Along with grants, student loans are an important form of federal student aid that can help you pay for college. But before borrowing, it’s important to understand the types of federal student loans available, and how you can use them to fund your education.
This guide will explore the types of federal loans, along with tips on how to get a loan, so you can pay for your degree while avoiding taking on too much debt.
What are federal direct loans?
Types of federal student loans
How to get a federal direct loan in college
Can you get a federal direct loan without filing a FAFSA?
How do federal direct loans compare to private 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 this program, Federal Student Aid offers funding to undergraduate students, parents of undergraduate students and students in graduate or professional programs. These loans help students cover costs while they are enrolled in college or graduate school.
Federal direct loans commonly mean subsidized and unsubsidized loans for undergraduates. These types of direct loans also might be referred to as Stafford 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 federal direct loans is $1.24 trillion, according to Student Loan Hero’s student loan debt statistics.
What’s more, two other federal student loan programs — Perkins loans and Federal Family Education Loan (FFEL) loans — are no longer available. That means all new federal student loans are 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 (2019-20)||One-time loan fee||Annual loan limit|
|Subsidized||Undergraduate students with a demonstrated financial need||5.05%||1.062%||Up to $5,500 per school year|
|Unsubsidized||Undergraduate students||5.05%||1.062%||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||6.6%||1.062%||Up to $20,500 per school year|
|PLUS||Graduate students and parents of undergraduate students||7.08%||4.236%||Cost of attendance after all student aid is applied|
|Consolidation||Student loan borrowers in repayment||Weighted average of interest rates on loans being consolidated rounded up to the nearest one-eighth of one percent||—||—|
Direct subsidized loans provide borrowers with an interest subsidy that lowers the interest they repay. The 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 must 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 active 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.
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. Here are five things to take care of:
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.
As a general rule, you’ll need to submit a FAFSA to access federal direct loans.
To file a FAFSA, you’ll need to create an account with the Federal Student Aid (FSA) 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.
Visit FAFSA.ed.gov to start a new FAFSA, which takes about an hour or less to complete. If you’re a dependent student (most unmarried college students under age 24 are), your parents also will need to complete forms to submit with your FAFSA.
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 are available to both undergraduates and graduate students (note that unsubsidized loans for graduate students have a higher interest rate)
- PLUS loans, as they carry the highest interest rates and fees
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. The remaining funds will then be disbursed to you. If you have a large amount left over, you might consider returning the loan money so you’ll owe less later down the road.
Submitting a FAFSA is the fastest and simplest way to get federal direct loans.
However, the parents of some dependent students might 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 also be able to connect you with other forms of aid.
Private student loans, which are offered by banks or other private lenders instead of the federal 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 cosigner 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 cosigner.|
|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 lower private student loan rates, which could be lower 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 are the better choice for most students. These student loans are accessible for most students in college, and they offer expansive protections during repayment.
Other students might hit their federal student loan limits and still have costs to cover; private student loans could help with this funding gap.
Carefully compare the types of federal student loans, along with their private loan counterparts, to make sure you understand how each choice could affect you both during college and when you enter repayment. If you’re pursuing any private loans, make sure to shop around for private student loans that suit your needs.
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|1.24% – 11.98%1||Undergraduate, Graduate, and Parents|
|1.25% – 11.15%*,2||Undergraduate and Graduate|
|1.12% – 12.37%3||Undergraduate and Graduate|
|1.24% – 11.44%4||Undergraduate, Graduate, and Parents|
|1.77% – 11.89%5||Undergraduate and Graduate|
|2.69% – 12.98%6||Undergraduate and Graduate|
|3.52% – 9.50%7||Undergraduate and Graduate|
|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers. |
1 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 9/24/2020. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for Discover.
Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for undergraduate loans, and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
4 Important Disclosures for Earnest.
5 Important Disclosures for SoFi.
UNDERGRADUATE LOANS: Fixed rates from 4.23% to 11.83% annual percentage rate (“APR”) (with autopay), variable rates from 1.87% to 11.66% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 11.83% APR (with autopay), variable rates from 1.77% to 11.73% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.30% to 11.98% APR (with autopay), variable rates from 1.94% to 11.89% APR (with autopay). PARENT LOANS: Fixed rates from 4.60% to 11.26% APR (with autopay), variable rates from 1.87% to 11.16% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 10/02/2020. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).
6 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicant’s ability to supply the necessary information for submission.
7 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.17% effective Sep 1, 2020 and may increase after consummation.