Direct Student Loans
College Funding Straight from the Federal Government
You may borrow federal student loans through two different programs: the Federal Family Education Loan Program (FFELP) and the Direct Student Loan Program. The Direct Loan program, more formally known as the William D. Ford Federal Direct Loan Program, is a Federal Student Aid program and one of the most affordable and trustworthy means by which to borrow money for college.
The Department of Education (DOE) acts as lender for all Direct Loans, from initial approval through repayment. Choose to consolidate and you still deal directly with the DOE.
Sounds like a killer deal, right? One hitch: not every student is able to get in on the Direct Loan program.
Find Out if You’re Eligible for Direct Loans from the Federal Government
This is the way it works: the college you’ll attend participates in either the Direct Loan Program or the FFELP. A few use both. Ask your college financial aid office and they will tell you which they use. But guess what? Whether you sign up for the FFELP or the Direct Loan Program you can’t go wrong. The Federal Stafford Loans and PLUS Loans are fairly routine through either program. The primary difference is lender.
Direct Stafford Loans
The most popular direct loans are the Stafford Loans. There are two types of Stafford: subsidized and unsubsidized.
- Subsidized Stafford Loans are available to low-income students. The Federal government pays the interest on the loan—subsidizes it—while you’re in college and during the six-month grace period between graduation and repayment. Should you ever apply for and receive a loan deferment or forbearance, the government will also pay the interest.
- Unsubsidized Stafford Loans are not based on financial need; almost anyone may qualify for some aid. You are expected to begin repayment of the loan as soon as it is disbursed or paid out to your college. Some students defer the principal and only pay the interest, and others choose to defer both while they are in school, it’s up to you.
Direct PLUS Loans
Two types of PLUS Loans are extended to borrowers through the DL program: PLUS Loans for Parents and PLUS Loans for Graduate and Professional students:
- Parents with dependent college students may borrow up to the outstanding balance on their children’s tuition cost through the PLUS Loan for parents program. Parents, you’ll have to agree to a credit check—if you are trying to borrow with bad credit you can qualify when you secure a creditworthy co-signor to borrow with you.
- Graduate and professional students may borrow toward the cost of their tuition with the PLUS Loan for graduates and professionals. You may borrow up to the outstanding balance on your tuition bill once you’ve subtracted other aid and any scholarships and grants. This is a credit-based loan, so you’ll either need to prove decent credit history or borrow with a credit-worthy co-signor.
Applying for a Direct Loan
Apply for a Direct Loan by completing the online FAFSA, Free Application for Federal Student Aid, form. Filing the FAFSA is a must. Here’s why: Fail to file this document and you kiss goodbye all federal aid, as well as state-based student loans, and many scholarships and grants from colleges and universities. This money is there for you. Don’t miss out.
Before you are handed out money you will have to participate in an entrance counseling session. This is an online informational “tutorial” that takes under 30 minutes to complete and is a requirement for almost any form of student loan. Basically you’ll get information on your loan and your responsibilities as a borrower.
The Master Promissory Note is the chief legal document. This document is a legally binding financial contract between you and the Department of Education, the lender. The promissory note includes a lot of legalese regarding the disbursement of the loan and repayment conditions. Before you sign make sure you understand how much you are borrowing, when it will enter repayment, what your monthly payments will be, and the loan interest rate. Always keep a copy of the promissory note for yourself.
Repaying Your Direct Loans
You have choices when it comes to loan repayment. When you first borrowed your Direct Loan you chose a repayment option: standard, graduated, extended or income contingent.
- In standard loan repayment you’ll make balanced monthly payments to the lender for the life of the loan.
- In graduated repayment your monthly payments will start out small and gradually get larger over the life of the loan. If you think your income may be limited for the first few years following graduation then increase this repayment plan may be right for you.
- Extended repayment allows you to make your monthly payments smaller by stretching out the life of the loan. In the end you’ll pay more for the same amount of money, but if you are looking for a way to keep payments smaller this is a solution.
- Income sensitive or income contingent repayment is exactly what it sounds like. If you expect your income to be potentially unstable or to fluctuate, this repayment option could be your best bet.
Direct Consolidation Loans
Sometimes it doesn’t matter how many repayment options you have, your money is just too tight and your college debt too out of control. You’re not alone. Before you make the mistake of defaulting on your student loans, consider the Direct Loan Consolidation Program. A consolidation loan rolls the balance of all your federal student loans into one monthly payment. The virtue of a consolidation loan is its lower monthly payments. Your repayment period will be extended and interest rates are often lower. The alternatives—defaulting on your student loans and the possibility of personal bankruptcy—are poor options, serious financial errors. On the other hand a Direct Consolidation Loan is almost a sure bet, but only before you default.
Take our consolidation self-assessment quiz. It’s designed to help you evaluate your financial situation so you may determine if you are a candidate for consolidation.
