Federal Direct Loans: Find Out How They Work

The federal Direct Loan program, with outstanding commitments of more than $1.7 trillion, is the best option for those who want to take out flexible, low-interest student loans. The Direct Loan program offers federal student loans to undergraduate students, graduate students, and parents of college students.

This financial aid helps students cover the costs of attending college. Plus, the basic eligibility criteria make it easy for most people to qualify. In this guide, we’ll explore the types of Direct Loans, when a private student loan is right, and more.

Types of Direct Loans

Type of loan	Aggregate limits	Term lengths
Direct Subsidized Loans	$23,000 for undergrads & $65,500 for grad or professional students	10 – 25 years
Direct Unsubsidized Loans	$57,500 for undergrads & $138,500 for grad or professional students	10 – 25 years
Direct Parent PLUS Loans	100% of the cost of attendance (as certified by the school)	10 – 25 years
Direct Graduate PLUS Loans	100% of the cost of attendance (as certified by the school)	10 – 25 years
Direct Consolidation Loan	Current federal loan amount	10 – 30 years

The federal student loan program offers five types of Direct Loans. These loans are available for undergraduate students, graduate students, and parents. Let’s look at each of the five types of Direct Loans below.

Direct Subsidized Loans

Direct Subsidized Loans, a type of Stafford Loan, are available to undergraduates based on financial need. The main difference between Direct Subsidized and Direct Unsubsidized Loans is that the government pays interest on Subsidized Loans while the student is in school and during periods of deferment.

The school you attend will determine the amount you’re eligible for. The government will pay the interest on the loan while you’re enrolled in school and for six months after graduation.

Here is a brief overview of the terms and conditions for Direct Subsidized Loans:

• Eligibility: Undergraduates who demonstrate financial need are eligible.
• Amount: The aggregate loan amount is $23,000 for dependent undergraduate students and up to $65,500 in Subsidized Loans for those who enroll later in a graduate or professional program.
• Interest: The current interest rate is 5.50%.
• Origination fee: The current origination fee is 1.057%.
• How to apply: Students must first fill out the FAFSA. Then, they‘ll get a financial award letter from their school’s financial aid office.

Direct Unsubsidized Loans

Direct Unsubsidized Loans, another type of Stafford Loan, are available to all undergraduates, and eligibility isn’t based on financial need. 

The total cost of attendance and other financial aid offers determine the amount of funding you can receive. You’re responsible for paying any interest that accrues over the life of the loan.

Here is a brief overview of the terms and conditions for Direct Unsubsidized Loans:

• Eligibility: Students who are enrolled at least half-time in school as undergraduate or graduate students are eligible, with no requirement to demonstrate a financial need.
• Amount: The aggregate loan amount is $31,000 for dependent undergraduate students and up to $138,500 for students enrolled in graduate or professional programs.
• Interest: The current interest rate is 5.50% for undergraduate programs and 7.05% for graduate or professional programs.
• Origination fee: The current origination fee is 1.057%.
• How to apply: To apply, students will start by filling out the FAFSA. Then, get a financial award letter from your school’s financial aid office.

Direct Parent PLUS Loans

It’s not just students who can take out federal loans to pay for college. Parents can get a Direct PLUS Loan through the Department of Education to help fund their children’s schooling instead of relying solely on private student loans.

Here is a brief overview of the terms and conditions for Direct Parent PLUS Loans:

• Eligibility: Parents with dependent children in college are eligible for Parent PLUS Loans. However, they must have a good credit history.
• Amount: Parents can borrow up to the cost of attendance minus any other financial aid.
• Interest: The current interest rate is 8.05%.
• Origination fee: The current origination fee is 4.228%.
• How to apply: The application process varies depending on the school your child attends. Some parents can apply online, but you should contact the financial aid department to find out for sure. In addition, both the parent and student need to complete a FAFSA.

Direct Graduate PLUS Loans

Graduate PLUS loans are a way for graduate students to pay for school. Students must undergo a credit check to be eligible for this type of federal student aid, so if you have a poor credit history, you may be required to find an endorser, which is similar to a cosigner. 

Here is a brief overview of the terms and conditions for Direct Graduate PLUS Loans:

• Eligibility: Graduate students enrolled in an eligible program who can pass a credit check are eligible.
• Amount: You can borrow up to the cost of attendance.
• Interest: The current interest rate is 8.05%.
• Origination fee: The current origination fee is 4.228%.
• How to apply: To apply, students will start by filling out the FAFSA. Then, get a financial award letter from your school’s financial aid office.  

Direct Consolidation Loan

A Direct Consolidation Loan allows you to consolidate multiple federal loans into one loan. So, instead of making multiple payments every month, you’ll have one single monthly loan payment. 

Here is a brief overview of the terms and conditions for Direct Consolidation Loans:

• Eligibility: Borrowers with federal loans, either in a grace period or repayment period, are eligible. Most federal loans are eligible for consolidation.
• Interest: The interest rate is a weighted average of the loans being consolidated.
• Application fee: There is no application fee. 
• How to apply: You’ll apply online through the U.S. Department of Education for a Direct Consolidation Loan. 

