Your Practical Guide to Federal Direct Loans for College

federal direct loan

Federal Direct Loans are an important form of student aid that can help college students cover their costs and complete their degrees.

If you’re considering taking out a federal Direct Loan, learn more about how this type of federal student loan works — and how you can use it to fund your education.

What are federal Direct Loans?

Federal Direct Loans are government-funded student loans offered through the William D. Ford Federal Direct Loan Program, also known as the Direct Loan Program.

Through the Direct Loan Program, the Federal Student Aid Office offers funding to undergraduate students, graduate students, and parents of college students. These loans help students cover costs while students are enrolled in college.

Federal Direct Loans most commonly refer to the subsidized and unsubsidized loans for undergraduates. These types of Direct Loans also might be referred to as Stafford Loans.

Types of federal Direct Loans

The Direct Loan Program is the most common way for students in the U.S. to borrow for college.

The total outstanding balance of all Direct Loans is just over $1 trillion, accounting for three-quarters of funded federal student loans, according to our latest student loan debt statistics.

What’s more, two other federal student loan programs, Perkins Loans and FFEL Loans, are no longer available. That means all new federal student loans will be made under the Direct Loan Program.

Here’s an overview of the five types of federal Direct Loans and their basic features:

Type of Direct Loan Who can use it Interest rate (2017-18) One-time loan fee Annual loan limit
Subsidized Undergraduate students with a demonstrated financial need 4.45% 1.066% Up to $5,500 per school year
Unsubsidized Undergraduate students 4.45% 1.066% Up to $7,500 per school year for dependent students and up to $12,500 per school year for independent students
Unsubsidized (for graduate students) Students working toward a graduate or professional degree 6.00% 1.066% Up to $20,500 per school year
PLUS Graduate students and parents of undergraduate students 7.00% 4.264% Cost of attendance after all student aid is applied
Consolidation Student loan borrowers in repayment Weighted average of interest rates on loans being consolidated

Direct Subsidized Loans provide borrowers with an interest subsidy that lowers the interest they repay. Direct Subsidized Loans are deferred while the student is enrolled in college, and interest charges don’t apply. Instead, the interest is paid by the Department of Education during deferment.

However, Direct Subsidized Loans are the only form of need-based aid offered through the Direct Loan Program. Students will need to have a demonstrated financial need, which is calculated based on the information they provide in the Free Application for Federal Student Aid (FAFSA).

The Direct Loan Program also provides an option for borrowers who are in the midst of repayment to modify their student loans. Direct Consolidation Loans combine different federal student loans into one and give borrowers a chance to simplify and even lower their monthly payments.

How to get a federal Direct Loan in college

Students who plan to take advantage of the Direct Loan Program will need to take some steps to be eligible for and receive a Direct Loan.

1. Meet federal aid eligibility requirements

The laws and policies that set up the Direct Loan Program and other federal student aid require that students meet certain guidelines to participate. So, to find out if you’re eligible, ensure you meet federal student aid requirements.

2. Create your FSA ID

As a general rule, you’ll need to submit a FAFSA to get access to federal Direct Loans.

To file a FAFSA, you’ll need to create an account with the Federal Student Aid Office. When you do, you’ll also create an FSA ID, which you’ll use to log in to your account and submit your FAFSA.

3. Complete and submit your FAFSA

Visit FAFSA.ed.gov to start a new FAFSA. It takes about an hour or less to complete the FAFSA. If you’re a dependent student (most unmarried college students under 24 are), your parents also will need to complete forms to submit with your FAFSA.

4. Review your financial aid award

After you submit your FAFSA, the college you’re enrolled in or accepted to will use the information to evaluate you for student aid. The college will send you a financial aid award letter that will outline all the student aid that can be extended to you, including Direct Loans.

You’ll then need to evaluate your college costs and figure out how much you’ll need to borrow to cover them. From there, you can choose which Direct Loans to use.

Typically, you’ll want to use Direct Loans for which you qualify in this order:

  • Subsidized Direct Loans, as they include an interest subsidy
  • Unsubsidized Direct Loans, which do not have a subsidy but carry some of the lowest federal student loan rates
  • Unsubsidized Direct Loans for graduate students
  • PLUS Loans, as they carry the highest interest rates and fees

5. Claim your Direct Loans

Next, you’ll claim the Direct Loans you want to use and the amounts you intend to borrow through your college’s financial aid office. You’ll have to sign a promissory note, which is your agreement to repay and honor the terms of your Direct Loans.

From there, your student loans will be disbursed to your college, which will apply the funds to any outstanding charges, such as tuition or on-campus living costs. Remaining funds will then be disbursed to you at your request.

Can you get a federal Direct Loan without filing a FAFSA?

Submitting a FAFSA is the fastest and simplest way to get federal Direct Loans.

However, some dependent students might have parents who refuse to submit a FAFSA. Or you might encounter other obstacles to submitting a FAFSA and getting subsidized or unsubsidized loans. Without a parent’s FAFSA, however, these students can’t be evaluated for or awarded federal student aid.

There might be a workaround if you talk to your college’s financial aid office. These financial aid administrators might be able to authorize students to borrow Unsubsidized Direct Loans without a complete FAFSA from a parent. Depending on your situation, they might be able to connect you with other forms of aid too.

How do federal Direct Loans compare to private loans?

Private student loans, which are offered through banks or other lenders instead of the government, can be an alternative for some students or parents. Here’s a comparison of some key differences between federal Direct Loans and private student loans:

Direct Loans Private Student Loans
Qualifying for the loan Easy to get. You won’t need an income, good credit, or a co-signer to qualify. PLUS Loans are an exception and will require a non-adverse credit history. However, it’s easier to get PLUS Loans than private student loans. Borrowers must qualify, so you’ll need a decent income and job history as well as good credit. These requirements will be hard for many students to meet, and most who take out private student loans will have a co-signer.
Student loan rates Interest rates are fixed and determined by law. All borrowers receive the same rate regardless of their personal circumstances. Interest rates can be variable or fixed, and each borrower will pay a rate based on their creditworthiness. Well-qualified borrowers receive the best private student loan rates, which might be less than Direct Loan rates.
Loan protections Federal student loans come with many ways to pause or adjust payments: deferment and forbearance, including automatic deferment while enrolled in college; income-driven repayment plans; student loan forgiveness in some cases; Subsidized Direct Loan interest paid during any period of deferment. Private student loans have fewer protections than federal student loans. Each private lender sets its own rules for forbearance and deferment, but private lenders rarely offer options as robust as those available for federal student loans.

Private student loans can be worth considering for some students and their parents. For example, those facing the high interest rates of PLUS Loans might find a private student loan that offers savings with a lower rate.

As a general rule, though, federal Direct Loans will be the better choice for most students. These student loans are accessible for most students in college, and they offer robust protections during repayment.

Other students might hit their federal student loan limits and still have costs to cover; private student loans can help with this funding gap.

Carefully compare your options in your own situation to make sure you understand how each choice could affect you both during college and when you enter repayment. Shop around for the best private student loans too so you know you’re getting a good deal.

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