The cost of college tuition is continuing to rise at a rate much faster than inflation. Students and their families have been forced to turn increasingly to student loans to fund education.

Advantages of Federal Direct Loans

Federal Direct Loans have proved to be the most popular choice for American students for many reasons. A list of the major advantages that they offer includes:

  • Tax-deductible interest – As with any other type of student loan, borrowers with modified adjusted gross incomes that fall below the threshold limit imposed by the IRS can take an above-the-line deduction for up to $2,500 of the interest paid on these loans each year. This means that the taxpayer does not have to itemize in order to take this deduction.

  • Flexible repayment terms – Unlike other types of loans, such as Perkins loans, Federal Direct Loans offer a choice of four different repayment plans. The right choice will depend on the borrower’s current and projected future income and the amount of the loan. The standard repayment plan uses fixed payments over the life of the loan, while the graduated repayment plan starts with smaller payments that slowly increase each month until the loan is repaid. Payments will rise and fall in accordance with changes in the borrower’s income under the income-based repayment plan. Borrowers who owe at least $30,000 on their Federal Direct Loans can also opt for the extended repayment plan, which can stretch out the loan term for up to 25 years.

  • Competitive interest rates – As with other types of federal loans, Federal Direct Loans charge a lower rate than loans from private lenders. For 2015-2016, Federal Direct Loans charge 4.29% per year for both subsidized and unsubsidized undergraduate loans and 5.84% for graduate loans. Rates are recalculated each year; recent legislation now links them to the rate of the 10-year Treasury note. Click here to check current rates.

  • Ease of qualification – Students who wish to obtain a Federal Direct Loan must only be able to satisfy a few basic criteria. The borrower must be a U.S. citizen or permanent resident (or a non-citizen who meets certain criteria) and take on a load of coursework that classifies the student as at least a half-time student. The student must also make adequate academic progress toward an accredited degree or other certificate of completion, and cannot be in default on any other federal student loan or have a drug offense. (And males 18 to 25 must have registered with the Selective Service.) As long as these conditions are met, the student can receive a Federal Direct Loan by completing the FAFSA and submitting a promissory note. There is no credit check for this type of loan and applicants only need to be able to show genuine need of funds as a financial condition for approval.

  • Flexible deadlines – Federal Direct Loans have no federally mandated application deadline. Every educational institution has its own rules, so get the information from your school's financial aid office.

  • Federal subsidies available for undergraduate loans – Undergraduates who qualify for and receive a Direct Subsidized Loan do not have to pay the interest that accrues on their loans while they are still in school. The federal government will pay this amount for the student until graduation as long as the student makes satisfactory academic progress. See Federal Direct Loans: Subsidized vs. Unsubsidized.

  • Liberal definition of education expenses – Federal Direct Loans can be used to pay for almost any type of educational expense, such as tuition, room and board, books, lab fees and any other miscellaneous expense legitimately incurred in the pursuit of higher education. Even expenditures such as transportation to class, the cost of a personal computer, dependent care and certain personal expenses are allowed, including disability-related costs.

  • No prepayment penalty – If you come into a windfall from your job, an inheritance or any other source and suddenly become able to pay off your loan – or you make more than the minimum payment on it – you can retire your loan balance at any time without a prepayment fee or penalty.

  • No payments until after you leave at least half-time school – Students do not have to begin repaying their loans until six months after they have either graduated or allowed their academic status to drop below that of a half-time student.

  • Student loan forgiveness – As a direct federal loans, these loans are one of a select group eligible for student loan forgiveness. Read more about this in Debt Forgiveness: How To Get Out Of Paying Your Student Loans.

The Bottom Line

Most students and parents today will need to take out at least one student loan in order to pay for college.Grants and scholarships are the first avenue of financial aid to explore, but federal student loans are typically next on the list. Federal Direct Loans have become the most popular type of federal student loan because of their flexibility and availability. For more information on student loan options, consult your high school guidance counselor or college financial aid officer. And read Federal Direct Loans, and Investopedia's tutorial on student loans.

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