Direct Loans vs. private student loans

Here’s how federal student loans differ from private loans.

Federal student loans	Private student loans
Provided by the federal government	Provided by banks, credit unions, and other lenders
Fixed interest rates	Fixed or variable interest rates
No credit check, except for PLUS loans	Credit check required
Income-driven repayment plans are available	No income-driven repayment plans
Loan forgiveness programs are available	Loan forgiveness isn’t an option
Lower interest rates	Potentially higher interest rates

Some students will take out a combination of federal student loans and private student loans to help pay for college. While the federal government provides Direct Loans, private loans are provided by banks, credit unions, or other lenders. 

Many borrowers prefer federal loans because they are more flexible, provide more repayment options, and have a lower interest rate. In most cases, a credit check isn’t required for federal student loans. In contrast, you can expect private lenders to check your credit. 

Another benefit of federal loans is the ability to enroll in an income-driven repayment plan that limits the borrower’s monthly repayments to a percentage of their total income. Private lenders don’t offer this feature. However, there is a limit to how much students can borrow in federal loans. 

If federal loans don’t cover the full cost of college, private loans can help cover the gap. You’ll apply for the loan online with a private lender. To get the best rate possible, shop around with multiple lenders and consider applying with a creditworthy cosigner to get a lower interest rate. See our list of the best private student loans if you need a place to start.

How does repayment on a Direct Loan work?

Repaying a federal Direct Loan begins after you leave school and a grace period ends. This is typically six months after you graduate or stop attending college at least half-time. The goal of a grace period is to give students time to find steady employment they have to begin making payments.

You can also choose from several repayment plans: 

• Standard repayment plan: The standard repayment plan requires you to make fixed payments over 10 years to repay the loan in full. However, if you consolidate your loans, you could extend the term up to 30 years.
• Graduated repayment plan: With this plan, you’ll typically have 10 years to repay the loan in full, but your payments will start lower and increase every two years. Like the standard repayment plan, you might be able to get as long as a 30-year term with a loan consolidation. 
• Extended repayment plan: For individuals with more than $30,000 in outstanding loans, you’ll get a term of up to 25 years, even if you haven’t consolidated your loans. You can choose between a standard or graduated repayment structure. 
• Income-driven repayment (IDR) plan: With this plan, your monthly payment is typically a percent of your monthly income, which can vary depending on your family size. At the end of the repayment term, any remaining balance is forgiven. 

With federal student loans, you can make extra payments without penalty, allowing you to repay the loan faster and reducing the overall interest costs. 

Unlike private student loans, there’s an opportunity for your loan balance to be forgiven. For instance, if you work in public service, you may qualify for loan forgiveness after making 10 years of regular payments. 

Remember, each repayment plan has its own terms, so compare which is best for you.

How to apply for a Direct Loan

To apply for a Direct Loan, you’ll start by completing the FAFSA. Once this is done, your school will let you know how much financial aid you can get. After you accept the offer, you’ll receive counseling to ensure you understand the loan and sign a master promissory note outlining the terms. 

The steps you’ll need to complete to apply for a Direct Loan are: 

1. Complete the FAFSA: This federal form determines your eligibility for federal aid. Once you submit it to the Department of Education, the information is sent to your college. 
2. Review your financial aid offer: Your college will send this to you after reviewing your FAFSA. It will provide details about how much funding you’re eligible for in the form of Direct Loans and other financial aid (e.g., grants). 
3. Accept your loan: After you review the financial aid offer, you’ll follow your college’s process to accept the loan. Keep in mind that you don’t have to accept the entire loan amount; just let your school know you don’t want to accept all the funds.
4. Complete entrance counseling: This is an online session you’ll complete that explains your loan responsibilities and repayment options. The goal is to ensure you understand how the loan will work before accepting it. 
5. Sign the Master Promissory Note (MPN): The last step of the application process is to sign the MPN, a legal document in which you promise to repay the loan.

As you prepare for college, do your best to apply for a federal Direct Loan as soon as possible. Applying early ensures you have your financial aid ready before the semester starts. 

Are Direct Loans the only student loans offered by the government? 

The four types of federal student loans offered by the government are all Direct Loans. These include Direct Subsidized Loans, Unsubsidized Loans, PLUS Loans, and Consolidation Loans. Older programs, such as the HEAL and Federal Perkins Loan programs, were discontinued many years ago. 

However, in addition to student loans, you might be eligible for other types of federal financial aid, such as grants and work-study programs:

• Grants: Unlike loans, grants are a type of financial aid you usually don’t need to repay. Many federal grant programs are available. One of the most common is the Federal Pell Grant, which is issued based on financial need. 
• Work-study program: The federal work-study program allows you to earn money from a part-time job to cover the cost of school. Similar to a grant, there’s nothing you need to repay with this program because you work to earn the money. 

Although Direct Loans can make up a large part of a student’s financial aid package, they’re not the only funding option. Grants and work-study programs can also be an effective way to cover the costs of college without needing to take on additional debt.