What is a Federal Direct Loan?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 January 2020
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A federal direct loan is one of several loans offered to college students by the United States government. These loans have relatively low interest and several different repayment plans. There are three main types of federal direct loan: subsidized, unsubsidized, and PLUS.

In 1965, the US Congress passed the Higher Education Act, which provided loans to college students in an attempt to increase college attendance nationwide. This bill was the beginning of the direct loan program, and the loan portion of the bill became known as the William D Ford Federal Direct Loan Program. The terms of the Higher Education Act have changed and expanded over the years according to varying administrative policies and economic fluctuations. In 2010, the varying loan programs were merged into one large administrative group through the passage of the Health Care and Education Reconciliation Act. This act also made the US Government the sole lender for federal direct loans.


Students apply for a federal direct loan by filling out the Free Application for Federal Student Aid, more commonly known as the FASFA. This single form is used for all types of federal direct loan, though not all students may be eligible for all loan programs. The FASFA contains detailed questions about financial status, tax information, dependency, previous schooling, and family and personal history. Filling out a FASFA can be done online, and the application is generally filled out once per year. Forms become available on 1 January of each calendar year to apply for the next school year.

Federal direct loan terminology can be somewhat confusing, and it is important to understand the basic terminology to be sure of what is available. A subsidized loan is when interest does not accrue while the student remains enrolled at least half time at a college or university. An unsubsidized loan has interest accrue while the student is still in school, though payments are usually not made until after graduation or leaving college.

After filing a FASFA, students generally receive notification of which loans are available to them and how much they are allowed to borrow. Generally, borrowing amounts are based on university cost of living estimates, which include required expenses such as books and tuition, but also factors in housing, transportation, and food expenses. There is a maximum allowed borrowing limit, both per school year and for the entire span of higher-level education.

Most undergraduate students receive a combination of loans under the Stafford and Perkins federal direct loan programs. Graduate student may receive some of the same loans, but are also eligible for the PLUS loan, a higher limit but higher interest loan that can cover the much more expensive fees of advanced degrees. Parents who are paying for a child's education may also be able to apply for PLUS loans.

Repayment of a federal direct loan generally commences within six months to a year after graduation or cessation of attendance, though people with unsubsidized loans can choose to pay off the accruing interest while still in school. There are several types of repayment plan, including 10 and 30 year repayments, gradually increasing payments, and income-sensitive plans that allow payment to fluctuate based on income each year. It is important to note that student loans are impossible to get out of; unlike many other types of loan, they cannot be forgiven due to bankruptcy. Though it may be impossible for many to attend college without loans, it is important to create a repayment plan early so as to avoid panic upon graduation.



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