What Is a Federal Direct Loan?

If you’re starting to think about how to pay for college, applying for federal direct loans can feel overwhelming. That’s probably why only 61% of high school students filled out the FAFSA in 2018.

female college student

The ideal scenario is to not have to borrow any money to pay for college. But increasingly, most college students find that this isn’t an option for them.

So if you do have to take out student loans, federal direct loans are your best bet. The interest rates will usually be lower than private student loans, the repayment plans are more flexible, and you’ll receive certain federal protections.

What is a Direct Loan?

The U.S. Department of Education provides a program called the William D. Ford Federal Direct Loan Program. Direct Loans refer to the subsidized and unsubsidized loans available to undergraduates. The program offers several student loans and each one is a bit different.

Here are the four different types of student loans you could qualify for:

  • Direct subsidized loans: These are also sometimes referred to as Stafford loans. With direct subsidized loans, the Department of Education covers the interest that accrues on your loans while you’re still in school. This means you won’t have to start paying any interest on these loans until after you graduate. Undergraduate students must demonstrate a financial need to qualify for direct subsidized loans.
  • Direct unsubsidized loans: With this type of loan, you’re responsible for footing the bill for any interest that accrues while you’re still in school. And this interest will capitalize while it remains unpaid, adding principal to the original loan. For that reason, direct unsubsidized loans are not given based on financial need. Direct unsubsidized loans are also available to graduate and professional students.
  • Direct PLUS loans: If you apply for Direct PLUS loans, you’ll be required to undergo a credit check. These loans are designed for graduate and professional students who’ve had time to build their credit. However, you can apply for Direct PLUS loans with a cosigner. With PLUS loans, you’ll be given a six-month grace period after you graduate before you have to start repaying your loans.
  • Direct consolidation loans: Direct consolidation loans allow graduates to combine several loans into a single loan with one servicer. This can streamline your monthly loan payments and extend your loan repayment plan to 20 years.

See also: Subsidized vs. Unsubsidized Student Loans: What’s the Difference?

What are the eligibility requirements?

Here are the requirements you’ll need to meet to qualify for a federal direct loan:

  • Undergraduate at qualified school.
  • Have demonstrated financial need as determined by the FAFSA.
  • U.S. citizen or eligible non-citizen.
  • Have received a high school diploma or GED.
  • Enrolled at least half-time in an eligible school.
  • Not in default on any existing federal student loans.
  • Meet general eligibility requirements for federal student aid.

What is the maximum amount of student loans you can get?

Federal direct loans are easier to qualify for than private student loans, but there are limitations on how much you can borrow. These loan limits depend on how far along in school you are and whether your parents are contributing to your education.

Dependent undergraduate students

First-year$5,500 total; $3,500 subsidized
Second-year$6,500 total; $4,500 subsidized
Third and fourth years$7,500 total; $5,500 subsidized

Independent undergraduate students

First-year$9,500 total; $3,500 subsidized
Second-year$10,500 total; $4,500 subsidized
Third and fourth years$12,500 total; $5,500 subsidized

Graduate students have a $20,500 annual limit and a $138,500 lifetime limit.

How do I apply for a federal Direct Loan?

Most people will qualify for some type of federal aid, but it does take some planning on your part. Here are five steps you can take to begin this process.

1. Create your FAFSA ID

The first thing you need to do is create your FSA ID. This is a username and password you’ll use to access the Department of Education’s online system and view your financial aid documents.

If this is your first time creating an ID, it should only take about 10 minutes to complete. If you’ve filled out the FAFSA before and are creating a new ID, it may take a few days before you can sign in with your new ID.

2. Gather the documents you’ll need

You’ll need quite a bit of information to complete the Free Application for Federal Student Aid (FAFSA), especially if it’s your first time. It’s a good idea to gather this information before you get started so you don’t miss anything.

