A federal direct loan is a type of student loan issued by the United States Department of Education that undergraduates and graduates can use to cover tuition costs. Due to their low interest rates and added benefits, this is usually the best place to start if you are considering taking out a loan for your education.
What is a federal direct loan?
The William D. Ford Federal Direct Loan Program, which issues direct loans, is the United States government’s student loan program. These federal loans are available to undergraduates, graduate students, professional students, and parents of undergraduates. There are four types of federal direct loans, each with its own interest rate.
How does a federal direct loan work?
To see if you are eligible for direct loan financial aid, you must submit the Free Application for Federal Student Aid (FAFSA), which opens on October 1 of each year. 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, you will see the offer in your award letter.
You can choose to take all or part of the Direct Loan assistance 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. This describes the details of your loan, including important repayment information.
At this point, the Department of Education will release the funds directly to your school. The school will apply 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 if they have received Parent 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. It offers the greatest benefit to student borrowers, since interest is subsidized by the federal government during certain periods. This means that the Ministry of Education pays the interest accrued 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 3.73%, and a small loan fee based on a percentage of your loan amount will be deducted before funds are disbursed.
Direct unsubsidized loan
Video: How Social Security Benefits Are Calculated If You Make $ 35,000 Per Year (CNBC)
Click to enlarge
Eligible undergraduate, graduate and professional students have access to direct unsubsidized loans. Direct unsubsidized loans are like direct subsidized 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 – in other words, it will be added to the total loan balance.
The interest rate on unsubsidized direct loans is 3.73% for undergraduate borrowers and 5.28% for graduate and professional borrowers. Origination fees apply before the loan is disbursed.
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”.
Direct PLUS loans are not necessary. They require a credit check and you must meet Ministry of Education borrower requirements to be approved. 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, since it guarantees that they 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.
The interest rate on grad PLUS and parent PLUS loans is currently 6.28%, and an origination fee will be deducted from the total loan amount.
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, you will need to already 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 reduces your monthly payment, but it also means that it will take you longer to pay off your loans, which means that you will pay more interest over the entire term of the loan.
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 your original loans to the new principal balance.
Finally, if you are working towards the civil service loan forgiveness, taking out a direct consolidation loan will erase any credit you have made for the 120 payments required for the forgiveness. You will have to start the process again.
How to get a federal direct loan
Direct loans are the best choice for many student borrowers. To get started, follow these steps:
- Fill out the FAFSA. The FAFSA uses tax returns, pay stubs, and other official documents to determine your expected family contribution and the financial assistance you are entitled to.
- Complete the requirements for acceptance. Since taking out a loan requires entry advice, you will need to complete it before you receive your loans.
- Take only what you need. Just because you could get approval for the full loan amount doesn’t mean you should take it. Borrow only what you need for school, as you may have to pay it back with interest.
- Sign your primary promissory note. Your Master Promissory Note is essentially your lender agreement; it describes your obligations to repay the loans and the consequences if you do not. You cannot get your loan without signing it.
- Your school receives the funds. Once you have completed the paperwork, the Department of Education will release the funds directly to your school. If anything is left over, it will go to you (or your parents, if they took out the loan).
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.
It is best to avoid student debt if possible. But as tuition fees continue to rise, it might be necessary to take out student loans to cover the cost of your studies. If you need to borrow money for your education, use federal direct loans first. You’ll get protections for borrowers, such as income-tested repayment plans, loan forgiveness, and extended deferral or forbearance, which private student loans typically don’t offer.