What is a Federal Direct Loan?

Article Summary:

Federal Direct loans are federal funds that help finance a student’s higher education costs. While federal loans, sometimes referred to as Stafford loans, tend to have more favorable and flexible terms than private student loans, federal student loans have low caps that force many students to apply for additional funding elsewhere.

Paying for college gets more expensive by the year, which means more students rely on federal and private student loans. Fortunately, there are multiple types of federal student aid to help finance your higher education, most commonly in the form of grants and low interest loans. While grants provide students funding that doesn’t need to be repaid, it’s usually not enough to cover all educational expenses.

Direct loans are offered by the federal government and include both subsidized and unsubsidized loans as well as consolidation loans. These loans may be available for students (both undergraduate and graduate) and parents of dependent students. Let’s take a look at what you need to do to apply, how they work, and how much money you can borrow.

What are direct loans?

Direct loans are federal student loans offered by the government through the William D. Ford Federal Direct Loan Program, also known as the Direct Loan Program. These federal loans are available to eligible undergraduate, graduate, and professional students in addition to the parents of dependent undergraduate students, to help pay for the costs of higher education. This includes four-year colleges, community colleges, career, trade, and technical schools.

Direct loans are currently the only types of education loans offered by the federal government. In the past, there were other federal loan programs available for students, such as the Perkins loans and the Federal Family Education Loan (FFEL), but those have since been discontinued.

Student loan borrowers of federal loans are required to start paying the debt back within six months of leaving school or dropping below half-time enrollment status. If you have more than one loan, you can apply for a consolidation loan which gives you the convenience of only one monthly payment.

What are the different types of direct loans?

Depending on your dependency status and type of schooling, you may be eligible for different student loans and loan caps. Below are the four kinds of federal student loans.

Direct subsidized loans

Of the several kinds of federal student loans, direct subsidized loans are offered only to undergraduate students who also demonstrate a financial need. Because of this restriction, these loans tend to come with slightly better terms than other direct loans.

The biggest benefit of a direct subsidized loan is that the federal government picks up the interest while you are in school at least half time and for a six-month grace period after you’ve graduated or otherwise left school. If in the future you need a loan deferment (a temporary pause in payments), the interest will also be paid by the government.

Direct unsubsidized loans

Direct unsubsidized loans are available to all undergraduate, graduate, or professional student borrowers. Applicants for these loans don’t need to demonstrate a financial need. Because they’re unsubsidized loans, the interest will accumulate while you’re in school.

You may make interest payments while you’re in school. If you choose not to, the interest will continue to accrue and then be capitalized, which means it will be added to the principal loan amount. Like subsidized loans, student loan repayment begins six months after you’ve finished school, dropped out, or aren’t attending at least half-time.

Direct PLUS loans

PLUS loans can help bridge the gap that other financial aid doesn’t cover. They’re awarded to parents of dependent students or to graduate and professional students. Unlike other federal student loans, a credit check is required to qualify, which means you could be denied.

A direct PLUS loan doesn’t work within the same type of monetary borrowing limits as other federal student loans offered. Instead, the total money you can borrow is determined by the difference between the cost of attendance (COA) and the amount of other financial aid awarded.

Direct consolidation loans

Who needs the hassle of juggling multiple loans if you can just have one? A direct consolidation loan allows you to combine multiple eligible federal student loans into a single loan, so you only have one monthly payment rather than several.

To apply you need to first fill out the Federal Direct Consolidation Loan Application and Promissory Note. If approved, your loans will be combined at a fixed interest rate, calculated by taking the average interest rate of your existing separate loans. This can be a nice way to streamline some of your bills as you start your career.

If you have multiple private student loans you can also consolidate them with a student loan refinance. The rates and terms vary considerably by lender so make sure you compare several offers before you make a decision.

How do I get a federal student loan?

To apply for a federal student loan, you must follow the below steps:

  1. Fill out your FAFSA. This is the Free Application for Federal Student Aid (FAFSA), which the student and/or their parent or guardian must complete before each year the student is enrolled and in need of financial aid.
  2. Complete your counseling. This counseling is designed to educate students about the loans they are about to take on. Covered topics include how the interest works, repayment plans, and other information about how to manage your debt after graduation.
  3. Review your package. Your school’s financial aid office will evaluate your application and come up with a package that might include all or some of the following: direct subsidized loans, direct unsubsidized loans, grants, and work-study programs. Ideally, this package covers the difference between the expected family contribution (EFC) and the COA. Your school’s financial aid office will arrive at this number through your FAFSA.
  4. Sign the MPN. A student will officially be eligible for the aid after signing the Master Promissory Note (MPN). The MPN is your promise to stick to the repayment plan and pay back your loan.

What is a direct loan disclosure statement?

Before or near the same time that federal loans are first disbursed, you will receive a disclosure statement detailing the loan amountss, dates of expected disbursement, and other loan terms and conditions.

What are the borrowing limits for direct loans?

Federal student loans come with varying annual maximum disbursement amounts, and they generally increase every year. In addition, the amounts differ based on whether you are a graduate or undergraduate student.

This amount may also differ depending on any PLUS loans you applied for. Because PLUS loans come with a credit check, you may not qualify for them. In that case, you might be eligible for higher borrowing limits on direct loans if you or your parents are denied a PLUS loan.

Undergraduate borrowers

Undergraduate dependent students are eligible to borrow up to a total of $31,000 in direct loans, but only $23,000 of that can come from subsidized loans.

This number increases for independent undergraduate students. They can receive total loans up to $57,500, only $23,000 of which can come from direct subsidized loans.

Graduate borrowers

Graduate or professional students are eligible to borrow up to $20,500 per year in unsubsidized loans. The current borrow limit is $138,500 over the course of their college career, which includes any accrued undergraduate loans both subsidized and unsubsidized.

