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What Is a Federal Direct Loan? 

TLDR

What You Need To Know

  • The Federal Direct Loan program provides student aid to undergraduate, graduate and professional students based on a variety of criteria
  • Loan limits depend on academic year, demonstrated financial need and independent or dependent borrower tax status
  • You can choose how much you want to borrow within your loan limit, allowing you to better strategize your long-term loan repayment plan

Contents

If you’re like many high school students, you’re probably not in the financial position to cover the entire cost of your higher education. Well, you’re in good company. College and other post-secondary institutions can be expensive, close to 48 million borrowers have student loan debt.[1]

Once you graduate or leave school, you start making monthly payments on your student loans for up to 10 years or more. And that’s a long time.

That’s why it’s important to think strategy when you think student loans. If you manage your loans to your advantage, you can use Direct loans through the Federal Direct Loan program (aka the Direct Loan program) to fund your education with lower interest loans. 

We’ll show you how to find the right kind of Direct loan for your needs (and your benefit).

How Do Direct Loans Work?

The Federal Direct Loan program is a form of federal student aid that provides loans to student borrowers regardless of their financial need. The borrowing limits on Direct loans and their interest rates depend on your tax status (think: dependent or independent). In 2022, the borrowing limits and interest rates are.[2][3]

  • Undergraduates: Borrowing limit of $5,500 – $12,500 a year at a fixed 3.73% interest rate
  • Graduates or professional students: Borrowing limit of up to $20,500 a year at a fixed 5.28% interest rate
  • Parent(s) of dependent undergraduate students: Get a Direct PLUS loan at a fixed 6.28% interest rate to cover any gaps in student expenses that aren’t covered by financial aid

Direct loans are simple interest or daily interest loans. That means interest accrues on the loan’s principal balance every day. 

Although Direct loans are a form of financial aid, you must repay them. Your payments usually don’t start until 6 months after you graduate or leave school, but it’s important to keep track of how much you’re borrowing and the terms of your loans. 

If you ever need help repaying your Direct loans, there are several student loan repayment plans you can consider, including income-driven repayment plans.

How Can I Get a Direct Loan?

The first step is to complete a Free Application for Federal Student Aid (FAFSA®) form online. Create an FSA ID to complete the form and access other important loan information. You’ll need to provide: 

  • Your Social Security number
  • Your parents’ Social Security number (if you’re a dependent student)
  • Driver’s license (if applicable)
  • 8 or 9-digit alien registration number (if you’re not a U.S. citizen)
  • Federal tax information or tax returns (yours or your parents’)
  • Records of untaxed income
  • Information about your savings, investments and any other assets

After submitting the FAFSA® form, the Department of Education reviews your application and determines what kind of aid you’re eligible for. If you’re eligible for Direct loans, you’ll see a loan offer in your financial aid award letter from the schools that accepted you.

Next, you’ll decide how much you want to borrow within your borrowing limit – you’re not obligated to use all the money you’re allowed to borrow.  

Once that’s taken care of, you’ll complete your student loan entrance counseling requirement to learn the responsibilities, terms and conditions of Direct loans. Then you’ll sign a Master Promissory Note, which is your promise to repay your loan(s), including interest and fees. 

You don’t get the money directly. The Department of Education disburses the money to the school you’re enrolled in. The school will apply the loan amount to your tuition and any school fees. If you’re a dependent and your parents received a Parent PLUS loan, they’ll receive any remaining funds. 

Be aware that you’ll need to fill out the FAFSA® form every year you need student aid or federal loans.

What Are the Different Types of Direct Loans I Can Get?

There are a few loan types available. The type of loan you qualify for is usually determined by financial need or academic year, so you won’t have to worry about choosing a loan.

Direct subsidized loans

Students who meet the Department of Education’s definition of financial need are eligible for Direct subsidized loans. 

As long as students are enrolled part-time, the Department of Education will pay the interest on the loans (aka subsidizes them) and will cover interest during deferment or grace periods. 

Loan limits depend on a student’s academic year and are calculated based on tuition or financial need. The annual subsidized loan limits for all dependent and independent students are:[2]

  • First year: $3,500
  • Second year: $4,500
  • Third and fourth year: $5,500
  • Graduate or professional student: Not applicable

The total loan limit for subsidized undergraduate loans is $23,000. And the limit is $65,500 for graduate or professional students and includes any subsidized loans received as an undergraduate. 

After you leave school, you start repaying the loan 6 months later (aka your 6-month grace period). Payments are usually made every month, but you’ll get your specific repayment information from your loan servicer during the grace period.

Direct unsubsidized loans

Direct unsubsidized loans are similar to Direct subsidized loans, but students don’t need to demonstrate financial need to qualify for Direct unsubsidized loans. 

However, Direct unsubsidized loans do differentiate between students whose parents can claim them as dependent and students who claim independent status on their FAFSA® form. Independent students can receive more in unsubsidized loans each year. 

