Department of Education Direct Loan Program Q&A

One of the most common types of student loan / student aid is a direct student loan from the U. S. Federal Government, as offered through the Department of Education's Direct Loan Program. There are four different types of loans available through the Direct Loan Program:

Federal Direct Stafford/Ford Loans (Direct Subsidized Loans)

Students must demonstrate financial need to receive this type of loan. (The school determines financial need based on the information provided on a financial aid application.) The federal government pays the interest on these loans while students are in school at least half time and during certain periods, such as grace and deferment.

Federal Direct Unsubsidized Stafford/Ford Loans (Direct Unsubsidized Loans)

Students can get these loans regardless of financial need but will have to pay all interest charges.

Federal Direct PLUS Loans

Parents of dependent students can get these loans to pay for their children's education. Parents are responsible for all interest charges.

Federal Direct Consolidation Loans

These loans combine one or more federal education loans in one new Direct Loan. Only one monthly payment is made to the U.S. Department of Education. In certain circumstances, students who have loans under the Federal Family Education Loan Program may consolidate them into Direct Loans.

How do I apply for a Direct Loan?

Students fill out one application -- the Free Application for Federal Student Aid (FAFSA). Parents must complete a separate PLUS Loan application available from postsecondary institutions.

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How much can I borrow?

The amount students can borrow each year for Direct Subsidized and Direct Unsubsidized Loans depends on whether they are dependent students or independent students.

	Dependent Student	Independent Student
1st year undergraduate	$2,625	$6,625
2nd year undergraduate	$3,500	$7,500
3rd and 4th year undergraduate	$5,500	$10,500
Graduate/professional	NA	$18,500

The amount a student can borrow is also limited by the student's school costs, other financial aid the student may receive, and (in the case of Direct Subsidized Loans), the student's Expected Family Contribution.

These are the overall limits for all subsidized and unsubsidized loans (including a combination of FFELs and Direct Loans):

$23,000 for a dependent undergraduate student
$46,000 for an independent undergraduate student
$138,500 for a graduate or professional student (including loans for undergraduate study)

Note: The unsubsidized loan limits may be higher for health professions students who are enrolled in certain degree programs at a school that participated in the Health Education Assistance Loan Program. Please contact the Servicing Center for more information.

The parent of a dependent student can borrow up to the cost of the student's education minus other financial aid the student receives.

What repayment options are available for my Direct Loan?

There are four ways to repay a Direct Subsidized Loan or Direct Unsubsidized Loan. Direct PLUS Loan borrowers may choose from the first three options.

Standard Repayment Plan

This plan requires fixed monthly payments (at least $50) over a fixed period of time (up to 10 years). The length of the repayment period depends on the loan amount. This plan usually results in the lowest total interest paid because the repayment period is shorter than under the other plans.

Extended Repayment Plan

This plan allows loan repayment to be extended over a period from generally 12 to 30 years, depending on the total amount borrowed. Borrowers still pay a fixed amount each month (at least $50), but monthly payments usually will be less than under the Standard Repayment Plan. This may make repayment more manageable; however, borrowers usually will pay more interest because the repayment period is longer.

Graduated Repayment Plan

This plan allows payments to start out low and increase every two years. This plan may be helpful to borrowers whose incomes are low initially but will increase steadily. As in the Extended Repayment Plan, the repayment period will vary from generally 12 to 30 years, depending on the total amount borrowed. Again, monthly payments may be more manageable because they are lower, but borrowers usually will pay more interest because the repayment period is longer.

Income Contingent Repayment Plan

This plan bases monthly payments on the borrower's income and the total amount of Direct Loans borrowed. As the borrower's income rises or falls each year, monthly payments will be adjusted accordingly. Borrowers have up to 25 years to repay; after 25 years, any unpaid amount will be discharged, but borrowers must pay taxes on the amount discharged.

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What should I consider when choosing a repayment plan?

