Definition of the federal direct loan program


What is the Federal Direct Loan Program?

The Federal Direct Loan Program offers low-interest student loans to higher education students (undergraduate and graduate students) and their parents. The William D. Ford Federal Direct Loan Program is issued and administered by the US Department of Education and is the only government-backed student loan program in the United States.

Key takeaways

  • The Federal Direct Loan Program offers subsidized and unsubsidized direct loans, PLUS loans, and consolidation loans.
  • Subsidized federal student loans offer the lowest interest rates.
  • Parent PLUS loans often have the highest interest rates of any federal student loan offered by the government.
  • All loans have maximum amounts that are established annually, and each successive year allows a specific increase.
  • Federal direct loans tend to have more favorable interest rates than private loans.

How the Federal Direct Loan Program Works

The program offers several types of loans, including Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans. Direct subsidized loans are the only federal government student loans that are based on financial need. The US Department of Education pays the interest on these loans while the student is in school.

All loans granted through the Federal Direct Loan Program have maximum amounts established each year, and each successive year allows an increase in the total maximum annual amount, with established aggregate amounts. Students who wish to apply for funds must first submit the Free Application for Federal Student Aid (FAFSA).

Undergraduate students can borrow from $ 5,500 to $ 12,500 per year, depending on the year they are in school and their state of dependency. These amounts are for both direct subsidized and unsubsidized loans. Professional and graduate students can borrow $ 20,500 each year in direct unsubsidized loans, and parents of college students can borrow through a direct PLUS loan.

Your college or university decides how much money you can borrow in federal loans.

Types of federal student loans

Direct Subsidized Loans

Direct subsidized loans are for undergraduate students who are eligible for financial assistance due to their financial circumstances or those of their families. These loans help cover the costs of a career school, college, or university. Qualified individuals can borrow up to $ 12,500 per year in direct subsidized loans and $ 57,000 in total during their undergraduate years.

Unsubsidized Direct Loan Program Loans

These federal loans are available to eligible college students, graduates, and professionals and are not based on financial need. Undergraduate borrowers can borrow up to $ 57,000 in total, or $ 12,500 per year, and graduate and professional students can borrow up to $ 20,500 per year and $ 138,500 in total.

Direct PLUS Loans

These loans are offered to both parents of undergraduate students and graduate or professional students to help offset the costs of education not covered by other financial aid. Eligibility is not based on financial need like subsidized loans, but you will need decent credit to qualify without meeting additional requirements. Borrowers with less than stellar credit can still access these loans, but will need to meet additional criteria.

Direct consolidation loans

These loans allow a student or family to combine all of their eligible federal student loans into one loan with a single service provider, making it easy to make all of their payments in one place. Direct consolidation loans also give you access to additional loan repayment programs.

A minimum credit score is not required for parents to obtain a Plus loan, but they cannot have “bad credit” on their record.

How to get a direct federal loan

To receive any direct federal loan (subsidized and unsubsidized), you must complete the FAFSA to find out if you qualify. When you complete your FAFSA, you will be asked to create an account with the US Office of Federal Student Aid, which will issue you identification to use the site.

After you submit your FAFSA, your college will send you a student financial aid letter describing the aid (including loans) available to you, including federal direct loans. If you qualify for direct subsidized loans, you should take them first because they have lower interest. Direct unsubsidized loans are also available, and PLUS loans are the most expensive of all federal direct loans because they have higher fees and interest rates.

When you decide which federal direct loans you want to get, you will do so through your school’s financial aid office, and the money will be sent directly there and used for tuition, room and board, and other costs. If you have any money left over, it will be given to you, but it may be wise to return it rather than spend it. Either way, the money must be returned.

Advantages and Disadvantages of the Federal Direct Student Loan Program

There are advantages and disadvantages to obtaining direct federal student loans to pay for college. One advantage of obtaining direct federal student loans over private loans is the low, fixed interest rates offered with federal loans. Federal loans (except PLUS loans) do not require strong credit, and the government pays interest on subsidized federal student loans when you enroll in college. Federal direct student loans also have multiple avenues of repayment through federal loan repayment and forgiveness plans.

Disadvantages of federal direct loans include the fact that only graduate students can access unsubsidized loans, who are also charged higher interest rates than college students. Borrowers who defaulted on these loans cannot escape debt by filing for bankruptcy.

Federal direct loans have lower loan limits for students claiming income tax dependents from their parents or guardians. Finally, students must reapply each year for direct loans.

Low-interest, fixed-rate loans

  • Federal payment programs are available when it’s time to return them.

  • You don’t need good credit to get them.

  • Grace period for reimbursement after graduation

Direct unsubsidized loans are only offered to graduate students.

  • Parents who obtain PLUS loans must pay fees

  • You cannot file for bankruptcy on federal student loans

  • You can only borrow a specific amount each year

  • You can only take out subsidized direct student loans if you meet the necessary criteria

Federal Direct Loans vs. Private Loans

Private lenders also offer student loans to use instead of, or in addition to, federal loans. Still, the federal program often has more favorable interest rates and other provisions, such as loan forgiveness and consolidation programs. Those looking for student loans should carefully research all of the available options.

Federal direct student loans have a limit on the amount they loan. Private loan companies do not usually impose a limit on the amount they lend. Interest rates are higher, but private loans can be more flexible in their rules on how the money can be used. Still, private student loans generally end up being more expensive than federal student loans.

Direct federal student loan payments are deferred until you graduate, but not all private loan payments offer the same option. Also, while direct loans may be eligible for student loan forgiveness and repayment plans, not all private lenders do.

Frequently asked questions about the Federal Direct program

What are the interest rates on federal student loans?

Direct subsidized loans and direct unsubsidized loans for college students have an interest rate of 3.73%, and unsubsidized student loans for graduate students have an interest rate of 5.28%. Direct PLUS loans for parents and graduate students carry an interest rate of 6.28%, the highest interest rate of all federal student loans.

Are student loans forgiven after 20 years?

Depending on the type of payment plan you have, your student loan can be forgiven after 20 years. But not. All student loans are not forgiven after 20 years.

How often can you apply for the Federal Direct Loan Program?

You must apply for every year that you need funding (undergraduate and graduate) for higher education. A FAFSA is submitted every year if you are in a four-year college. Direct federal loans can only be used for higher education.

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