Our table details subsidized and unsubsidized loan limits. If you also qualify for subsidized loans, they will be included as part of your total loan limit each year:[2]

YearDependent StudentsIndependent Students
First Year$5,500$9,500
Second Year$6,500$10,500
Third and Fourth Year$7,500$12,500
Graduate or Professional StudentNot applicable$20,500 (unsubsidized only)
Aggregate Loan Limit$31,000Undergraduate: $57,500Graduate: $138,500

If an undergraduate’s parents can’t get PLUS loans, their loan limits will be the same as the loan limits for independent students.

While the Department of Education covers the interest on Direct subsidized loans, Direct unsubsidized loan borrowers are responsible for interest payments as soon as the loan is disbursed. You can choose not to pay interest during grace periods, forbearance or deferment, but interest will accrue every day.

Direct PLUS Loans

Direct PLUS loans are Direct loans through the Department of Education. A Direct PLUS loan is usually taken out in addition to a Direct subsidized loan. Graduate or professional students are eligible for Direct PLUS loans. 

To qualify, students typically need a strong credit history that reflects a history of on-time debt repayment and meet general eligibility requirements for student aid.

Graduate or professional students must be enrolled at least half-time in an eligible school and program. Students apply for PLUS loans in addition to completing the FAFSA® form, but the FAFSA® form must be filed first. 

Like Direct unsubsidized loans, the interest on PLUS loans accrues even when you’re not required to make payments. As of 2022, PLUS loans have a 6.28% interest rate, and payments on the loans start 6 months after you leave school.[3]

Direct consolidation loans

If you’re done with school and you’re paying off your Direct loans, you can opt for a Direct consolidation loan. You can get a consolidation loan at no charge. The loan allows students to consolidate multiple student loans into a single loan with a single payment. The interest rate on the loan is fixed and is based on the average interest rate of the loans you bundled into the consolidation loan.[4] 

For example, if you have a Direct subsidized loan for $20,000 at a 3.73% interest rate and a Direct PLUS loan for $50,000 at a 6.28% interest rate, your consolidation loan would be $70,000 at a 5.01% interest rate (interest rates vary every year).

Once you’ve consolidated your loans, you’ll have a single monthly payment and a new repayment schedule rather than multiple monthly payments and repayment terms. 

Direct Loans vs. Private Student Loans: Which Is Better?

Direct loans are almost always a better option for students than private student loans because they come with more borrower protections and repayment plan options. Other benefits include:

  • Easy to apply and qualify for (even with PLUS loan credit requirements)
  • Fixed Direct loan interest rates determined by Congress, not borrower’s financial circumstances
  • Borrower protections (like deferment, forbearance and grace periods)
  • Subsidized loan interest paid by the Department of Education while students are enrolled or payments are deferred 
  • Repayment options (like income-driven repayment plans or extended repayment plans)

Private student loans are offered by banks and other private lenders as an alternative to federal student loans. Some students or parents may opt for private student loans instead of federal Direct loans or get them in addition to federal loans.

There are a few scenarios when private loans might make sense. 

  • You can get a higher loan limit: Federal loans have limits on how much students can borrow. Private student loans may have higher interest rates, but their loan limits are higher and there are fewer restrictions on use. They may be more expensive than federal Direct loans, but they can accommodate more expensive schools and programs. 
  • You can get a lower interest rate: For graduate or professional students or parents considering PLUS loans, private loans may be a better option if they can qualify for a lower interest rate. Because PLUS loans come with slightly higher interest rates than other Direct loans, some borrowers may be able to leverage good credit, assets or other aspects of their finances to get a lower interest rate on a private loan.

No matter which type of loan you get, you’ll have to pay it back. Carefully consider how much you’ll need to finance your education and consider loan alternatives, like scholarships, grants or work-study programs.

Make College Affordable With Direct Loans

Ideally, you wouldn’t have to take on any debt to fund your education. But, we live in the real world. And in the real world, Direct loans can help finance your education with lower interest rate loans and strong borrower protections.

  1. Education Data Initiative. “Total Student Loan Debt [2022]: Federal vs Private (by Year).” Retrieved March 2022 from https://educationdata.org/total-student-loan-debt

  2. Federal Student Aid Information Center. “Loans.” Retrieved March 2022 from https://studentaid.gov/understand-aid/types/loans

  3. Federal Student Aid Information Center. “Federal Interest Rates and Fees.” Retrieved March 2022 from https://studentaid.gov/understand-aid/types/loans/interest-rates

  4. Federal Student Aid Information Center. “FSA Loan Programs Fact Sheet.” Retrieved March 2022 from https://studentaid.gov/sites/default/files/federal-loan-programs.pdf

ICYMI

In Case You Missed It

  1. The Direct Loan program offers four types of Direct loans: subsidized loans, unsubsidized loans, PLUS loans and consolidation loans

  2. Interest rates are fixed and determined by Congress but differ depending on the type of loan you take out

  3. Although Direct loans have many advantages, consider private student loans if you’ve maxed out federal loan limits or can get lower interest rates

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