Here is a list of some documents you’ll need:

  • Your Social Security Number
  • Your driver’s license
  • You and your parents’ W-2 forms
  • Your parents’ federal tax returns from the year before (for dependent students)
  • Your federal tax returns from the year before (for independent students)
  • A bank statement
  • Any other record of previous income earned

3. Fill out the FAFSA

The deadline for filling out the FAFSA is June 30, 2023, by midnight. But, you should always submit the FAFSA as soon as possible, so you can work out the financial aid as soon as possible.

When you get started, you’ll need to choose the year you are attending school. If you’ve filled out the FAFSA before, you can choose the “renewal” form. This will automatically fill in your demographics information from the year earlier, saving you some time.

Here is some of the information you can expect to fill out:

  • Demographic information: This will be questions about your name, birthdate, and other basic information.
  • School information: This is where you will enter the information about schools you are considering attending. You can add up to 10 schools, even if you haven’t been accepted at any of them. This will ensure that your application is completed for whatever school you choose.
  • Dependency status: This will help the Department of Education determine whether you are a dependent or independent student.
  • Parent demographics: If you’re a dependent student, you’ll need to fill out demographic information for your parents as well. If your parents are still married, then both parents need to complete this section. If they’re divorced, you can use the parent who gives you the most financial support.
  • Financial information: For most people, this is the most difficult part of filling out the FAFSA. But it’s also one of the most crucial sections because this determines the amount of financial aid you’ll qualify for. And fortunately, it’s not as complicated as it seems. The FSA uses an IRS Data Retrieval Tool so you transfer your tax information pretty easily. Once you’re done, you should receive a message confirming the transfer was successful.

4. Review Your Student Aid Report (SAR)

Once you’ve filled out the FAFSA and submitted it online, you’ll want to review your Student Aid Report (SAR). It’s usually available two weeks after you’ve filled out the FAFSA.

Your SAR is sent to all the schools you listed on the FAFSA and this is the information they’ll use to determine your eligibility for student aid.

To review it, you’ll go to FAFSA.gov and log in using your FAFSA ID. You’ll click on the “My FAFSA” page and then “View or Print Your Student Aid Report (SAR).”

5. Review and Accept Your Financial Aid Letter

Once you’ve filled out the FAFSA, the schools you were accepted at will send you a financial aid offer letter. This letter will arrive by mail and will summarize the financial aid you qualify for.

You should review this letter carefully so you understand what kind of financial aid you’ll receive. The letter will include the following information:

  • The total cost of attendance
  • Your expected family contribution
  • Any grants and scholarships you’re eligible for
  • Any subsidized or unsubsidized loans you qualified for

Once you’re ready, you’ll accept your financial aid offer through your school’s financial aid office. They can help you work out the details of how your loans will be distributed.

See also: Beginner’s Guide to Federal Student Loans for 2023

What is the difference between federal and private student loans?

Most students begin by applying for federal direct loans and then use private student loans to fill in any funding gaps. Here are the most significant differences between the two types of loans.

Application ProcessYou’ll apply online at FAFSA.gov.You’ll apply with a private lender or bank.
EligibilityMost federal loans are easy to qualify for. You don’t need a cosigner or credit history.Borrowers need to show a strong credit history and proof of income. Or you can apply with a cosigner.
RatesThe rates are determined by law. This means all borrowers receive the same rates, regardless of their situation.The rates will be either fixed or variable interest rates. Borrowers qualify for the lowest rates based on their creditworthiness.
Borrowing LimitsYes, the FAFSA determines the borrowing limits.The lender determines the borrowing limits. But many lenders will let you borrow up to the total cost of attendance.
Borrower ProtectionsFederal loans come with income-driven repayment plans, deferment, forbearance, and loan forgiveness.Private loans have fewer borrower protections. These protections will be set by the lender.

Final Thoughts

It’s important to know how to apply for federal student loans so you can receive the funding you need for college. A federal student loan has some advantages that private loans don’t offer, but it’s still student loan debt that you’ll have to repay.

Make sure you understand all the terms and conditions before accepting student loans and never borrow more than you’re able to repay. And make sure you capitalize on all available scholarships and grants first.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about various personal finance topics including student loans, credit cards, investing, building credit, and more.