Learn How Federal Direct Loans Can Help Fund Your College Education

By Kate Gillan | Citizens Staff

What is a Federal Direct Loan and How Does it Work?

If you're looking for ways to pay for college including student loans, and specifically Federal Direct Loans, you're not alone. According to the Department of Education, more than 33 million borrowers in the U.S. have at least one Federal Direct Loan, and 92% of those loans are made by the federal government. Federal Direct Loans, formerly called Stafford Loans, are low-interest loans taken out in the student's name (not the parent or guardian's) for eligible students to help cover the cost of higher education at a four-year college or university. To learn about some helpful features of the loan, read on!

Getting to Know the Difference: Subsidized or Unsubsidized Loans

Federal Direct Loans, or Stafford Loans, include the following types of loans:

A subsidized loan is awarded on the basis of financial need, as determined by how you fill out the FAFSA, or Free Application for Federal Student Aid. If you are eligible, you won’t be charged interest while you are in school on a full time or at least half time basis, during a grace period of up to six months after you graduate. The Federal Government pays (subsidizes) the interest during this period. These loans also have lower borrowing limits than an unsubsidized loan. But to keep things simple, check out the chart below for details and loan eligibility requirements:

What Is the Amount of a Federal Direct Loan?

According to Student Aid, first-year undergraduate dependent students are eligible for loans of up to $5,500, but only $3,500 of that amount can be subsidized. Variations include year in school, dependent or independent students, and whether the student is a graduate student, in which case they can only take out a maximum of $20,500 annually with an unsubsidized loan only.

Who Qualifies for Federal Direct Loans & How Are They Dispersed?

To qualify for Federal Direct Loans, students must be a U.S. citizen, permanent resident, or eligible non-citizen, enrolled at least part-time in an accredited college, and not in default on any other education loan. And now, for some good news: According to the U.S. Department of Education, almost every FAFSA applicant is eligible for some kind of student aid package that may include federal student loans.

A school will then apply your loan funds to pay for tuition, fees, room and board, and other charges. Also under consideration are any scholarships, grants and work-study programs. If any additional funds remain, the money will be returned to you, which is why it’s important to carefully consider the amount of student loan funding you need.

How Do You Repay your Federal Direct Loan?

While it’s wonderful to receive a loan, they must be paid back. As mentioned above, you will have a six-month grace period to pay back your Federal Direct Loan. Of course, you also have the option to begin repayment directly upon graduation if your financial situation allows. Keep in mind the interest on an unsubsidized loan is still accruing during the grade period. Also, if you reach the maximum amount of borrowed funds over the course of your education, you are not eligible for more loans. But you can repay some of your existing student loans and therefore fall below the aggregate loan limit. You may then be able to borrow again.

With subsidized Federal Direct Loans, you may not receive the loan for more than 150% of the published length of your program. This is called the “maximum eligibility period.” If yours is a four-year degree program, for example, you’ll have six years to borrow this type of loan, even if you take longer than six years to graduate. However, with an unsubsidized Federal Direct Loan, students don’t have the same rules regarding eligibility, so students who take longer than six years to complete a four-year program are in the clear. The standard repayment period for Federal Direct Loans is 10 years, but you can secure a longer repayment term if you have more than $30,000 in federal student loans.

Also, if you’re struggling to make payments due to circumstantial hardship, like the loss of a job, you may qualify for loan deferment, or forbearance, for a certain amount of time. This means you’d temporarily stop making federal student loan payments or reduce the amount you pay, but there are drawbacks to unsubsidized loans because the interest will continue to accrue at its regular rate and start to pile on to the total loan amount.

When it’s time for repayment, your college will support you. If you received a Federal Direct Loan during school, upon graduation you will have exit counseling. This is a mandatory information session that explains your student loan repayment responsibilities and when repayment begins, and it’s run by your school’s financial aid office. 

Ready To Learn More About Federal Direct Loans?

For more information on Federal Direct Loans, or to choose the right one for you, visit Citizens Student Lending. Whether you use federal or private student loans to pay for college or graduate school, know that you have a bright future ahead!