Direct Loan

What is a Direct Loan?

A direct loan is a type of student loan made under the William D. Ford Federal Direct Loan program. Funding for the loan comes from the federal government, not private lenders.

Deeper definition

Direct loans are either subsidized or unsubsidized loans given to students who are attending or plan to attend a four-year college or university, a community college, or a trade, career or technical school. Unsubsidized direct loans are available to students attending graduate school.

To qualify for the loan, a student needs to demonstrate financial need. Students need to complete the Free Application for Federal Student Aid (FAFSA) if they want to be considered for a direct loan and for other types of federal aid, such as work study and grants.

The student also must enroll in a school that participates in the federal student aid. The government limits the amount a student can borrow under the Direct Loan Program, based on the student’s year in school.

Direct Loans have fixed interest rates, meaning they remain the same for the life of the loan. As of 2017, the interest rate on subsidized and unsubsidized Direct Loans for undergraduates is 3.76 percent. The rate on unsubsidized Direct Loans for graduate students is 5.31 percent.

If a student receives a subsidized Direct Loan, he or she isn’t responsible for paying interest while enrolled in school. Instead, the federal government pays the interest, as long as a student is enrolled at least half-time.

The government also pays the interest during the six-month grace period after a student leaves school. If a student receives an unsubsidized loan, he or she is fully responsible for the interest.

Direct loan example

If you are going to college or graduate school, filling out the FAFSA can help you see if you qualify for a Direct Loan. For example, Joe is a high school senior who plans to go to college next year. He completes his FAFSA by the due date.

Based on Joe’s financial information and expected family contribution, his school determines that he is eligible for a $1,000 Pell Grant, $2,000 in work study, and $3,500 from a subsidized Direct Loan (the limit for freshman students). Since it is a subsidized loan, Joe won’t have to pay interest until he leaves school.

A Direct Loan isn’t the only way to pay for college. Follow these tips to get the most financial aid when you fill out your FAFSA.

 

 

 

Other Loans Terms

Add-on interest loan

Add-on interest loans have interest baked into the principal. Bankrate explains.

Hypothecation

Hypothecation is the act of securing a loan with collateral. Bankrate explains.

Voluntary lien

Voluntary lien is an important term to understand. Bankrate explains it.

Add-on interest

Add-on interest is calculated at the start of the loan. Bankrate explains.

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