YearDependent Students (except students whose parents are unable to obtain PLUS Loans)Independent Students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans)
First-Year Undergraduate Annual Loan Limit$5,500-No more than $3,500 of this amount may be in subsidized loans.$9,500-No more than $3,500 of this amount may be in subsidized loans.
Second-Year Undergraduate Annual Loan Limit$6,500-No more than $4,500 of this amount may be in subsidized loans.$10,500-No more than $4,500 of this amount may be in subsidized loans.
Third Year and Beyond Undergraduate Annual Loan Limit$7,500 per year-No more than $5,500 of this amount may be in subsidized loans.$12,500-No more than $5,500 of this amount may be in subsidized loans.
Graduate or Professional Student Annual Loan LimitNot Applicable (all graduate and professional degree students are considered independent).$20,500 (unsubsidized only).
Subsidized and Unsubsidized Aggregate Loan Limit$31,000-No more than $23,000 of this amount may be in subsidized loans.$57,500 for undergraduates-No more than $23,000 of this amount may be in subsidized loans.

$138,500 for graduate or professional students-No more than $65,500 of this amount may be in subsidized loans. The graduate aggregate limit includes all federal loans received for undergraduate study.

What are the interest rates for federal student loans?

All federal direct loans come with fixed interest rates, which are typically much lower than private student loans. As you can see below, direct subsidized loans carry the lowest interest rates, whereas PLUS loans carry the highest.

Loan TypeBorrower TypeFixed Interest Rate
Direct Subsidized and Unsubsidized LoansUndergraduate3.73%
Direct Unsubsidized LoansGraduate or Professional5.28%
Direct PLUS LoansParents and Graduate/Professional Students6.28%

If you choose to get a direct consolidation loan down the road, the interest rate will be calculated by averaging the interest rates of all eligible federal student loans.

Can I pay off direct loans early?

There are no penalties for paying off any federal student loans early. Whether you have direct subsidized loans, direct unsubsidized loans, PLUS, or consolidation loans, you can pay them back with a lump sum or choose to pay extra with your usual monthly payment. If you choose the latter option, any extra money you pay toward the loan will first be applied to the outstanding interest before going toward the outstanding principal.

Oftentimes, there are no prepayment penalties on private student loans either, but you will want to check with your bank, credit union, or other lender to confirm this information.

Is it better to get a federal direct loan or a private student loan?

Federal direct loans generally offer better loan terms, repayment plans, and forbearance or deferment options. However, federal loans may not provide the entire funding amount you need.

  • No credit check is required (except with PLUS loans)
  • Lower interest rates (typically)
  • No prepayment penalties
  • Direct subsidized loans allow you to pause payments without accruing interest
  • Flexible repayment terms
  • May be allowed to use funds for more than just education expenses
  • Can borrow more than the federal student loan limits
  • Could get a great interest rate and repayment schedule with an excellent credit score or co-signer
  • Quicker application process than filling out a FAFSA
  • May save money by refinancing your student loans
  • Must reapply for a loan each year
  • Graduate or professional students cannot apply for subsidized direct loans
  • Federal direct loan caps are smaller than most loans
  • Cannot refinance federal student loans
  • The lender may impose higher interest rates, stricter repayment plans, and shorter loan terms
  • May be denied if your credit score is poor
  • Limited payment plan options

Overall, private loans tend to be more expensive than federal ones. If you need to go into student loan debt, you’d do well to exhaust all federal student aid options before looking to the private sector to finance your college costs. But if you do need to take out private student loans, be sure to do your research and talk to multiple lending agencies.

Can my federal student loans be forgiven?

Depending on your current occupation or situation, you may be eligible for student loan forgiveness. However, these forgiveness options have strict qualifications that must be met before you receive forgiveness.

There are three categories for student loan forgiveness: occupational-, institutional-, and reasonable cause-related. To learn whether you qualify for this assistance, review these student loan forgiveness qualifications.

What are my deferment or forbearance options?

Occasionally, you might find yourself struggling to make your monthly loan payments. First, you should talk to your loan servicer and see if a modification of your repayment plan is a viable option.

If that’s not feasible for you, and you need to take a brief pause on your federal direct loan payments, you might want to look into a temporary deferment or forbearance. The primary difference between the two is a loan deferment pauses your payments as well as the interest. Alternatively, forbearance does not pause interest accrual (except on certain occasions, such as with the Covid-19 pandemic).

IMPORTANT! If you plan to pursue loan forgiveness, a deferment or forbearance will interrupt that progress — except, again, in the case of the pandemic emergency. In most other cases, your loan forgiveness progress won’t continue until you resume making qualified payments.

Key Takeaways

  • The Direct Loan Program offers the only federally-funded student loans.
  • Loans offered through the program are Direct subsidized loans, Direct unsubsidized loans, Direct PLUS loans, and Direct consolidation loans.
  • Federal student loans usually have more favorable and flexible terms than private student loans.
  • With Direct subsidized loans, the government pays your loan’s interest until you graduate or leave school.
  • If you work for a non-profit or in the public service sector, you might be eligible to have some or all of your loans forgiven.
View Article Sources
  1. Federal Versus Private Loans — Federal Student Aid
  2. Student Loan Forgiveness — Federal Student Aid
  3. Student Loans — Consumer Financial Protection Bureau
  4. The Definitive Guide to Federal Student Loans — SuperMoney
  5. What Increases Your Total Loan Balance? — SuperMoney
  6. The Ultimate Guide to Student Loan Refinancing — SuperMoney
  7. Best Personal Loans for Students | March 2022 — SuperMoney
  8. Best Student Loan Debt Settlement Companies | March 2022 — SuperMoney