The Federal Direct Loan Program

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November 2008—The William D. Ford Federal Direct Loan program is a form of government financial aid that allows students to borrow money for college directly from the U.S. Department of Education rather than from a bank or commercial lender. Hundreds of colleges who wanted to feel more certain about providing student loans next year joined the federal Direct Loan program in 2008. For students, the financial aid application process is exactly the same, but there are differences in the way Federal Direct Loans are managed and repaid. In some ways, managing a student loan awarded through the Direct Loan Program is a little simpler.

Federal Student Loans and the Credit Crisis

The U.S. Department of Education has two student loan programs, the bank-based Federal Family Education Loan Program and the Direct Loan Program. Like other businesses hindered by the recent credit crisis, schools became concerned about the credit availability of the bank-based loan program and signed up to participate in the Direct Loan Program. If your school participates in the Direct Loan Program, you may want to consider this loan option when you apply for federal financial aid.

The Advantages of a Federal Direct Loan

Obtaining a student loan through the Direct Loan program has several advantages:

  • The money you borrow will come from the federal government. Unlike some banks who may be having trouble finding money to loan out, the federal government has plenty of financial aid funding to lend.
  • When it comes time to repay your loan, you will work with just one customer service center, the Direct Loan Servicing Center, for everything related to your loan(s)—even if you have more than one Direct Loan from different schools. Don't underestimate this convenience—having just one point of contact really simplifies your life.
  • The Direct Loan program offers several different repayment plans. You choose the one that works the best for you, and if you need to switch from one repayment plan to another for any reason, you can do that.
  • The Direct Loan Program has a website,, where you can check on your loan account 24 hours a day, 7 days a week.

Subsidized and Unsubsidized Direct Loans

Like those in the federal bank-based loan program, student loans offered through the Direct Loan Program are known as Stafford Loans for undergraduate students and PLUS Loans for graduate and professional degree students (PLUS Loans/Grad Students) and parents (Plus Loans/Parents).

If you qualify for a Subsidized Direct Stafford Loan, the U.S. government will pay the interest on your loan during the time you're in school, for the first six months after you leave school, and during any payment deferment period, if you qualify for one. (By paying your loan interest during these specified times, the federal government is subsidizing your college attendance.) A subsidized loan is awarded on the basis of financial need.

If you don't qualify for a Subsidized Direct Stafford Loan, you may still apply for an Unsubsidized Direct Stafford Loan. With an unsubsidized loan, you're responsible for paying the interest from the date the loan money is released (disbursed) to you, whether you're in school or not.

To qualify for either type of direct loan, you must be in school at least half-time.

Federal Direct Loan Amounts

The amount of money you can apply for depends on several factors, including whether you are still claimed as a dependent on your parents' taxes or not, whether your parents tried to get a Parent PLUS loan, whether you are an undergraduate or graduate student, and what year of school you're in. Based on these factors and financial need, the amount of your Direct Loan can range from $5,500 (undergraduate freshman) to $20,500 (graduate or professional student per year, in a combination of subsidized and subsidized loans.

Federal Direct Loan Interest Rates

Interest rates on federal student loans are generally lower than what you'll get with private loans, which is why you should always take out as much as you can in federal loans before applying for private loans. The borrowing fees and terms on federal loans are usually better, too. For Undergraduate subsidized loans first paid out on or after July 1, 2008, the interest rate is fixed at 6.0%. For Graduate subsidized loans paid out on or after July 1, 2008, and for both Undergraduate and Graduate unsubsidized loans first paid out on or after July 1, 2006, the interest rate is fixed at 6.8%. For all PLUS loans first paid out on or after July 1, 2006, the interest rate is fixed at 7.9%.

How to Apply for a Federal Direct Loan

You apply for a Federal Direct Loan by submitting a FAFSA, the Free Application for Federal Student Aid. The FAFSA is your gateway not only to federal student loans, but also to financial aid from your state and local government, as well as your school.

The FAFSA can be filled out online, which makes the application process faster. For the 2008–2009 school year (July 1, 2008–June 30, 2009), the FAFSA submission deadline is June 30, 2009. For the 2009–2010 school year (July 1, 2009–June 30, 2010), you can submit your FAFSA as early as January 2, 2009. See our FAFSA article for more details on this essential federal financial aid application.

The Master Promissory Note

A promissory note is a written document in which a borrower promises unconditionally to repay a loan to the lender. Promissory notes often accompany loans and contain the loan's terms and conditions.

To be eligible for a Federal Direct Loan, you must complete a Master Promissory Note along with your FAFSA. Fortunately, this can also be accomplished online. One Master Promissory Note will cover one or more loans for one or more academic years (up to 10 years). There are two types of Master Promissory Notes in the Direct Loan Program: one for student loans and one for parent PLUS loans.

If you're a student and you attend only one school, one Master Promissory Note will probably cover all your direct subsidized loans and direct unsubsidized loans over more than one academic year. If you are a parent whose child attends one school, you will probably only sign one Master Promissory Note for all your Direct PLUS Loans for that child over multiple academic years.

In some circumstances, such as attending more than one school, you may need to sign more than one Master Promissory Note.

Don't Skip the Federal Direct Loan Opportunity!

Don't assume you won't qualify for a federal loan. It turns out that nearly half the number of college students who would have qualified for federal loans didn't even apply, losing out on thousands of dollars in financial aid.

Most, if not all, of CourseAdvisor's partner schools have financial aid offices or advisors who can offer assistance with obtaining federal student aid. When you talk with the representative from the school you're interested in, ask for details on Federal Direct Loans and other federal financial aid programs.

1) "Direct Lending Could Overtake Bank-Based Loans," Paul Basken, Chronicle of Higher Education, 11/7/2008
2) Student Aid on the Web