Federal Direct Loans: Find Out How They Work

For most people, it’s difficult to attend college without taking out student loans. And if you want to receive flexible, low-interest student loans the Direct Loan Program is your best bet.

The Direct Loan Program offers federal student loans to undergraduate students, graduate students, and parents of college students. This student aid helps students cover the costs of attending college.

With an outstanding balance of just over $1 trillion, the Direct Loan program is the most common way to pay for college. It accounts for three-quarters of all federally funded student loans. 

Types of Direct Loans

	Aggregate loan limits	Term lengths	Rates	Origination fee
Direct Subsidized Loans	Up to $23,000 for undergrads; $65,500 for graduate or professional students	10 – 25 years	4.53% for undergrads	1.059%
Direct Unsubsidized Loans	Up to $57,500 for undergrads; $138,500 for graduate & professional students	10 – 25 years	4.53% for undergrads; 6.08% for graduate & professional students	1.059%
Direct Parent PLUS Loans	100% of school-certified cost of attendance	Up to 25 years	7.08%	4.236%
Direct Graduate PLUS Loans	100% of the school-certified cost of attendance	10 – 25 years	7.08%	4.236%
Direct Consolidation Loan	Current federal loan amount	Up to 25 years	Weighted average of current loans	$0

The federal loan program offers five different 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 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 maximum lifetime amount is $23,000 for undergraduates and $65,600 for independent students who attend graduate programs.
• Interest: The current interest rate is 5.05%.
• How to apply: To apply, students will start by filling out the FAFSA. Then you’ll receive a financial award letter from your 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 amount you receive will be determined by the total cost of attendance and other financial aid offers. 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: Borrowers who are enrolled at least half-time in school as undergraduate students are eligible.
• Amount: Dependent undergraduate scan borrow a combined maximum of $31,000 in subsidized and unsubsidized loans. Independent undergraduates have a combined maximum loan limit of $57,500, and graduate and professional students have a combined maximum of $138,500.
• Interest: The current interest rate is 5.05%.
• How to apply: To apply, students will start by filling out the FAFSA. Then you’ll receive a financial award letter from your school’s financial aid office.

>> Read More: Difference Between Subsidized and Unsubsidized Loans

Direct Parent PLUS Loans

It’s not just students who are able to take out loans to pay for college. While parents cannot get a federal Direct Loan Parents also have the ability to borrow money through the Department of Education to help fund their children’s schooling.

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 7.60%.
• How to apply: The application process varies based on what school your child attends. Some parents can apply online but you should contact the financial aid department to find out for sure.

Direct Graduate PLUS Loans

Graduate PLUS loans are a good way for graduate students to pay their way through school. Students will be required to 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 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 that can pass a credit check are eligible.
• Amount: You can borrow up to the cost of attendance.
• Interest: The current interest rate is 7.6%.
• How to apply: To apply, students will start by filling out the FAFSA. Then you’ll receive 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 will be a weighted average of the loans being consolidated.
• How to apply: You’ll apply online for a Direct Consolidation Loan. 

Direct Loans vs. Private Student Loans

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

Many borrowers prefer federal loans because they are more flexible, provide more options for loan repayment and come with a lower interest rate. If you’re applying for Direct Loans, rather than PLUS Loans, you also don’t have to undergo a credit check. 

And many federal loans offer income-driven repayment plans. This limits the borrower’s monthly repayments to a percentage of their total income.

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, it may be necessary for students to take out private loans as well.

Private loans come with either a fixed or variable interest rate. They aren’t based on financial need but you will have to undergo a credit check. You’ll apply online directly with the bank giving out the loan.

To make sure you get the best rate possible, look into several different lenders before taking out a loan. And applying with a creditworthy cosigner could help you receive a lower interest rate. 

Bottom Line

The federal government offers Direct Loans for borrowers in any type of situation. Most loans will cover the full cost of attendance. However, with certain types of federal loans, a credit check may be necessary. If Direct Loans don’t cover the full cost of attending college, you might consider looking into private loans as well.