What is a federal direct loan? Your questions answered

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Along with scholarships, student loans are an important form of federal student assistance that can help pay for your education. But before you borrow, it’s important to understand the types of federal student loans available and how you can use them to finance your education.

This guide will explore the types of federal loans, as well as tips on how to get a loan, so you can pay for your degree while avoiding too much debt.

What are Federal Direct Loans?
Types of federal student loans
How to get a federal direct loan to college
Can You Get A Federal Direct Loan Without Filing From FAFSA?
How do federal direct loans compare to private loans?

What are Federal Direct Loans?

Federal Direct Loans are government-funded student loans offered through the Federal William D. Ford Direct Loans Program, also known as the Direct Loans Program.

Through this program, Federal Student Aid provides funding to undergraduates, parents of undergraduates, and students in graduate or vocational programs. These loans help students cover their costs while they are enrolled in college or university.

Federal direct loans generally mean subsidized and unsubsidized loans for undergraduates. These types of direct loans can also be called Stafford loans.

Types of federal student loans

The direct loan program is the most common way for U.S. students to borrow for college. The total outstanding balance of all federal direct loans is $ 1.24 trillion, according to Student Loan Hero’s student loan debt statistics.

In addition, two other federal student loan programs – Perkins Loans and Federal Family Education Loans (FFELs) – are no longer available. This means that all new federal student loans are made under the direct loan program.

Here is an overview of the five types of federal direct loans and their basic characteristics:

Type of direct loan Who can use it Interest rate (2019-20) One-time loan fee Annual loan limit
Subsidized Undergraduate students with demonstrated financial need 5.05% 1.062% Up to $ 5,500 per school year
Not subsidized Undergraduate students 5.05% 1.062% Up to $ 7,500 per academic year for dependent students and up to $ 12,500 per academic year for independent students
Not subsidized (for graduate students) Students in the process of obtaining a graduate or vocational diploma 6.6% 1.062% Up to $ 20,500 per school year
MORE Graduate students and parents of undergraduates 7.08% 4.236% Tuition fees after application of all student aid
Consolidation Student loan borrowers in repayment Weighted average interest rates on consolidating loans rounded to the nearest eighth of a percent

Direct subsidized loans offer borrowers an interest subsidy that reduces the interest they repay. Loans are deferred while the student is enrolled in university and interest charges do not apply. Instead, interest is paid by the Department of Education during the deferral.

However, direct subsidized loans are the only form of needs-based assistance offered under the direct loan program. Students must have a demonstrated financial need, which is calculated based on the information they provide in the Free Application for Federal Student Aid (FAFSA).

The direct loan program also offers borrowers in repayment the option of modifying their student loans. Direct Consolidation Loans combine different federal student loans into one and give borrowers the ability to simplify or even reduce their monthly payments.

How to get a federal direct loan to college

Students who plan to take advantage of the direct loan program will need to take certain steps to qualify for and receive a direct loan. Here are five things you need to take care of:

1. Meet the eligibility criteria for federal assistance
2. Create your FSA ID
3. Complete and submit your FAFSA
4. Review your financial aid allocation.
5. Claim your direct loans

1. Meet the eligibility criteria for federal assistance

The laws and policies that implement the Direct Loan Program and other federal student aid require students to follow certain guidelines to participate. So, to find out if you qualify, be sure to meet federal student aid requirements.

2. Create your FSA ID

Typically, you will need to submit a FAFSA to access federal direct loans.

To file a FAFSA, you will need to create an account with the Federal Student Aid Office (FSA). When you do, you’ll also create an FSA ID, which you’ll use to log into your account and submit your FAFSA.

3. Complete and submit your FAFSA

Visit FAFSA.ed.gov for start a new FAFSA, which takes about an hour or less. If you are a dependent student (most single students under the age of 24 are), your parents will also need to complete forms to submit with your FAFSA.

4. Review your financial aid allocation.

After you submit your FAFSA, the college you are enrolled in or accepted in will use the information to assess you for student aid. The college will send you a financial aid award letter that will describe any student aid that may be available to you, including direct loans.

You will then need to assess your tuition fees and determine how much you will need to borrow to cover them. From there, you can choose which direct loans to use.

Typically, you’ll want to use direct loans that you’re eligible for in this order:

  • Subsidized direct loans, because they include an interest subsidy
  • Direct unsubsidized loans, which are available to both undergraduates and graduate students (note that unsubsidized loans for graduate students have a higher interest rate)
  • PLUS loans because they have the highest interest rates and fees

5. Claim your direct loans

Next, you will apply for the direct loans you want to use and the amounts you intend to borrow from your college financial aid office. You will need to sign a promissory note, which is your commitment to repay and honor the terms of your direct loans.

From there, your student loans will go to your college, which will apply the funds to any unpaid fees, such as tuition or campus living expenses. The remaining funds will then be paid to you. If you have a large amount left over, you might consider paying off the loan money so that you owe less debt later.

Can You Get A Federal Direct Loan Without Filing From FAFSA?

Submitting to a FAFSA is the fastest and easiest way to get federal direct loans.

However, parents of some dependent students may decline to submit a FAFSA. Or you might face other hurdles in submitting a FAFSA and getting subsidized or unsubsidized loans. Without a parent’s FAFSA, however, these students cannot be assessed or awarded federal student aid.

There might be a workaround if you talk to your college financial aid office. These financial aid administrators might be able to authorize students to borrow direct unsubsidized loans without a full FAFSA from a parent. Depending on your situation, they may also be able to put you in touch with other forms of help.

How do federal direct loans compare to private loans?

Private student loans, which are offered by banks or other private lenders instead of the federal government, may be an alternative for some students or parents. Here is a comparison of some keys differences between federal direct loans and private student loans:

Direct loans Private student loans
Loan eligibility Easy to get. You won’t need income, good credit, or a co-signer to qualify. PLUS loans are an exception and will require a non-adverse credit history. However, it is easier to get PLUS loans than private student loans. Borrowers must be eligible, so you will need a decent income and employment history, as well as good credit. These requirements will be difficult for many students to meet, and most of those who take out private student loans will have a co-signer.
Student loan rate Interest rates are fixed and determined by law. All borrowers benefit from the same rate regardless of their personal situation. Interest rates can be variable or fixed, and each borrower will pay a rate based on their creditworthiness. Well-qualified borrowers receive lower private student loan rates, which may be lower than direct loan rates.
Loan protections Federal student loans come with many ways to suspend or adjust payments: deferment and forbearance, including automatic deferment during university enrollment; income-based repayment plans; cancellation of the student loan, in certain cases; interest on subsidized direct loans paid during any deferral period. Private student loans have less protections than federal student loans. Each private lender sets their own forbearance and deferral rules, but private lenders rarely offer options as strong as those available for federal student loans.

Private student loans can be attractive to some students and their parents. For example, those facing the high interest rates of PLUS loans can find a private student loan that offers savings at a lower rate.

Generally, however, federal direct loans are the best choice for most students. These student loans are available to most students and offer extensive protections during repayment.

Other students could reach their federal student loan limits and still have costs to cover; private student loans could help close this funding gap.

Carefully compare the types of federal student loans, as well as their private loan counterparts, to make sure you understand how each choice could affect you both while you are in school and when you start paying off. If you are looking for private loans, be sure to look for private student loans that meet your needs.

Rebecca Safier and André Pentis contributed to this report.

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