Direct Loans Overview

Summary: Direct Loans, sometimes called Stafford Loans, are federal student loans available to undergraduate and graduate students. Students in undergraduate programs receive a 4.29% interest rate. Students in graduate school or professional school programs receive a 5.84% interest rate. A 1.068% fee is deducted from the loan amount before the funds are sent to the school.

Direct Loans (sometimes called Stafford Loans) are low-cost, fixed-rate federal student loans available to undergraduate and graduate students. Direct Loans are the most common — and among the lowest-cost — ways to pay for college.

There are two types of Direct Loans:

Direct Subsidized Loans

Direct Unsubsidized Loans

  • Available to undergraduate and graduate students regardless of financial need
  • Student pays all interest

Key benefits:

  • Fixed interest rate of 4.29% for undergraduate students for the 2015-2016 academic year
  • Fixed interest rate of 5.84% for graduate students for the 2015-2016 academic year
  • No payments while enrolled in school at least half-time
  • Eligibility not based on credit

How to Apply for a Direct Loan

You need to file the FAFSA (Free Application for Federal Student Aid) before you can take out federal student loans from the Direct Loans program.

  1. Complete the FAFSA or Renewal FAFSA (for returning students) at FAFSA.ed.gov.
  2. Receive a financial aid award letter by mail or email from your school's financial aid office. This letter will summarize your available financial aid, including Direct Subsidized Loans (if eligible) and Direct Unsubsidized Loans.
  3. Contact your school’s financial aid office to accept the financial aid and including student loans.
  4. Sign any associated paperwork such as the Master Promissory Note (MPN).

Eligibility

Most students who qualify for federal aid are eligible to take out Direct Loans.

Required:

  • U.S. citizen, national, or eligible non-citizen
  • Have received a high school diploma or the equivalent (e.g., GED)
  • Enrolled at least half time in an eligible degree or certificate program
  • Not in default on any existing federal student loans
  • Meet general eligibility requirements for federal student aid

Not Required:

  • Credit check
  • Cosigner
  • Separate loan application

Interest Rates and Fees

The interest rates on Direct Loans are fixed and do not change over the life of the loan. The interest rate for the 2015-2016 academic year are:

  • Undergraduate students: 4.29% 
  • Graduate students: 5.84%

Every year on July 1, interest rates are reset based on current market rates. The interest rates are based on the 10-year Treasury Notes (determined each year by the final auction prior to June 1) plus a fix margin (see table).

Type of Direct Loan Interest Rate Formula Interest Rate Cap Current Interest Rate (2015-2016)
Undergraduate Students 10-Year Treasury + 2.05% 8.25% 4.29%
Graduate Students 10-Year Treasury + 3.60% 9.5% 5.84%

The interest on Direct Loans starts to add up (accrue) from the date the loan is first disbursed. If you don’t pay the interest as it accrues, it will be capitalized (added to the loan balance), increasing the size of the loan.

The current fee on Direct Loans is 1.068%. Fees are deducted from each loan disbursement. You can ask the college financial aid office to increase the loan amount to cover the fees, up to the annual loan limit.

Loan Limits: How Much You Can Borrow

The amount you can borrow from the Direct Loans program is subject to annual and aggregate loan limits.

View larger version of Annual Loan Limits chart.

Annual Loan Limits

Direct Loans Annual Borrowing Limits Bar Chart

View larger version of Aggregate Loan Limits chart.

Aggregate (Cumulative) Loan Limits

Direct Loans Aggregate Borrowing Limits Bar Chart

Loan limits are also capped at the college’s annual cost of attendance.

The cost of attendance includes:

  • Tuition and fees
  • Room and board
  • Books
  • Supplies
  • Equipment
  • Transportation
  • Miscellaneous personal expenses

How Loan Funds are Distributed

If you are a first-time Direct Loans borrower, you will be required to attend entrance counseling before your loan funds are sent (disbursed) to your school. Some schools require in-person counseling, but many offer online counseling. You will learn about the loan terms, conditions, and requirements during the counseling session.

You will also be required to sign a Master Promissory Note (MPN) before the loans can be disbursed.

The Direct Loan program sends the funds to your school to be credited to your student account. In most cases, the loan will be sent (disbursed) in at least two installments.

Special reminder: There is typically a 30-day delay in disbursing student loans to first-time, first-year borrowers.

Loan funds are credited to your account in this order:

  1. Tuition and fees
  2. Room and board (if you are living in college-owned student housing)
  3. Other school charges (with your permission)

If any loan funds remain in your account, the credit balance will be refunded to you by check, cash, debit card, or electronic funds transfer (EFT) to your bank account. Remember, the refund must be used to pay for your direct and indirect education expenses, such as textbooks, supplies, and equipment.

In-School Deferment and Grace Period

While you are enrolled in school at least half-time, your Direct Loans will be placed into deferment, which means you don’t have to make any payments. In addition, you don’t have to make payments during the 6-month grace period after you graduate or drop below half-time enrollment status.

If you have Direct Subsidized Loans, the federal government pays the interest on your loans during these periods of authorized deferment.

If you have Direct Unsubsidized Loans, interest on your loans will start to accrue (add up) as soon as all of the loan funds are sent to your school. Even though you aren’t making any payments, interest is still adding up.

Repayment

The standard repayment term on Direct Loans is 10 years. However, you can qualify for a longer repayment term if you consolidate the loans or have more than $30,000 in federal student loans.

Direct Loans are eligible for all of the different repayment plans offered by the U.S. Department of Education.

Eligible repayment plans:

The next table shows how much your monthly payments would be under various interest rates and repayment terms.

Monthly Loan Payment ($100,000 Loan)

Monthly Loan Payment ($100,000)
Loan Term 3.4% 3.86% 5% 6%  6.8% 7% 7.9%  8.25%  8.5%  9.5% 
10  $984 $1,006 $1,061 $1,110 $1,151 $1,161 $1,208 $1,227 $1,240 $1,294
12 $847 $869 $925 $976 $1,018 $1,028 $1,077 $1,096 $1,110 $1,166
15 $710 $733 $791 $844 $888 $899 $950 $970 $985 $1,044
20 $575 $599 $660 $716 $763 $775 $830 $852 $868 $932
25 $495 $520 $585 $644 $694 $707 $765 $788 $805 $874
30 $443 $469 $537 $600 $652 $665 $727 $751 $769 $841

Direct Loans are also eligible for a variety of other deferments and forbearances.

Recommendations

  1. File the FAFSA every year to maintain eligibility for student aid.
  2. Borrow Direct Subsidized Loans (if eligible) first. Then, take out Direct Unsubsidized Loans. If you have borrowed the maximum in Direct Loans and still can’t pay all of your costs, consider other loans.
  3. Compare the costs and benefits of Parent PLUS Loans, Grad PLUS Loans, and private student loans. If you have excellent credit or a strong cosigner, you may get a lower interest rate with a private student loan.
  4. If you are in repayment on your Direct Loans, sign up to have your monthly payments automatically deducted from your bank account to qualify for a 0.25% interest rate reduction.
  5. When you file your federal income taxes, be sure to take the student loan interest deduction. You can deduct up to $2,500 in federal and private student loan interest each year.
  6. Look into programs for cancelling your loans. There are many forgiveness and discharge programs for federal student loans — especially for teachers and public service workers.
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