Direct Loans

Student studyingThe cost of college is on the rise, and for the 2011 to 2012 school year at four-year institutions, an estimated 85 percent of full-time undergraduates attending college for the first time received some form of financial aid to offset costs, per the National Center for Education Statistics (NCES). Student financial aid is available in many types, including private loans offered by banks or other financial institutions, state loans, and federal loans, where the federal government is the lender. Federal aid comes either in the form of grants, which don’t have to be paid back, or loans where the student agrees to pay the money back. One of the most common forms of government student loans offered under the William D. Ford Direct Loan Program is the Direct Loan. Direct Loans, formerly known as Stafford Loans, are popular due to their low interest rates and flexible repayment plans, as well as the fact that they are not based on credit that a young adult probably doesn’t have yet.

Borrowing Limits

Student studyingLoan limits for both subsidized and unsubsidized loans are set by the federal government. There are loan limits per year and also aggregate, or the total amount you are allowed to borrow. The total loan amount you can receive annually depends on what year in school you are and whether or not you are an independent or dependent student. You may not be eligible for the full amount, and your loan amount may be less than the set loan limit. Current loan limits per year as published by the U.S. Department of Education for dependent students are:

  • First year: $5,500 in unsubsidized loans, $3,500 in subsidized loans
  • Second year: $6,500 in unsubsidized loans, $4,500 in subsidized loans
  • Third year: $7,500 in unsubsidized loans, $5,500 in subsidized loans
  • Fourth year: $7,500 in unsubsidized loans, $5,500 in subsidized loans
  • Graduate or professional degree programs per year: None as all of these students are considered independent

The total or aggregate amount that you can receive as a dependent student via an unsubsidized Direct Loan is $31,000, and up to $23,000 may be awarded in the form of a subsidized loan.

Current independent student loan limits are:

  • First year: $9,500 in unsubsidized loans, $3,500 in subsidized loans
  • Second year: $10,500 in unsubsidized loans, $4,500 in subsidized loans
  • Third year: $12,500 in unsubsidized loans, $5,500 in subsidized loans
  • Fourth year: $12,500 in unsubsidized loans, $5,500 in subsidized loans
  • Graduate of professional degree programs per year: $20,500 in unsubsidized loans, no subsidized loans are offered

An independent undergraduate student can receive up to $57,500 in the form of an unsubsidized loan, with up to $23,000 in subsidized loans allowed. Graduate or professional students can borrow up to $138,500 in unsubsidized loans, not to exceed $65,500 in subsidized loan amounts.

Amounts Awarded and Loan Estimate

The amount of federal financial aid you receive in the form of a Direct Loan is determined by your participating school and can change annually. You must reapply every year. Individual schools also determine what type of loan you will be offered, whether or not you are eligible for an unsubsidized or subsidized loan, or both. Schools make these determinations in part based on your Free Application for Federal Student Aid (FAFSA), which you need to fill out and return to your school each academic year in which you wish to apply for aid.

The school calculates the actual cost of attendance, including tuition, school fees, room and board, books, etc. They then subtract any other financial aid you may receive before determining your Direct Loan amount. Your loan is also charged a loan origination fee by the federal government, which is subtracted from your total loan amount before it is disbursed to the school. This fee affects loans disbursed after July 1, 2010, and the rate for loans between October 1, 2018 and September 30, 2019 is 1.062%.

Interest Rates

Federal Direct Loans offer fixed interest rates, meaning that they are locked-in for the life of the loan. These rates are set each academic year by the federal government. Prior to the 2006-2007 school year, rates were variable and changed depending on what period of the loan the student was in. This is no longer the case, with fixed rates offering the borrower set, low rates that won’t fluctuate with the market. All loans made on or after July 1, 2013 are now linked to the 10-year treasury rate and added to a fixed margin, per the Bipartisan Student Loan Certainty Act of 2013. While these loans will still have fixed rates for the life of the loan, each year fixed interest rates of new loans will be determined by the current market rate; therefore, they can differ year to year.

The 2019-2020 fixed interest rates are 4.53% for undergraduate students and 6.08% for professional and graduate students. Interest rates are the same for Unsubsidized and Subsidized Direct Loans. Furthermore, borrowers can deduct up to $2,500 of their interest from federal or private student loans on federal income tax returns annually, decreasing the total amount of the loan.

Time Limit for Loan

Unsubsidized Direct Loans do not have a time limit requiring you to complete your degree or certificate program. Direct subsidized loans do have what is called a “maximum eligibility period” for first-time borrowers after July 1, 2013, however. This maximum amount of time during which you can receive subsidized loans is based on 150% of your current program’s published length. This means that if you attend a four-year degree program, for example, your “maximum eligibility period” would be six years, while if you are enrolled in a two-year degree program, your maximum length of time would be three years. This eligibility period can change if you change programs as well, and the subsidized loans you received for your previous program will still count toward your new eligibility timeline.


