Student Loans

5 Facts About Federal Direct Student Loans

Don’t feel that college is impossible because you don’t have a lot of money. If you were to poll graduates and undergraduates, a large percentage might empathize with your situation. There is nothing cheap about college tuition, and when you factor in the cost of rooming, food, books and other supplies, the cost can soar to well over $20,000 for a four-year degree.

The federal government understands the financial dilemma faced by many college students. For this reason, the government has created several financial aid programs to help graduates and undergraduates work toward a degree. Direct Student Loans are the most common type of student loan. Before you apply, make sure you know the facts about these loans.

1. Types of Loans

With a Direct Loan, students and parents borrow directly from the federal government. Different types of loans are offered through the Direct Student Loans program. These include Direct Subsidized and Unsubsidized Loans, and Direct PLUS Loans available to parents and graduate students. Direct Consolidation is a third option that lets students consolidate their outstanding student loan balances into one loan, often at a lower interest rate. Most federal loans are eligible for consolidation. However, students who choose to consolidate cannot include a PLUS Loan for parents or a private student loan in their consolidation.

2. Repayment Requirements

Repayment on a Direct Loan depends on the type of loan. For example, students with a unsubsidized or subsidized loan aren’t required to make payments while in school. They can make periodic payments toward their interest and balance to reduce how much they owe after graduation, but repayment isn’t required until six months after graduation. Unfortunately, there is no grace period with Direct PLUS Loans for parents. Repayment begins after disbursement. For part-time or full-time graduate students with a Direct PLUS Loan, repayment does not begin until six months after graduation. In the case of a Direct Consolidation Loan, repayment begins within 60 days of disbursement.

3. Credit Requirements

Like repayment terms, credit requirements vary depending on the particular loan program. For example, students who apply for a subsidized or unsubsidized Direct Student Loans can get approved with no credit history or bad credit. There is no credit check with these types of loans which makes them easier to obtain than private student loans. However, the rules regarding credit scores differ for PLUS Loans for parents and graduate students. In both cases, applicants must have a good credit history. Any adverse information on the borrower’s credit report, such as a foreclosure, a bankruptcy or late payments, can prevent a loan approval.

4. Entrance Counseling

Before a student can receive a subsidized or an unsubsidized Direct Loan or a PLUS Loan, the school’s financial aid department may require entrance counseling. This is a meeting between the student and a financial aid counselor. The counselor explains how Direct Loans work, offers tips for managing educational expenses, discuss other available resources and explains the student’s rights as a borrower. Entrance counseling is typically required before a school disburses funds.

5. Fixed Interest Rate

Students loans offered by the federal government have better rates than most private lenders, thus increasing affordability. Direct Subsidized Loans (interest paid by the federal government while in school) have a fixed rate of 3.4%. For graduate and undergraduate students with a Direct Unsubsidized Loan, the interest rate is 6.8%. Direct PLUS Loans for parents and graduates have an interest rate of 7.9%.