Attending college can take a toll on your finances, with most students paying more than $ 20,000 per year. Students can look to scholarships, grants, and work-study programs to help pay the cost, but many students should explore student loans as well. A federal direct loan is a type of student loan issued by the Department of Education that undergraduates and graduates can use to cover tuition costs. Keep reading to find out how a federal direct loan works and who it’s best for.
What is a federal direct loan?
The William D. Ford Federal Direct Loan Program, more commonly referred to as a “direct loan,” is the United States government’s student loan program. These federal loans are available for undergraduates, graduate and professional students, and parents of undergraduates. There are four types of federal direct loans, which include need-based loans and non-financial need-based loans.
How it works?
To see if you are eligible for direct loan financial aid, you will need to complete and submit the Free Federal Student Aid Application (FAFSA) by the form deadline. Your school may also have its own FAFSA deadline for determining your financial aid award, so ask your financial aid office for the due dates.
After your school reviews your FAFSA, it determines the types of help you are eligible for based on expected family contribution, your financial needs, and other factors. If you are eligible for Federal Direct Loans and your school has given you assistance, you will see the offer in your award letter.
You can choose to take some or all of the Direct Loan assistance that is offered to you. You will need to follow entry tips, which will remind you of your responsibility when accepting federal direct loans. Borrowers are also required to sign a principal promissory note, which outlines the details of your loan, including important repayment information.
Once these steps are completed, the Department of Education will release the funds directly to your school. The school will then allocate the funds to tuition and other fees that you owe. If there are any loan funds left, the school will pay them to you or your parents (for Direct PLUS loans).
Types of direct loans
There are a few different direct loans; which type you choose depends on your financial needs and grade level.
Direct Subsidized Loan
A direct subsidized loan is only available to undergraduates who have demonstrated financial need on their FAFSA. It offers the greatest benefit to student borrowers, as the interest is subsidized by the federal government (meaning the Department of Education pays the accrued interest) in the following scenarios:
- When the pupil is enrolled at least half-time at school.
- During the first six months after graduation or leaving school.
- When the loan is deferred.
By default, direct subsidized loans are placed on a standard repayment plan. This plan divides your federal student loans into fixed and equal payments over a 10-year period. But you can change your repayment plan for free at any time. Currently, the interest rate on direct subsidized loans is 2.75%, and a small loan fee based on a percentage of your loan amount will be deducted before funds are disbursed.
Direct unsubsidized loan
Eligible undergraduate, graduate and professional students have access to direct unsubsidized loans. As the name suggests, unsubsidized direct loans are similar to subsidized direct loans, but they do not subsidize interest.
Instead, interest accumulates and students are responsible for any interest as soon as funds are disbursed. However, while a student is enrolled at least part-time at school, or deferred or withheld, he may choose not to pay interest. This will cause accrued interest to be capitalized, i.e. it will be added to the total loan balance.
Interest on unsubsidized direct loans is also 2.75% for undergraduate borrowers and 4.3% for graduate students. Both rates are fixed for the entire term and an origination fee applies before the loan is disbursed. These loans are automatically placed under the standard repayment plan, but you can choose to change your repayment plan at any time.
Direct PLUS loan
A Direct PLUS loan is available to eligible graduate or professional students or eligible parents of an undergraduate student. Depending on the borrower, it is commonly referred to as a “grad PLUS loan” or “parent PLUS loan”.
It is not a needs-based loan; in fact, it requires a credit check and you must meet the Department of Education borrower requirements to be approved for a Direct PLUS loan. However, applicants who do not have strong credit can still get financing if they can provide an endorser for the loan. An endorser is similar to a co-signer who guarantees that he will pay off the loan if you cannot. You could also get a PLUS loan despite having a bad credit history if you have proof of a mitigating circumstance that led to your adverse credit.
Most schools require a separate online application process for this type of direct loan, but students must still submit their FAFSA by the deadline. The interest rate on the grad PLUS and parent PLUS loans is 5.3 percent fixed, and a set-up fee will be deducted before funds are paid to the school.
Direct consolidation loan
Borrowers who have taken out multiple federal student loans can simplify their repayment experience with a direct consolidation loan. This type of loan combines all of your current eligible federal loans into one loan, with a monthly payment and a fixed interest rate. To consolidate your loans, they will need to be in repayment.
Applying for a direct consolidation loan is free and you have the option of extending the term of your loan up to 30 years. This lowers your monthly payment, but it also means you’ll pay more for your student debt over time.
There are other drawbacks to a direct consolidation loan. Your fixed interest rate is determined based on the weighted average of all loans being consolidated, so you won’t necessarily save on interest charges using this method. Consolidation also adds any unpaid interest on the original loans to the principal balance of the new consolidation loan.
Finally, if you are working towards the forgiveness of the civil service loans, a direct consolidation loan will wipe the credit of the 120 payments required for the forgiveness. You will have to start the process again.
How Much Money Can I Borrow for a Federal Direct Loan?
Federal direct loan borrowing limits vary depending on the type of direct loan and student status.
- Dependent undergraduates can borrow up to $ 31,000 in total in direct loans, of which $ 23,000 may be subsidized.
- Independent undergraduate students can borrow up to $ 57,500 in total in direct loans, of which $ 23,000 may be subsidized.
- Graduate students or independent professionals can borrow up to $ 138,500 in direct unsubsidized loans and up to the full cost of attendance with grad PLUS loans.
Who is best for a direct loan?
A direct loan is best for students and parents who have exhausted grant and scholarship opportunities but still need additional help to supplement education costs. Since most federal direct loans do not require a credit check, it is ideal for borrowers who have yet to build credit or have adverse credit.
It is also the best option, especially for those who have demonstrated financial need and are eligible for direct subsidized loans. And since all interest rates on direct loans are fixed, it’s ideal for borrowers who prefer predictable monthly payments.
Final considerations
It is best to avoid student debt if possible. But as tuition fees continue to rise, it may be necessary to take out student loans to continue your desired educational path. If you need to borrow money for your education, use federal direct loans first. You’ll guarantee borrowers protections, such as income-based repayment plans, loan forgiveness, and extended deferral or forbearance that private student loans typically don’t offer.
