The federal loans program in the United States is officially known as the William D. Ford Federal Direct Loan Program. Under the Department of Education, there are three types of federal student loans available: direct subsidized, direct unsubsidized, and Direct PLUS loans.
It’s important to carefully weigh the pros and cons before choosing which is best for your family’s specific and unique financial needs base on the offers outlined in your financial aid award letter.
Direct Subsidized Loans
Direct subsidized loans are only for students who display and prove financial need. You must attend school half time, be enrolled in a degree or certificate program, and be an undergraduate, graduate, or professional student to be eligible for the loan.
Under these loans, the school decides the amount you will receive from the government. It is based solely on financial need. Loans tend to be from $5,500 to $12,500 annually for undergraduates. Your school year also impacts the amount you receive. Students can only borrow these loans for 150% of the program’s completion estimate. For example, if you are in a 4-year Bachelor’s degree program, you may only apply and receive direct subsidized loans for 6 years.
Undergraduate borrowers can expect 3.73% interest rate for direct subsidized loans (graduates have a 5.28% interest rate). However, there is a major bonus for this option. As long as you remain in school for half-time, the Department of Education will cover your interest. This continues during a 6 month grace period after leaving the school or if you request a deferment (postponement of payments).
Direct Unsubsidized Loans
Direct unsubsidized loans are similar to the previous choice except you do not have to prove financial need. Your school will also determine the loan amount in this case. It is based on tuition and any other financial aid you may already be receiving.
While you do not have to display your family’s financial need to receive a direct unsubsidized loan, interest begins to accumulate immediately. If this interest is not paid during school years, the amount adds to the principal loan and also accrue interest.
To be eligible for a direct unsubsidized loan, you must be an undergraduate, graduate, or professional student that is attending school at least half-time. Amounts received are similar to subsidized loans: $5,500 to $12,500.
Direct PLUS Loans
Direct PLUS loans are directed towards parents of undergraduates as well as graduates and professional students. They help you pay for educational costs not covered under any other financial aid.
To be awarded a Direct PLUS loan, parents or students must have:
- good standing credit
- be attending higher education at least half-time
- meet eligibility requirements for federal aid
The max a borrower can receive depends on the cost of the school minus any other financial aid that was already awarded. For example, if a student’s tuition costs $10,000 and they received $6,000 from other financial aid avenues, the max award amount from the Direct PLUS loan is $4,000. The interest rate is variable and is adjusted each year on July 1st, but it does not go above 9%.
Parents have the ability to request deferments for current students and may ask for a grace period for up to 6 months after the student graduates, leaves the school, or stops attending half-time. The loan length is up to 30 years.
Other Federal Student Loans Options
Also available through the Department of Education are Direct Consolidation Loans and the Federal Perkins Loan Program. Direct consolidation gives you the option of combining all of your federal student loans under a single servicer. While consolidation simplifies your loan repayment, you may end up paying more in the long run due to interest.
The Federal Perkins Loan Program contains federal loans for students with exceptional financial needs. However, the loan is provided by your chosen school, not the government, and not all schools participate in the program. Money granted will depend on availability and your financial need.
Students and parents can apply for federal loans at FAFSA, which must be reapplied for each year. Every family’s financial situation is different. It is important to carefully weigh your options before choosing a loan program to pursue. Explore the various types of federal student loans! While private loans are also available, federal loans tend to have lower interest rates, often don’t require credit checks, and don’t need a cosigner. They also provide flexible repayment plans that usually don’t have to be repaid until after graduation.
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