What are the benefits of Direct Loans?

After exhausting sources of gift aid like grants and scholarships, you should always borrow federal first before turning to parent education loans and private student loans. Federal student loans, such as Direct Subsidized and Unsubsidized Loans, are cheaper, more available, and have better repayment terms.

Here are some of the many benefits of federal student loans:

  • Federal student loans offer low, fixed interest rates that do not depend on your 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 you are enrolled in school on at least a half-time basis and during periods of authorized deferment.
  • The student loan interest deduction allows you to deduct up to $2,500 a year in student loan interest on your federal income tax returns even if you don't itemize deductions.

There are only a handful of downsides to federal student loans. Federal student loans have annual and cumulative loan limits. If you are enrolled at a high-cost college, you may need additional financing, such as private student loans, to bridge the gap between the annual cost of attendance (COA) and the expected family contribution (EFC). You need to 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 your credit history and do not require a creditworthy cosigner.

Annual Loan Limits

If you are an undergraduate student, you may borrow a combined $5,500 to $12,500 per year in Direct Subsidized and Unsubsidized Loans, depending on your year in school and on your dependency status. If you are attending graduate school or professional school, you 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 you graduate or drop below half-time enrollment.

In addition, the federal government pays the interest on the Direct Subsidized Loan while you are 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 you are between jobs. But because interest can continue to accrue, the loan balance may grow, digging you into a deeper hole. If you are experiencing a longer-term financial difficulty, you 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 offers a fixed monthly payment with a 10-year repayment term.
  • Graduated Repayment. Monthly payments under graduated repayment start off low, usually 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, revised pay-as-you-earn-repayment, and pay-as-you-earn repayment) are based on your 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 you have $30,000 or more in federal student loan debt, you can get a 25-year repayment term without consolidating. Otherwise, you can consolidate with a Direct Consolidation Loan to 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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