexible. You can consolidate all your government loans, switch between repayment plans, and survive some delinquency with less damage to your personal credit rating than you would suffer over delinquency on private loans. Whereas a private lender would likely report you to credit bureaus after 90 days past due, federal loan delinquency may allow you up to 270 days before impacting your credit score. Consolidation reduces the amount of paperwork you need to worry about and may even open up avenues for lowering rates.
When you consolidate federal loans the resulting interest rate is the weighted average of the individual rates, rounded up to the nearest eighth of a percent. There is no application fee to consolidate federal education loans. Private companies may charge you for such a service, but you can do it yourself for free using online government resources.
A default will adversely affect your credit score, which may haunt you over several years. With federal loans you’re allowed an opportunity to make some arranged “reasonable” payments and rehabilitate your credit record. The government will then inform the credit agencies that you’re in good standing, which could allow the default to be expunged from your credit record.
Federal student debt is not dischargeable in bankruptcy. This means the student debt does not go away as a result of bankruptcy filing. You’d still be responsible for paying all that money back. There can be exceptions in cases where repaying your student loan would cause undue hardship. Federal loans are dischargeable for total and permanent disability.
If you automate federal loan repayments electronically from your bank account you may qualify for a 0.25% (25 basis point) interest rate reduction. Some private lenders offer this as well.
Arguably the most compelling feature of federal loans is the possibility of qualifying for loan forgiveness.