What are the benefits of Direct Loans?

After exhausting sources of gift aid like grants and scholarships, students should always borrow federal first before turning to parent education loans and private student loans. Federal student loans, such as the Direct Loan, are cheaper, more available and have better repayment terms. Some of the many benefits of federal student loans include:

  • Federal student loans offer low, fixed interest rates that do not depend on the borrower’s credit scores and that do not require a cosigner. Most students will qualify for a federal student loan.
  • Federal student loans may be used to pay for tuition, fees, textbooks, supplies, housing, food, transportation, a computer and other college costs.
  • Federal student loans offer income-based repayment, pay-as-you-earn repayment, public service loan forgiveness, generous deferments and forbearances, and flexible repayment plans.
  • The government pays the interest on Direct Subsidized Loans while the borrower is enrolled in school on at least a half-time basis and during periods of authorized deferment.
  • The student loan interest deduction allows borrowers of federal student loans to deduct up to $2,500 a year in interest on the borrower’s federal income tax return even if the borrower does not itemize.

There are only a handful of downsides to federal student loans. Federal student loans have annual and cumulative loan limits, so students who are enrolled at high-cost colleges may need additional financing, such as private student loans, to bridge the gap between the annual cost of attendance (COA) or student expense budget and the expected family contribution (EFC). Borrowers must maintain satisfactory academic progress (e.g., a minimum 2.0 Grade Point Average (GPA)) to continue to receive federal student loans and other federal student aid. Federal and private student loans are almost impossible to discharge in bankruptcy.

Fixed Interest Rate

Direct Loans offer a fixed interest rate. Direct Loans for undergraduates, including both Direct Subsidized Loans and Direct Unsubsidized Loans, have a fixed rate of 4.29% during the 2015-2016 award year. Direct Unsubsidized Loans for graduate students have a fixed rate of 5.84%.

Each year’s new loans will have different interest rates, but these interest rates will remain the same for the life of the loans.

These low interest rates do not depend on the borrower’s credit history and do not require a creditworthy cosigner.

Annual Loan Limits

Undergraduate students may borrow a combined $5,500 to $12,500 per year in Direct Subsidized and Unsubsidized Loans, depending on the student’s year in school and on the student’s dependency status. Students attending graduate school or professional school may borrow up to $20,500 per year in Direct Unsubsidized Loans.

Repayment Not Required Until Graduation

No payments are required on a Direct Loan until six months after the borrower graduates or drops below half-time enrollment.

In addition, the federal government pays the interest on the Direct Subsidized Loan while the borrower is enrolled in college on at least a half-time basis. (Previously, the federal government also paid the interest during the six-month grace period after graduation. This benefit was suspended for loans made during the 2012-2013 and 2013-2014 award years.)

Deferment and Forbearance

Similar to the in-school and grace period deferments, deferments and forbearances are temporary suspensions of the obligation to repay. They are good for short-term financial difficulty, such as during medical or maternity leave or while a borrower is between jobs. But because interest can continue to accrue, the loan balance may grow, digging the borrower into a deeper hole. If a borrower is experiencing a longer-term financial difficulty, he or she may be better off in an alternate repayment plan, such as income-based repayment or extended repayment.

Affordable Repayment Plans

Federal student loans offer several flexible repayment plans:

  • Standard Repayment. Standard repayment is a form of level repayment, offering a fixed monthly payment with a 10-year repayment term.
  • Graduated Repayment. Monthly payments under graduated repayment start off low, increasing every two years. No payment will be more than three times the lowest payment.
  • Income-Based Repayment. Monthly payments under income-based repayment (and variations like income-contingent repayment and pay-as-you-earn repayment) are based on the borrower’s discretionary income.
  • Extended Repayment. Like standard repayment, extended repayment offers a fixed monthly payment, but with a repayment term of 10 to 30 years. There are two versions of extended repayment. If the borrower has $30,000 or more in federal education loan debt with a single lender, the borrower can get a 25-year repayment term without consolidating. Otherwise, borrowers who get a federal direct consolidation loan can get repayment terms based on the amount of debt, such as 20 years for $20,000 to $39,999 in debt, 25 years for $40,000 to $59,999 and 30 years for $60,000 or more in debt.

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