Federal Direct Loans are available through the U.S. Department of Education and are accessed through the FAFSA application. The two levels of Federal Direct Loans, subsidized and unsubsidized, are determined by financial need. Your need is determined by your financial status based upon the FAFSA application and whatever your student aid report (SAR) indicates. (For related reading, see College Loans: Private Vs. Federal.)
TUTORIAL: Student Loans

These loans are available to undergraduate and graduate students and those attending professional schools. Rates are less expensive than other forms of financing (such as private loans or credit cards). The most attractive feature of Federal Direct Loans is that you do not have to make payments on the loan until after graduation. There is no credit check or collateral required either, so this source of funding is open to nearly everybody. (For related reading, see Student Loan Debt: Is Consolidation The Answer?)

Federal Direct Loan Features

By taking out either type of Federal Direct Loan, undergraduate students qualify for an interest rate of 4.29% for the 2015-2016 academic year. Graduate (and professional degree) students have an interest rate of 5.84%. Rates can change from year to year (click here for the latest figures), so you may have a different interest rate for each year you take out a loan.

After school, you will have 10 to 25 years – depending on your repayment plan – from the time you leave school to repay the loan with no penalty for early repayment. As an added bonus, interest on your loan may be tax deductible, but please consult a tax professional to determine your individual case.

In addition, Federal Direct Loans:

  • Charge a 1% loan fee to pay for the administration of the loan
  • Do not require a credit check or collateral
  • Do not require co-signers
  • Do not require payments against the principal while you are attending school at least half time
  • Are eligible for consolidation after graduation (if required)
  • Are issued to students in their own names. (For related reading, see Your Kid's College Loan: Who Should Foot The Bill?)

Direct Subsidized Loans

Subsidization is based upon financial need as laid out in the FAFSA application. If approved for subsidization, you will not have to pay any interest during the time you are enrolled, provided you are attending school at least half time. The interest payments will be made by the federal government. This is true for the grace period (six months) after graduation and any authorized deferment periods. It is only after this grace period that you will begin to make payments on the principal and the interest on the loan. (Never go beyond the interest-free 30 day grace period. For more, see Get A Free Ride From Credit Companies.)

Direct Unsubsidized Loans

If it is determined that you do not qualify for subsidization, you will still be eligible for an unsubsidized loan. Although you will not need to make loan payments on the principal during your period of enrollment (again, at least half time), you will be required to make the interest payments as soon as you receive the funds. If you choose to, you can let the interest accrue and capitalize it. The latter option will increase the total amount you have to repay because you will be charged interest on the higher principal amount.

Maximum Amount of Funding

The maximum amount available depends on the type of student you are and your financial need. It also depends upon what year of college you are entering and if your parents are eligible for a PLUS loan. First-year undergraduate students may receive up to $9,500 if their parents are unable to get a PLUS loan. A graduate student is eligible for up to $20,500 for each year. The following chart outlines the various maximums that are allowed.

Stafford Loan Maximums

Figure 1: A chart showing the maximums for Stafford loans.

Source: U.S. Department of Education, Federal Student Aid

Federal Direct Loan Eligibility

Aside from satisfying the FAFSA application, you must also meet the following requirements to be eligible for a Federal Direct Loan.

  • You must be a U.S. citizen (or have approved status).
  • You must be enrolled at least half time at an authorized school.
  • You must not be currently in default on any existing federal education loans.
  • You must be a high school graduate or equivalent.

Loan Disbursement

The loan funds are paid by the Department of Education directly to your school registrar's office at the start of each semester to be used to pay your tuition, room and board, and school fees. Any money left over will distributed to you, usually via a school check or direct deposit if you so request. (For related reading, see Getting A Loan Without Your Parents.)

Loan Repayment

You do not have to make loan payments on a Federal Direct Loan until six months after you leave school. This six-month period is called your grace period. You may be approved to take additional deferment time before making payments, but this is determined on a case-by-case basis. Subsidized loans will have their interest paid for them until after the grace period. Non-subsidized loans will require that you make interest payments even while attending school. (For related reading, see Student Loan Deferment: Live To Pay Another Day.)

There is a 10 or 25 year amortization period for all Federal Direct Loans, although there is no penalty for early repayment. Individual cases of financial difficulty may warrant the deferment or forbearance of loan payments. You may also work out a repayment plan based upon a unique schedule as determined by your case worker and your need.

Forgiven Loans

All Federal Direct Loans are forgiven in the event of the death or permanent disability of the borrower. Your Federal Direct Loan may also be forgiven or canceled under certain circumstances. For example, if you work for five years teaching children in a low income area or you have made 120 payments and work in the public sector.

The Bottom Line

Federal Direct Loans have many attractive features. There is no credit check, so if you have no credit history or even bad credit, you will still have access to funding. There is also no requirement for a co-signer for the loan, which can sometimes be difficult to find. If you are in financial need you may be eligible for the Direct Subsidized Loan, but no matter how much money you or your parents earn, you can still access Direct Unsubsidized Loans. You can get additional information on Federal Direct Loans through your school's financial aid department. (For more, see Keeping Your Student Loans In Check and College Loans: Private Vs. Federal )

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