While the federal government offers several student loan types, the William D. Ford Federal Direct Loan Program (Direct Loans) is the most popular for student and parent borrowers. According to Federal Student Aid, these loans are low-interest and offer the following conveniences:
- The U.S. Department of Education is the lender.
- The loan servicer (a third party) will be a one-stop point of contact for all borrower needs, such as choosing between different repayment plans.
- The loan servicer’s website will provide borrowers with simple and direct access to account details.
According to Federal Student Aid, Direct Loans encompass the following federal student loans:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
Regarding the Federal Family Education Loan (FFEL) Program, it is important to note that new lending under this program ended in 2010. According to the U.S. Department of Education, all new loans fall under the Direct Loan Program (Perkins Loans are separate).
Direct Subsidized Loans
As the name suggests but does not fully elucidate, subsidized loans provide a supplemental benefit to borrowers. The benefit comes in the form of the government paying the interest on subsidized loans (rather than the borrower) under any one of the following circumstances:
- While the borrower is matriculated in school at least half-time
- During the grace period after college graduation (typically six months)
- During a deferment (a period when payments are postponed for a qualifying reason)
These highly favorable loans are available to undergraduate students with a demonstrated financial need, based on information reported in the Free Application for Federal Student Aid (FAFSA). The financial aid office of the admitting school will determine the amount of the loan.
Direct Unsubsidized Loans
As the name implies, borrowers are responsible for accruing interest, which capitalizes (i.e., the amount of the interest will be added to the principal amount of the loan). Direct Unsubsidized Loans do not require financial need, and they are available for graduate study as well.
While subsidized loans are more favorable than unsubsidized ones, there is a rising trend in unsubsidized student loan borrowing. According to The College Board, comparing 2007-08 and 2012-13, the percentage of undergraduates who borrowed both subsidized and unsubsidized federal loans (as opposed to subsidized only) increased from 13 percent to 25 percent, respectively.
Direct PLUS Loans
As Federal Student Aid discusses, these loans are available to certain qualifying graduate students and to parents of dependent undergraduates. In other words, undergraduate student borrowers are not eligible for this loan, but it may be a good option for their parents. PLUS Loan applicants are subject to credit checks, as credit worthiness is a determining factor.
Direct Consolidation Loans
These loans allow a borrower to consolidate eligible federal loans into one loan, which can make handling loan repayments much easier.
Applying for Direct Loans
Undergraduate students who submit a FAFSA application will be considered for Direct Subsidized and Unsubsidized Loans, and PLUS Loans (for parents) as part of the school’s financial aid packaging. To apply for a Direct Consolidation Loan, borrowers must complete the Federal Direct Consolidation Loan Application, which is free. For more information on this application, visit Federal Student Aid.
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