What Is the Federal Direct Loan Program?

The Federal Direct Loan Program provides low-interest student loans to postsecondary students (undergraduates and graduate students) and their parents. The William D. Ford Federal Direct Loan Program is issued and managed by the U.S. Department of Education. It is the only government-backed student loan program in the United States.

Key Takeaways

  • The Federal Direct Loan Program offers direct loans that are subsidized, unsubsidized, PLUS loans, and consolidation loans.
  • Subsidized federal student loans offer the lowest interest rates.
  • Parent PLUS loans often have the highest interest rates of all the federal student loans offered by the government.
  • All loans have maximum amounts that are set annually, with each successive year allowing for a specified increase.
  • Federal direct loans often have more favorable interest rates than private loans.

How the Federal Direct Loan Program Works

The program offers several types of loans, including subsidized direct loans, unsubsidized direct loans, direct PLUS loans, and direct consolidation loans. Subsidized direct loans are the only student loans from the federal government based on financial need. The U.S. Department of Education pays the interest on these loans while the student is in school.

All loans granted through the Federal Direct Loan Program have maximum amounts set each year, with each successive year allowing for an increase in the total maximum yearly amount, with set aggregate amounts. Students who wish to apply for funding must first submit the Free Application for Federal Student Aid (FAFSA).

Undergraduate students can borrow $5,500 to $12,500 per year, depending on what year they are in school and their dependency status. These amounts are for both direct subsidized loans and direct unsubsidized loans. Professional and graduate students may borrow $20,500 each year in direct unsubsidized loans, and parents of undergraduate students can borrow using a direct PLUS loan.

Your college or university decides on the amount of money you can borrow in federal loans.


Types of Federal Student Loans

Direct Subsidized Loans

Direct subsidized loans are for undergraduate students who are eligible for financial assistance due to their or their families' economic circumstances. These loans help to cover the costs of a professional career school, college, or university. Qualified individuals can borrow up to $12,500 per year in direct subsidized loans and $57,000 in total during their undergraduate years.

Direct Unsubsidized Loans

These federal loans are available to eligible undergraduate, graduate, and professional students, and they are not based on financial need. Undergraduate borrowers can take out up to $57,000 in total, or $12,500 per year, and graduate and professional students can borrow up to $20,500 per year and $138,500 in total.

Direct PLUS Loans

These loans are offered to both parents of undergraduate students and graduate or professional students to help offset the costs of education not covered by other financial aid. Eligibility is not based on financial needs like subsidized loans, but you will need decent credit to qualify without meeting additional requirements. Borrowers with less than stellar credit may still access these loans, but they will have to meet additional criteria.

Direct Consolidation Loans

These loans allow a student or family to combine all your eligible federal student loans into one loan with a single service provider, making it easy to make all your payments in one location. Direct consolidation loans allow you to gain access to additional loan repayment programs, as well.

There is no minimum credit score needed for parents to take out a Plus loan, but they cannot have an "adverse credit" on their history.

How to Get a Federal Direct Loan

To receive any federal direct loan (subsidized and unsubsidized), you must fill out FAFSA to find out if you qualify. When you fill out your FAFSA, you will be asked to create an account with the U.S. Federal Student Aid Office, which will issue you an ID to use the site.

After you file your FAFSA, your college will send you a student financial aid letter outlining the aid (including loans) available to you, including federal direct loans. If you qualify for subsidized direct loans, you should take them first because they come with lower interest. Unsubsidized direct loans are also available, and PLUS loans are the most costly of all the federal direct loans because they have fees and higher interest rates.

When you decide on the federal direct loans you want to take out, you will do so via your school's financial aid office, and the money will be sent directly there and used for tuition and room and board, and other costs. If you have any money left over, it will be given to you, but it may be wise to return it rather than spend it. Either way, the money has to be paid back.

Advantages and Disadvantages of the Federal Direct Student Loan Program

There are advantages and disadvantages to taking out federal direct student loans to pay for college and university. An advantage of taking out federal direct student loans versus private loans is the low interest, fixed rates offered with federal loans. Federal loans (except for PLUS loans) do not require strong credit, and the interest on subsidized federal student loans is paid by the government when you are enrolled at school. Federal direct student loans have several pathways to repayment via federal repayment and loan forgiveness plans, too.

Drawbacks to federal direct loans include the fact that only unsubsidized loans are available to graduate students, who are also charged higher interest rates than undergraduates. Borrowers who default on these loans cannot escape the debt by declaring bankruptcy.

Federal direct loans have lower loan limits for undergraduates claimed as dependents on their parents' or guardians' income taxes. Finally, students must apply each year anew for direct loans.

Low Interest, fixed interest rate loans
  • Federal repayment programs are available when it comes to time to pay them back

  • You do not need good credit to get them

  • Grace period on repayment after graduation

Only unsubsidized direct loans are offered to graduate students
  • Parents who take out PLUS loans must pay fees

  • You cannot declare federal student loans in bankruptcy

  • You can only borrow a specific amount each year

  • You can only take out subsidized direct student loans if you meet the necessary criteria

Federal Direct Loans vs. Private Loans

Private lenders also provide student loans to use instead of—or in addition to—federal loans. Still, the federal program often has more favorable interest rates and other provisions, such as loan consolidation and forgiveness programs. Those seeking student loans should carefully investigate all available options.

Federal direct student loans have a cap on much they will lend. Private loan companies do not often impose a cap on how much they will lend. Interest rates are higher, but private loans may be more flexible in their rules of how the money can be used. All in all, private student loans usually end up being more expensive than federal student loans.

Federal direct student loan payments are deferred until you graduate, but not all private loan payments offer the same option. In addition, while direct loans may be eligible for student loan forgiveness and repayment plans, not all private lenders do.

Federal Direct Program FAQs

What Are the Interest Rates for Federal Student Loans?

Direct subsidized loans and direct unsubsidized loans for undergraduates have an interest rate of 3.73%, and unsubsidized student loans for graduate students have a 5.28% interest rate. Direct PLUS loans for parents and graduate students have an interest rate of 6.28%, the highest interest rate of all the federal student loans.

Are Student Loans Forgiven After 20 Years?

Depending on the type of repayment plan you have, your student loan may be forgiven after 20 years. But no. All student loans are not forgiven after 20 years.

How Often Can You Apply for the Federal Direct Loan Program?

You must apply every year you need funding (undergraduate and graduate) for higher education. A FAFSA is filed every year if you are in a four-year college. Federal direct loans can only be used for higher education.