Direct Student Loans
The U.S. Department of Education administers the old Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan Program. Both the FFEL and Direct Loan programs consist of what are ofter referred to as Stafford Loans (for students), Direct PLUS Loans for Parents and Direct PLUS Loans for Graduate and Professional Students. There are also Federal Direct Consolidation Loans which help people manage their debt after graduation. As of 2010,federal student loans for undergraduate and graduate students are referred to simply as Direct Student Loans.
All schools now participate in the Direct Loan Program but at one point, some participated in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.
In order to apply for a Direct Student Loan, you must first complete the Free Application for Federal Student Aid (FAFSA). The FAFSA is used to apply for all types of federal student aid and serves as your application for Direct Student Loans as well.
All colleges and universities are now Direct Loan schools. Your school will provide all the necessary instructions for you to obtain your Direct Student Loan. Your loan will be funded by the federal government. Back when the FFEL program existed, you had to choose a lender for your loan and schools generally presented a list of lenders from which to choose. However, students could ignore the list and were free to choose any lender that participated in the FFEL program. The “Preferred Lender List” was simply provided to you as a convenience as hundreds of lenders offered Stafford loans (now called Direct Subsidized and Unsubsidized Student Loans). With the government as your lender, the process is much less complicated.
Once you have received approval from the Direct Loan Program, you will also need to sign a master promissory note (MPN). The promissory note is your legally binding agreement to repay your loan. Be sure to also read the “Borrower’s Rights and Responsibilities” which should be part of the loan package. Your school will also conduct an “Entrance Interview” that you must complete in order to receive your loan proceeds. The Entrance Interview will be conducted in-person or online and is an informational session to ensure you understand your rights and responsibilities connected with borrowing a federal loan. The session will likely last no more than 20-30 minutes.
Your school will determine your eligibility for either a Subsidized and/or Unsubsidized Direct Student Loan. “Subsidized” means the government pays the interest on your loan while you are in school at least half-time and during periods of deferment depending on your financial need. “Unsubsidized” means you are responsible for either making interest-only payments on your loan while you are in school or allowing the interest to accrue (added to the loan principal) while you are in school. Interest on Direct Unsubsidized Student Loans accrues daily.
Direct Student Loan Limits
Direct Student Loans have fixed maximums based on your year in school. If you’re a dependent undergraduate student, each year you can borrow up to:
- $5,500 if you’re a first-year student enrolled in a program of study that is at least a full academic year (no more than $3,500 of this amount may be in subsidized loans).
- $6,500 if you’ve completed your first year of study and the remainder of your program is at least a full academic year (no more than $4,500 of this amount may be in subsidized loans).
- $7,500 if you’ve completed two years of study and the remainder of your program is at least a full academic year (no more than $5,500 of this amount may be in subsidized loans).
If you’re an independent undergraduate student or a dependent student whose parents have applied for but were unable to get a Direct PLUS Loan for Parents, each year you can borrow up to:
- $9,500 if you’re a first-year student enrolled in a program of study that is at least a full academic year (no more than $3,500 of this amount may be in subsidized loans).
- $10,500 if you’ve completed your first year of study and the remainder of your program is at least a full academic year (no more than $4,500 of this amount may be in subsidized loans).
- $12,500 if you’ve completed two years of study and the remainder of your program is at least a full academic year (no more than $5,500 of this amount may be in subsidized loans). This amount remains unchanged for both academic years.
If you are a graduate student each year you can borrow up to $20,500. Graduate students may not receive Direct Subsidized Loans.
You cannot borrow more than your cost of attendance (determined by your school) minus other financial aid including other loans. As a result, the amount you may borrow could be less than the maximums listed above. The amount you can borrow will be communicated to you by your school. This communication usually comes in the form of an “award letter” that list all of the assistance for which you qualify through your school. You may accept up to the full amount of the Direct Student Loan offered or request a reduction if you do not require the full amount.
All Direct Subsidized and Unsubsidized Loans disbursed between July 1, 2013 and June 30, 2014 carry a fixed interest rate of 3.86% for undergraduates. Graduate or professional students receiving a Direct Unsubsidized Loan disbursed between July 1, 2013 and June 30, 2014 will have a fixed interest rate of 5.41%.
Direct Subsidized and Unsubsidized Student Loans will have a 1.051% origination fee deducted from the amount you borrow. What this means is that the amount your school receives will be 1.051% less than the total amount of the loan. You are still responsible for repaying the entire amount you borrow.
You will not have to begin repayment of your Direct Student Loan until 6 months after you graduate, leave school or drop below half-time attendance.
There are six different repayment plans available:
- Standard – even monthly payments over a ten year period.
- Extended – even monthly payment over a 12-30 year period depending upon the total amount you borrow.
- Graduated – payments start out low, and then increase in stages. You can generally take from 12 to 30 years to repay your loan. The length of your repayment period will depend on the total amount you owe when your loan goes into repayment. However, you will pay more in interest over the life of the loan than the standard repayment plan.
- Income Based Repayment-takes into account your income and
family size and will adjust payments according to those factors. For
more info, go here:
- Income Sensitive – monthly payment is based on your yearly income and your loan amount. As your income increases or decreases, so do your payments. Each payment must at least equal the interest accrued on the loan between scheduled payments, and no scheduled payment amount can be more than three times greater than any other scheduled payment amount. You may take from 12 to 30 years to repay your loan depending on the total amount you have borrowed.
- Income Contingent — monthly payment plan only offered by the Direct Loan Program. Payments are based on a borrower’s adjusted gross income (AGI), including any spousal income, family size, and loan amount. The monthly amount can change annually.
Remember, borrow only what you need and compare student loans before you apply to make sure you get the loan that’s right for you.
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