There are many different types of financial aid to help students and their families pay college tuition costs. Front and center, generally offering the best deals – except for an outright grant or scholarship, of course – are federal student loans. (See College Loans: Private Vs. Federal.)

Federal Direct Loans – called direct loans because the funds come directly from the federal government not through a private lender – are the most widely used of these loans today. One of their biggest advantages is  that they do not require a credit check, any form of collateral or a co-signer, which means that borrowers with poor credit scores and low incomes can qualify for them, as long as they meet the other criteria for borrowers.

Available subsidized or unsubsidized, with different qualifications and options in each case, Federal Direct Loans can be used to pay a student's Total Cost of Attendance (TCA). These expenses include tuition, books, lab fees, room and board, and any other pertinent educational expenditures. For details on qualifying for a loan and the differences between the two types, see Federal Direct Loans: Subsidized Vs. Unsubsidized.

How Much Can You Borrow?

Federal Direct Loans resemble other types of federal student loans in that there is both an annual and a cumulative ceiling on the dollar amount that can be borrowed. Factors that affect these limits include whether the loans are subsidized or not, the borrower’s dependency status for tax-filing purposes, the year in school of the student (for example, is he or she is a freshman or a senior), and whether the loans are being used to pay for medical school.

Some exceptions permit students to borrow additional funds in a particular year. One applies to students who move from one grade to another during an academic year: For example, students who become sophomores after the fall semester are eligible to borrow the difference between the higher annual loan limit for a sophomore and what they had already borrowed when they had the status of freshman. (If this could apply to you, check with your financial aid officer.)

Students who transfer from one institution to another also be able to borrow the difference between the loan limit at the new institution and the amount they borrowed at their previous place of learning if the new institution has higher in-house limits.

Unsubsidized Loans. There are no income restrictions on eligibility for a unsubsidized loan. They are also the only type available for graduate education. The following table shows the loan limits:

Loan Limits Dependent Independent
First-Year (Freshman) $5,500 $9,500
Second-Year (Sophomore) $6,500 $10,500
Third-Year and Beyond (Junior, Senior) $7,500 $12,500
Cumulative $31,000 $57,500

Direct Unsubsidized Loan – Graduate and Professional Students

Loan Limits Graduate and Professional Medical School
Annual $20,500 $43,883 – $47,167
Cumulative $138,500 224,000

The cumulative loan limits listed for graduate students include any undergraduate debt that has not been repaid. Here's another cumulative limit applied to Federal Direct Loans: The student can borrow no more than the institution's total annual cost of education fees and expenses minus any other loan, scholarship or financial aid he or she was awarded. Note that "independent" students – those not claimed as dependents on their parents’ or guardians’ tax returns – are eligible for $4,000 to $5,000 more per year in loans, with a cumulative additional total of $26,500. 

Medical students who are enrolled in qualifying program have much higher loan limits (see above). In addition, there is a current annual limit of $40,500 per year for students of osteopathy, dentistry, podiatry, veterinary medicine and certain other programs. Students of pharmacy, chiropractic, clinical psychology and other specified fields can borrow up to $33,000 per year.

Subsidized Loans. To get one of these, the student must be an undergraduate and meet an income qualification of financial need. The loan-size limits for dependent and independent students are identical – and lower than the limits for unsubsidized loans. However, students are not charged interest on these loans while they are in school. Graduate students may no longer receive a Direct Subsidized Loan.

Direct Subsidized Loan  – Undergraduate Students

Loan Limits Dependent Independent
First-Year (Freshman) $3,500 $3,500
Second-Year (Sophomore) $4,500 $4,500
Third-Year and Beyond (Junior, Senior) $5,500 $5,500
Cumulative $23,000 $23,000

A student with a subsidized loan may be able to borrow additional Direct Unsubsidized Loan funds, up to the cumulative limit for Direct Unsubsidized Loans. Consult your financial aid office.

Who Qualifies?

Students who wish to receive Federal Direct Loans must apply for them by completing the FAFSA. They will then receive a Student Aid Report (SAR) that outlines the amount of financial aid for which they are eligible. Students with greater financial need are awarded subsidized loans while those with greater resources receive unsubsidized loans.

The school will then use this report to craft its financial aid award letter, telling the student the amount of aid that can be granted and whether he or she qualifies for a subsidized loan. The student will then submit a Master Promissory Note that delineates the intention to repay the loan after graduation. Students who receive Federal Direct Loans must  be U.S. citizens, permanent residents or non-citizens who meet certain criteria. Students who do not meet the criteria for those categories may still be eligible if they meet certain other conditions pertaining to where they enroll, their enrollment status and financial condition. Any student who applies for a Federal Direct Loan must also attend a Title-IV-eligible school and cannot be in default on any other current federal student loan.

What Fees and Interest Are Charged?

For the 2015-2016 school year, Federal Direct Loan rates were 4.29% for both subsidized and unsubsidized loans for undergraduates, and 5.84% for graduate loans.

Any Federal Direct Loan granted on or after October 1, 2015, also charges a 1.068% origination fee, and neither interest nor loan fees can be applied to the principal balance of the loan. The Bipartisan Student Loan Certainty Act of 2013 now links student loan rates to those of the 10-year Treasury note, with an additional fixed margin. Federal Direct Loan rates are fixed for the life of the loan when they are set, but you will get a different rate for each year's loan depending on interest rate movements. Click here to check current rates.

What Are the Repayment Terms?

The standard term for Federal Direct Loan repayment is usually ten years, but there are exceptions. Students can choose among four basic types of repayment plans when it comes time to begin repaying their loans:

  • Standard Repayment Plan borrowers make a fixed monthly payment based on principal and interest, with a minimum amount of $50 or the amount of interest that has accrued.
  • Graduated Repayment Plan – the initial monthly payment is for a lesser amount but rises over time until the loan is repaid. Payments are based on principal plus interest, but must be equal to at least the amount of accrued monthly interest.
  • Income-Based Repayment Plan – the student’s monthly payment is based on annual income and the amount of the loan. Payments can rise and fall with changes in income.
  • Extended Repayment Plan – if the aggregate loan amount exceeds $30,000, this plan allows borrowers to make fixed or graduated payments for up to 25 years.

Students are not required to make payments on either type of loan while they are still in school as long as their coursework is equal to at least half of that of a full-time student. However, interest begins to accrue immediately on unsubsidized loans, while the Federal government covers this expense on subsidized loans until the student has graduated.

Be careful not to borrow more than you think you will be able to pay back, but tuck this information in the back of your mind: As a direct federal loan, a Federal Direct Loan is one of a select group of loans eligible for student loan forgiveness. If you need to learn more about this, read Debt Forgiveness: How To Get Out Of Paying Your Student Loans.

The Bottom Line

Federal Direct Loan are a convenient, flexible way to fund higher education. For more information on Federal Direct Loans and other ways to pay for college, consult your institution's financial aid officer. Also read Investopedia's tutorial on student loans, How To Score A Private Student Loan and Top Student Loan Providers