College is more expensive than ever. A year at an in-state public university will cost nearly $10,000. Decide to go to a private school, and you could pay triple that number.
Unless your parents are paying the bill, you’ll have to rely on student loans to cover that cost.
Federal student loans should be your go-to option for financing. Federal loans have more generous repayment terms and often have lower interest rates than private loans. Previously, there were two kinds of loans: Direct and Perkins. But the Perkins Loan Program expired, leaving borrowers with just the Direct Loan Program.
If you plan on applying for loans or are already in repayment, here’s everything you need to know about federal Direct Loans.
Federal Direct Loans
Your financial situation and grade level determines which federal Direct Loans you can borrow. Each type has their own criteria and interest rates, so it’s important to understand how each works so you can manage them after graduation.
1. Direct Subsidized Loan
Direct Subsidized Loans are one of the best options for borrowers because you get a break on interest charges.
Subsidized loans have a low interest rate. For the 2017-2018 school year, it’s just 4.45%. Moreover, the U.S. Department of Education (DOE) covers the interest that accrues on the loan while you’re in school at least half time, during the loan grace period after graduation, and if you enter into deferment. That aid can help reduce how much you owe and help you save money.
However, not everyone qualifies for a subsidized loan. Only undergraduate students with a financial need are eligible.
There’s also a limit on how much you can borrow. You can currently only borrow up to $5,500 per year. If your education costs more than that, you’ll have to take out other types of loans to fill the gap.
2. Direct Unsubsidized Loan
If you don’t meet the eligibility requirements for a subsidized loan, an unsubsidized loan might be your next best option. Most people can qualify for an unsubsidized loan as long as you meet the following criteria:
- You are enrolled at least half time at a school that participates in the Direct Loan program.
- You completed the Free Application for Federal Student Aid (FAFSA).
Although the government won’t help you with interest that accrues, Direct Unsubsidized Loans have an interest rate of just 4.45% for undergraduate students and 6.00% for graduate or professional degree students.
You can borrow up to $20,500 per year, but your school will determine how much you receive based on your grade level and dependency status.
3. Direct PLUS Loan
There are two kinds of Direct PLUS Loans:
- PLUS Loans: A PLUS Loan is for graduate or professional degree students.
- Parent PLUS Loans: Parents who want to help their children with college expenses can apply for Parent PLUS Loans if their child is a dependent and undergraduate student.
Unlike other kinds of federal loans, PLUS Loans require a credit check. If you or your parents have poor credit, you might need a cosigner on the loan application to qualify.
For the 2017-2018 school year, the interest rate on PLUS Loans — 7.00% — is much higher than on other types. However, there is no limit to what you can borrow. You can receive money to cover the complete cost of attendance minus any other financial aid you receive.
4. Direct Consolidation Loan
If you end up with several different types of federal loans, you might find that keeping track of all of them can be confusing and overwhelming. If that’s the case, you can use a Direct Consolidation Loan to make things easier.
You can consolidate your federal loans into one easy payment and, if you are struggling to afford your payments, you can get a longer repayment term to reduce your payments. Direct Consolidation Loans have an interest rate that is based on the weighted average of your current loans, so you won’t see a significant difference in rates.
Although these loans can be a big help, there are some drawbacks. If you extend the repayment term, you will end up paying more in interest. And if you are planning to take advantage of federal loan forgiveness programs, consolidating your loans could affect that.
How to apply for Direct Loans
To apply for any of the four types of loans within the Direct program, you need to complete the FAFSA.
The FAFSA asks you questions about where you want to go to school, your family’s financial information, and your dependency status. The government uses that information to determine what grants and federal Direct Loans you receive.
When a school accepts you, the financial aid office will send you a letter with your financial aid options, which might include scholarships and loans. Follow the instructions on your offer letter to accept a loan or other award.
Once you accept a loan, you must complete entrance counseling and sign a promissory note before you receive the money. In most cases, the DOE pays the loan amount directly to your school. You might receive any extra funds left over after paying for tuition and room and board to cover other expenses, such as books.
If you’re not sure how it works for you, contact your school’s financial aid office.
Repayment options for Direct Loans
If you have already graduated or are getting ready to graduate, it’s a good idea to know all of your repayment options for your federal Direct Loans.
When you leave school, the government will immediately place you on the Standard Repayment Plan, which means you will pay off your loan over the course of 10 years and your payments will stay the same throughout your repayment.
In some cases, your payments under a Standard Repayment Plan might be too large for you to afford them. If that happens, there are other repayment options you can use to reduce your payments.
Extended Repayment Plan
Under the Extended Repayment Plan, you can extend your repayment term from 10 years to 25. Because the repayment term is more than doubled, your monthly payments will be dramatically reduced. Typically, your payments under an Extended Repayment Plan are lower than they would be under other payment options.
Although you will pay more in interest over the length of your repayment, an extended repayment plan can give you more breathing room in your monthly budget.
To qualify for an Extended Repayment Plan, you must have at least $30,000 in outstanding Direct Loans.
Graduated Repayment Plan
With a Graduated Repayment Plan, you still pay off most loans within 10 years (you can have up to 30 years with Direct Consolidation Loans). However, rather than having a fixed payment for the length of your loan, your payments start small and increase over time.
You might end up paying more in interest charges over the repayment term, but you can still pay off your loans in just 10 years, rather than 20 or 25.
Income-driven repayment plans
If you can’t afford your student loan payments, you might be eligible for one of the four income-driven repayment (IDR) plans.
Under IDR plans, the government extends your repayment term to 20 to 25 years and caps your monthly payments at a percentage of your discretionary income. Some people qualify for payments as low as $0.
You will pay more in interest over the length of the loan, but an IDR plan can provide long-term relief if your income is too small to keep up with your payments.
Also, after 20 to 25 years — the timeline is dependent on what kind of IDR plan you’re on — the government will forgive the remaining balance on your loans. You’ll have to pay taxes on the forgiven amount, but it can still be a way to eliminate a large chunk of your loans.
For more information about the different IDR plans and how to apply, check out this complete guide.
Other repayment and forgiveness options
Besides alternative repayment plans, there are other options you can utilize to manage your loans. In some cases, you might be able to have your Direct Loans forgiven, postpone payments, or even get a lower interest rate.
Public Service Loan Forgiveness
If you work for a qualifying nonprofit organization or government agency, you might qualify for Public Service Loan Forgiveness (PSLF).
With the PSLF program, the government will forgive your loans after you make 10 years of qualifying payments. Qualifying payments include reduced payments under IDR plans, so you can save a significant amount of money.
Best of all, the balance that the government forgives is not taxable as income. You receive the benefit without having to worry about a huge tax bill.
Forbearance and deferment
If you can’t afford your payments due to financial hardship, job loss, or a medical emergency, you can temporarily pause payments with forbearance or deferment.
With a deferment, you aren’t responsible for interest charges that accrue on your loans if you have Direct Subsidized Loans. However, you are responsible for the interest charges on unsubsidized loans and PLUS Loans.
Under a forbearance, you are responsible for the interest fees on all types of federal loans, even subsidized ones.
Borrowing money for school
Federal Direct Loans provide a low-interest option to pay for school. However, there are some cases where you can’t borrow enough federal loans to pay for the full cost of attendance. If you’re in that situation and need money to finish your education, you might need to turn to private student loans to cover the difference.
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