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If you want to apply for financial aid and you’re not
applying with a parent as your co-signer, direct subsidized or direct
unsubsidized loans will likely be your most affordable option. Here’s a federal
student loan review, including what to expect for your loan terms, repayment
options, and more.
Pros
Cons
What are Federal Direct Student Loans?
Federal direct student loans are a type of student loan
offered by the federal government. These loans should not be confused with
direct PLUS loans, which allow a parent or guardian to act as the borrower.
With federal direct loans, the student is the principal borrower.
There are two types of federal student loans, subsidized and
unsubsidized. While direct unsubsidized loans are available to the vast
majority of students, the subsidized loans are only given to those borrowers
with the greatest financial need. The main difference is interest accrues later
on direct subsidized loans in order to make them more affordable.
Direct Subsidized and Unsubsidized Loan Features
One of the main advantages of a direct subsidized loan is that it’s very flexible in terms of the loan term and your repayment options. However, there are limits to how much you can borrow in a direct subsidized loan and the limits are fairly low compared to current education costs.
Repayment options include Standard Repayment, Extended Repayment, Pay As You Earn. Revised Pay As You Earn, Income-Based Repayment, Income- Contingent Repayment, and Income-Sensitive Repayment plans
| Loan terms | 10-25 years, depending on repayment plan |
| Repayment period | Typically starts six months after graduation |
| Loan amount | Undergraduate students can borrow a total of $23,000 in subsidized loans and graduate or professional students may borrow a total of $65,000. |
| Loan Structure Flexibility | Multiple repayment options |
Direct Subsidized and Unsubsidized Loan Interest Rates and Fees
Direct subsidized and unsubsidized loans come with fairly-affordable fixed interest rates, so you won’t have to worry about your rate changing over time. Still, while there are fewer fees than you might find with some other lenders, you’ll still have to prepare for an origination fee when you first take out the loan and late fees on any late payments.
| Borrowing/Origination Fees | 1.057% -1.059%, depending on loan disbursement date |
| Prepayment Fees | None |
| Late Payment Fees | $0.06 for each dollar due in the late payment |
| Maintenance Fees | None |
| Fixed Rates | 4.99% - 6.54%, depending on loan type and level of study |
| Variable Rates | None |
Direct Subsidized and Unsubsidized Loan Qualification Requirement
Qualifying for a Direct Subsidized Loan Is very different than qualifying for a private student loan. Instead of basing their eligibility requirements on your financial standing, the Department of Education determines eligibility solely based on two factors: citizenship and enrollment in a participating educational institution.
| Institution Type & Course Load Requirements | Must be enrolled at least part-time in an institution that participates in the Direct Loan Program |
| Minimum Credit Score | None |
| Minimum Income | None |
| Maximum Debt-to-Income | None |
| Co-signer/Joint Application Requirements | None |
Direct Subsidized and Unsubsidized Loan Application Process
If you’re ready to apply for federal student aid, the process is fairly similar to applying for any other loan. Once you fill out the required forms, the federal government will work with your school to determine your eligibility for aid. Check out the steps below for more information.
- Fill out a FAFSA form: Applying for a Federal Direct Loan
starts with filling out the Free Application for Federal Student Aid, also
known as a FAFSA form. This form will gather financial information, such as
information about your tax return and any bank accounts.
- Wait for a response from your school: Based on the
information included in your form, your school will determine how much federal
aid you’re eligible to receive and offer you a financial aid package, which may
include Direct Subsidized Loans. You can choose to accept or decline the
package.
- Complete any additional financial aid requirements: If you
choose to accept your financial aid, you may be required to complete additional
steps, such as undergoing entrance counseling before you can receive the funds.
- Sign the promissory note: Once you’ve completed all
requirements, you’ll be asked to sign the paperwork where you promise to repay
the loan. After signing on the dotted line, the funds will be disbursed to your
account.
Direct Subsidized and Unsubsidized Loan Perks and Bonuses
Federal direct loans come with a host of benefits that
aren't available from private lenders, including:
Flexibility:
Flexibility is what makes direct loans the best government
student loans, In particular, the Department of Education offers borrowers
direct loan borrowers seven different repayment options, including:
- Standard repayment plan: Fixed payments to be paid off
within ten years
- Graduated repayment plan: Payments start low and increase
every two years to allow you to pay of the loan in ten years
- Extended repayment plan: Available if you have more than
$35,000 in debt, this allows you to pay off your debt in 25 years, with fixed
or graduated payments.
- Revised Pay As You Earn repayment plan (REPAYE): Payments
are recalculated every year and are equal to 10% of your discretionary income
- Pay As You Earn repayment plan (PAYE): Available to
borrowers who received their first disbursement on or after October 1, 2011,
monthly payments are calculated each year to be 10% of your discretionary
income, but they can not exceed what you would pay under the standard repayment
plan.
- Income-based repayment plan (IBR): For borrowers who have
high debt relative to their incomes, payments will either be equal to 10% or
15% of their discretionary income, depending on when your first loan was
received.
- Income-contingent repayment plan (ICR): Payments are either
equal to 20% of your discretionary income or the amount you’d pay on a
repayment plan with a fixed payment over 12 years, adjusted for your income.
You’ll be expected to pay whichever is less.
In addition, direct loans are also eligible for forbearance
and deferment. These loans can also be considered.
Mentorship:
If you haven’t received a federal direct student loan
before, you’ll likely be required to take entrance counseling, which is a financial
education course provided by the Department of Education. Many schools require
you to complete this counseling before you receive your loan disbursement.
Technology:
Access to multi-channel payment functionality and mobile app
availability will depend on your loan servicer.
Final Thoughts
If you need to borrow money to pay for school, exploring
your federal student loan options should always be your first move. Typically,
federal options, like federal direct subsidized and unsubsidized loans, offer
better terms and more flexibility than you’ll find with private lenders. In
particular, federal direct student loans boast lower-than-normal interest rates
and a variety of different repayment options, including income-driven
repayment.
Use the information
above to help you decide whether federal direct student loans are the right
choice for you. Armed with this knowledge, you will be able to make a better
decision about how you'll pay for your education.
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