In order to be eligible for a federal Direct Loan, you must meet certain criteria, including:

  • Be a U.S. citizen, U.S. national, U.S. permanent resident, or eligible non-citizen
  • Have a valid Social Security Number
  • Either be accepted for enrollment or already be attending a school participating in the Federal Direct Loan Program
  • Plan to enroll or be enrolled at least half-time, generally in a program leading to a degree or certificate
  • Be registered with Selective Service if you are a male over age 18
  • Prove that you are qualified to receive a career school or college education either with high school diploma, GED, approved homeschool program completion, or meeting other state-established federally approved standards
  • Have turned in completed FAFSA forms
  • Not have any federal student loans in default or owe money on a federal student grant
  • Agree to use money distributed for educational purposes only
  • Maintain satisfactory academic progress as determined by your school
  • Demonstrate financial need for subsidized loans

If you have any questions about your eligibility for a federal Direct Loan, contact your school’s financial aid office.


Professor office hours

In order to apply for any type of federal student loans, you must first fill out a FAFSA (Free Application for Federal Student Aid) or renewal FAFSA if you are a returning student. This can be done online on the Federal Student Aid website or via mail. The FAFSA will determine what type of aid you may be eligible for and how much money you will either be granted or are eligible to borrow in the form of a federal student loan. The FAFSA calculates this based on financial need and by determining an Expected Family Contribution (EFC).

FAFSA will require income information, household information, assets, and the determination of whether or not you are a dependent or independent student in order to make their decision. FAFSA is submitted to the Department of Education and results are sent directly to your school’s financial aid office. Each school sets the deadline to file your annual FAFSA, and some are as early as January 1st. Be sure to know when your school’s deadline is as you have to reapply each year to continue receiving aid.

Application Process

After submitting your FAFSA, you will receive a letter detailing what type of aid you are eligible for. You will then need to contact your school’s financial aid office to accept the loan and sign any necessary paperwork. This will include a Master Promissory Note (MPN), which is often signed digitally online at

The MPN has all the information about your loan and its terms, and you should take care to read it carefully. The MPN is good for up to 10 years. First-time borrowers are required to attend an entrance counseling interview when obtaining federal student loans, to help you understand your responsibilities and rights as a borrower as well as to detail your options and loan terms.

How Direct Loans Are Disbursed

Direct Loans are typically disbursed directly to the school and used to pay school fees, tuition, and room and board where applicable. Any remaining money will be refunded to the student within 14 days via check, debit card, or EFT and can be used for education-related expenses, such as books, certification fees, a personal computer, dependent care, supplies, etc. Loans are generally disbursed at the beginning of each academic term, as defined by your school. For more information on how your school disburses federal Direct Loans, contact the financial aid office.

Grace Period

The grace period for a Direct Loan allows six months after leaving school before the loan repayment period will start. This means you will not make your first payment on your student loan for up to six months after leaving or completing school. The grace period can start if you drop below half-time enrollment as well. The grace period starts whether or not you graduate or finish your degree program.

For a subsidized loan, the government will continue to pay your interest during this time.  If you leave school, or drop below half-time status and allow your grace period to complete, you cannot receive another grace period if you reapply for aid. This means no matter the reason, if you allow the grace period on a Direct Loan to expire, you cannot get another six months. If you reenter school during your grace period, however, you may be eligible for another six-month grace period.


Repayment refers to the process of paying back the money you borrowed to the lender, which in the case of a Direct Loan is the federal government. The government does employ outside institutions to collect money and service the actual loan. These are called loan servicers and can change through the course of your loan. The terms of your loan will stay the same no matter how many times the loan is transferred or whom your loan servicer is.

You can find information on whom your loan servicer is on the My Federal Student Aid website using your FSA ID. The FSA ID is unique to you and is used to apply for federal student aid online as well as to check the status of your loans and access your Federal Student Aid records. It is your responsibility to make sure your loan servicer has your current and updated contact information as well.

There are several options for repaying a Direct Loan, and all of these should be covered during your exit counseling. Exit counseling is a required condition of obtaining a federal loan. During this interview, you will learn your responsibilities and rights as a borrower as well as learn how to repay your loan and the deferment options available to you.

Deferment and Forbearance

Sometimes things happen in your life, like losing a job or being deployed via active military duty, that may make it difficult to pay back your loan. Depending on the circumstances, you may be eligible for a deferment period. This is a period of time during which you can temporarily postpone your loan payments. If you have a subsidized Direct Loan, the government will continue to pay your interest during this time; if you have an unsubsidized loan, you are responsible for the interest that will continue to accrue during deferment. To apply for deferment, you will need to submit your request to your loan servicer.

Even if you are not eligible for deferment, you may still qualify for a forbearance. There are two types of forbearance: mandatory and discretionary. Mandatory forbearance has specific eligibility criteria that require your lender to grant the forbearance. Some eligibility requirements include entering into a medical or dental internship, owing more than 20 percent more on student loans than your income, or performing a qualifying teaching service. A discretionary forbearance is granted based on illness or financial hardship, and your lender decides whether or not to approve it. You may be required to provide your loan servicer with supporting documentation.

Interest is charged on all types of loans during forbearance. Contact your lender or financial aid office for further information on eligibility or to make a request for a forbearance.


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