Making a monthly budget can help you see what you can afford. A budget will show you what's coming in (income) and what's going out (expenses), as well as where it's going. It could show you that you can afford larger monthly loan payments than you thought, or it could show you that you need to cut back on nonessential spending so you can meet your loan obligations.

Remember that you don't necessarily want to choose a plan just because it has the lowest monthly payments. That may seem tempting, but it may not be the best course of action for every borrower.

The Servicing Center staff can also help you choose a repayment plan. Once you've considered your options, give the Servicing Center a call if you need advice.

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Can I change my repayment plan later?

If you ever decide that the plan you selected no longer meets your needs, you can switch plans. The maximum repayment period for your new plan must be longer than the amount of time your loans have already been in repayment.

Call or write the Servicing Center if you decide you want to switch plans.

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What is the interest rate on Direct Loans?

Below are the interest rates for student loans first disbursed on or after July 1, 1998. The rates are effective for the period July 1, 2001 through June 30, 2002: the interest rate for new student loans (Direct Subsidized and Direct Unsubsidized loans) in repayment is 5.99%. During in-school, grace, and deferment periods, the rate is 5.39%. The interest rate for new parent loans (Direct PLUS loans) is 6.79%.

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What is loan consolidation?

Consolidation means combining your eligible federal education loans into one new Direct Loan and making only one monthly payment.

Because the interest rate will be the same as for Direct Loans, you may be able to pay less interest on a Direct Consolidation Loan than you're paying on your current loans. You may be able to reduce your monthly payments. And you can choose the repayment plan that best fits your financial circumstances.

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What if I have difficulty making my payments? What if I'm going back to school? Can I ever postpone repayment?

You have two options for postponing repayment: deferment and forbearance. A deferment means you may postpone making payments on your loan under certain specific conditions. During forbearance, you may make either no payments or smaller payments than originally scheduled for a limited period of time.

You must contact the Direct Loan Servicing Center to request a deferment or forbearance.

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Can I prepay to get ahead on my loan?

As a Direct Loan borrower, you always have the option to pay more than your monthly payment without penalty.

If you make a payment that exceeds the required monthly payment, the prepayment will be applied in this order: first to any charges or collection costs, then to outstanding interest, and last to principal.

However, if your account is current and your additional payment is equal to or greater than one monthly installment, the entire prepayment will be applied to the principal and your next payment due date will be delayed. You will be notified of a revised due date for your next payment.

If you do not want your due date delayed, you should make a note on the bill that accompanies your prepayment. Your prepayment will then be reflected as a reduction in your principal, and there will be no change in your next payment due date.

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What happens if I don't repay my Direct Loan?

If you fail to make a payment on time, you're considered delinquent on your Direct Loan. If you do not make payments for 270 days, you are considered to be in default. Default has severe and long-lasting consequences, including the following: The Department of Education can immediately demand repayment of the total amount due on the loan.

The Department will attempt to collect the debt and may charge you for the costs of collecting.

The default will be reported to national credit bureaus. Your credit rating will be damaged, which will make it difficult for you to make purchases such as a car or house.

You are ineligible for Title IV student aid.

You are ineligible for deferments.

The Internal Revenue Service can withhold your federal income tax refund.

Your wages may be garnished.

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Can my loans ever be discharged?

Yes. A discharge releases you from all obligation to repay your loans. You can receive a discharge with proof of the following: You become totally and permanently disabled. (This cannot be for a condition that existed at the time you applied for the Direct Loans, unless a doctor certifies that the condition substantially deteriorated after the loans were made.)

You are unable to complete a course of study because your school closed or because your eligibility was falsely certified by the school.

Your obligation to repay a loan is discharged in bankruptcy (in rare cases).

You die.

You may not avoid repaying your loans because you did not complete your program of study (for reasons other than school closure or false certification of loan eligibility), did not like your school or program of study, or did not obtain employment after completing your program of study.

Source: U.S. Department of Education, Direct Loan Program