Federal Direct Loan Program: Meaning, Types, Pros and Cons

The Federal Direct Loan Program provides low-interest student loans to post-secondary students (undergraduates and graduate students) and their parents.

The William D. Ford Federal Direct Loan Program, managed by the U.S. Department of Education, is the only government-backed student loan program in the U.S.

How the Federal Direct Loan Program Works

The Federal Direct Loan Program offers several types of loans, including subsidized direct loans, unsubsidized direct loans, direct PLUS loans, and direct consolidation loans for refinancing student loans.

Subsidized direct loans are the only student loans made by the federal government that are based on financial need. The U.S. Department of Education pays the interest on these loans while the student is in school.

Loan Amounts

All loans granted through the Federal Direct Loan Program have maximum annual amounts and set aggregate amounts. Each successive year allows for an increase in the total maximum yearly loan amount. Students who wish to apply for funding must first submit the Free Application for Federal Student Aid (FAFSA).

Undergraduate students can borrow $5,500 to $12,500 per year, depending on their year in school and their dependency status. These amounts are for both direct subsidized loans and direct unsubsidized loans.

Professional and graduate students may borrow $20,500 each year in direct unsubsidized loans, and parents of undergraduate students can borrow using a direct PLUS loan.

Loan Forgiveness

Loans from the Federal Direct Loans Program are eligible for the student loan forgiveness proposed by President Joe Biden, but private loans are not. (Biden's student loan forgiveness program was deemed unconstitutional by the U.S. Supreme Court on June 30, 2023 but the administration announced the new SAVE repayment program on the same day.)

Types of Federal Direct Student Loans

Direct Subsidized Loans

Direct subsidized loans are for undergraduate students who are eligible for financial assistance due to their or their families' economic circumstances.

These loans help to cover the costs of a professional career school, college, or university. Qualified individuals can borrow up to $12,500 per year in direct subsidized loans and $57,000 in total during their undergraduate years.

Direct Unsubsidized Loans

These federal loans are available to eligible undergraduate, graduate, and professional students. They are not based on financial need. Undergraduate borrowers can take out $12,500 per year and up to $57,000 in total. Graduate and professional students can borrow up to $20,500 per year and $138,500 in total.

Direct PLUS Loans

These loans are offered to parents of undergraduate students and graduate or professional students to help offset the costs of education not covered by other financial aid. Eligibility is not based on financial need.

Borrowers with less than stellar credit may access these loans, but they will have to meet additional criteria.

Direct Consolidation Loans

These loans allow a student or family to combine all eligible federal student loans into one loan with a single service provider and loan payment. Direct consolidation loans also provide access to additional loan repayment programs.

How to Get a Federal Direct Loan

1. To obtain any federal direct loan (subsidized or unsubsidized), you must complete the FAFSA form to find out if you qualify.
2. On the form, you will be asked to create an account with the U.S. Federal Student Aid Office, which will issue you an ID to access the site.
3. After you file your FAFSA, your college will send you a student financial aid letter outlining the aid available to you, including federal direct loans.
4. If you qualify for subsidized direct loans, consider them first because they have a lower interest rate. Unsubsidized direct loans are also available. PLUS loans are the most costly of the federal direct loans due to fees and higher interest rates.
5. Once you've decided on the federal direct loans you want, contact your school's financial aid office to take the necessary steps.
6. The money will be sent directly to the school and used for tuition, room and board, and other costs. Any money left over is given to you. All of the money must be repaid.

Advantages and Disadvantages of the Federal Direct Student Loan Program

The federal direct student loan program has its advantages and disadvantages.

Advantages

• One advantage of federal direct student loans versus private loans is the low-interest fixed rates.
• Federal loans (except for PLUS loans) do not require strong credit.
• The interest on subsidized federal student loans is paid by the government while you are enrolled at school.
• Federal direct student loans have several pathways to repayment via federal repayment and loan forgiveness plans.

Disadvantages

• Only unsubsidized loans are available to graduate students.
• These students are also charged higher interest rates than undergraduates.
• Discharging a federal student loan through bankruptcy may be possible in certain cases, but only after you file a separate action in court.
• Federal direct loans have lower loan limits for undergraduates claimed as dependents on their parents' or guardians' income taxes.
• Students must apply each year for direct loans.

Federal Direct Loans vs. Private Loans

Private lenders also provide student loans that can be used instead of—or in addition to—federal loans. Those seeking student loans should carefully investigate all available options.

Consider the following differences:

The federal program often has more favorable interest rates and other attractive provisions, such as loan consolidation and forgiveness programs.

Federal direct student loans have a cap on loan amounts. Private loan companies do not often impose a cap on how much they will lend.

Interest rates may be higher, but private loans may offer flexibility in how the money can be used. All in all, though, private student loans usually end up being more expensive than federal student loans.

Federal direct student loan payments are deferred until you graduate, but not all private loan payments offer the same option.

In addition, while direct loans may be eligible for student loan forgiveness and repayment plans, private loans may not be eligible.

The Bottom Line

The Federal Direct Student Loan program offers a number of advantages, including low interest rates and fixed interest rates, but there are downsides as well. For example, you can only borrow a certain amount each year. Consider all of your financing options before deciding which type of student loan is best for you.