Federal Student Loans for Undergraduate Students

Summary: Undergraduate students can take out federal student loans from the Direct Loans program. Direct Loans, sometimes called Stafford Loans, offer a low, fixed interest rate and flexible repayment terms. Eligible undergraduates may receive subsidized interest loans.

Direct Loans, sometimes called Stafford Loans, are low-cost, fixed-rate federal student loans available to both undergraduate and graduate students.

There are two types of Direct Loans for undergraduate students:

Direct Subsidized Loans

Direct Unsubsidized Loans

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

Key Direct Loan benefits for undergraduate students:

  • Fixed interest rate of 4.29% for the 2015-2016 academic year
  • No payments while enrolled in school at least a half-time and during the 6-month grace period
  • Eligibility not based on credit

How to Apply

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.
  3. Contact your school’s financial aid office to accept the financial aid and 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 rate on Direct Subsidized and Unsubsidized Loans for undergraduate students is fixed and does not change over the life of the loan. The interest rate for the 2015-2016 academic year is 4.29%. This is less expensive than the 6.84% interest rate on Parent PLUS Loans.

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

Loan Program Interest Rate Formula Interest Rate Cap Current Interest Rate (2015-2016)
Direct Subsidized and Unsubsidized Loans for Undergraduate Students 10-Year Treasury + 2.05% 8.25% 4.29%

The interest on Direct Subsidized and Unsubsidized 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.

Interest rates: Fixed, 2006-2007 to present

Academic Year Direct Subsidized Loans
(Undergraduate)
Direct Unsubsidized Loans
(Undergraduate)
2015-2016  4.29% 4.29%
2014-2015 4.66% 4.66%
2013-2014 3.86% 3.86%
2012-2013 3.40% 6.80%
2011-2012 3.40% 6.80%
2010-2011 4.50% 6.80%
2009-2010 5.60% 6.80%
2008-2009 6.00% 6.80%
2007-2008 6.80% 6.80%
2006-2007 6.80% 6.80%

Interest rates: Variable, prior to 2006-2007

Before 2006-2007, interest rates on Stafford Loans (now known as Direct Loans) were variable, with different rates, depending on whether the borrower was in school, in the 6-month grace period after leaving school, or in the repayment period. (In 1993-1994 and earlier award years, the interest rates were the same for the in-school, grace, and repayment periods.) Interest rates during the repayment period were 0.60% higher (see table).

At that time, borrowers could lock in their interest rate (rounded to the nearest 1/8th of a percentage point) by consolidating the loans. Rates were the same for undergraduate, graduate, and professional students. Interest rates were also the same for subsidized and unsubsidized Stafford Loans.

Academic Year In-School and Grace Periods Repayment Period
2005-2006 4.70% 5.30%
2004-2005 2.77% 3.37%
2003-2004 2.82% 3.42%
2002-2003 3.46% 4.06%
2001-2002 5.39% 5.99%
2000-2001 7.59% 8.19%
1999-2000 6.32% 6.92%
1998-1999 6.86% 7.46%
1997-1998 7.65% 8.25%
1996-1997 7.65% 8.25%
1995-1996 8.25% 8.25%
1994-1995 7.43% 7.43%
1993-1994 6.22% 6.22%
1992-1993 6.94% 6.94%

Fees on Direct Loans

The current fee on Direct Subsidized and Unsubsidized Loans for undergraduate students is 1.068%. This is less expensive than the 4.272% fee on Parent PLUS Loans.

Year
Total Loan Fees
2015-2016 (10/1/15 - 9/30/16)  1.068%
2014-2015 (10/1/14 - 9/30/15)  1.073%
2014-2015 (7/1/14 - 9/30/14) 1.072%
2013-2014 (12/1/13 - 6/30/14) 1.072%
2013-2014 (7/1/13 - 11/30/13) 1.051%
2012-2013 1.0%
2011-2012 1.0%
2010-2011 1.0%
2009-2010 1.5%
2008-2009 2.0%
2007-2008 2.5%
2006-2007 3.0%
2005-2006 and before 4.0%

How fees affect the total loan cost

Loan fees are basically a form of up-front interest. For example, if your loan has a 10-year repayment term, a 4% fee is the about the same as an increase of about .875% to 1% in the interest rate. If your loan has a 30-year repayment term, a 4% fee is the same as an increase of about .334% to .5% in the interest rate.

Loan Limits: How Much Undergraduate Students Can Borrow

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

Annual Loan Limits for Undergraduate Students

Direct Loans Annual Loan Limits for Undergraduate Students Bar Chart

Aggregate (Cumulative) Loan Limits for Undergraduate Students

Direct Loans Aggregate Loan Limits for Undergraduate Students 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

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:

 Recommendations

  1. File the FAFSA every year to maintain eligibility for student aid.
  2. Apply for grants and scholarships to maximize your “free money.”
  3. 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 options.
  4. Compare the costs and benefits of Parent PLUS Loans and private student loans. I you have a strong cosigner, you may get a lower interest rate with a private student loan.