Time to start planning for a federal student loan? You have several options available to you under the William D. Ford Direct Loan Program. In fact, there are four main options. You have Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.
Direct Subsidized Loans
These loans are for those who demonstrate financial need and have slightly more favorable terms than the unsubsidized versions. You may receive these loans if you are an undergraduate student. The amount that you can borrow under the program is determined by your school and can never exceed your financial need.
Under this program, the Department of Education will pay the interest on the loans while you are in school at least half time. They will also pay interest during the initial 6 month grace period after school and for most will pay interest during a period of deferment.
So, exactly how much can you borrow under this program? The amount that you can borrow will escalate as you progress through school. For the first year, you can borrow up to $3500. For year two, you can borrow up to $4500 and for years three and four, you can borrow up to $5500 in subsidized loans. You can not use subsidized loans at all for graduate work.
In addition to the dollar limits above, there are also time limits. You can not receive subsidized loans for longer than 150% of the advertised length of your degree program. In other words, if your in a 4 year program, you can not receive subsidized loans for longer than 6 years.
Finally, you should also know that there are certain situations where you may become responsible for the interest on your subsidized loans. One is if you become financially ineligible for the loans and are still in your academic program. Another is if you transfer into a shorter program which would cause you to exceed the 150% time limit of the new program.
If you qualify for and receive a subsidized loan, all funds will be sent to the school. They will deduct the cost of tuition and school fees and return to you any additional money.
Direct Unsubsidized Loans
These are loans that are not issued on the basis of economic need and are available to both undergraduate and graduate students. Your school will determine how much you can borrow and this amount is based on the cost of the school and other aid that you receive.
The main difference between this type of loan and a subsidized one is that you are responsible for all of the interest on the loans at all times. This means that interest will accrue unless you decide to pay the interest while in school and in deferment.
And now, what is the cap for unsubsidized loans. It depends if they are classified as a dependent or independent student. Dependents are capped at $5500 the first year, $6500 the second year and $7500 for the last two years. For graduate work, students would be considered independent so they move to that category. For independent students, the cap is $9500 the first year, $10,500 the second year and $12,500 for the third year and fourth year. Graduate work is capped at $20,500 a year.
Dependent students are capped at $31,000 in total loans for undergraduate work while dependents are capped at $57,500. Graduate work is capped at $138,500. Students in certain healthcare programs may qualify for more money on a per term and cap basis.
Just like with subsidized loans, direct loans will be paid to the school. They will then deduct any school fees like tuition, room and board, etc. The remainder of the money will go to you.
Direct PLUS Loans
Direct PLUS Loans are given to graduate students and can be received by the parents of undergraduate students. To qualify for these loans, you need not meet financial limitations, but you must have satisfactory credit. A bad credit history can be overcome by meeting additional qualifications.
In order for a parent to qualify for one of these loans, they must be the biological, adoptive or step parent of a dependent undergraduate student. The student in question must be attending an eligible school and must be at least a half time student. The parent must have a good credit history although there are some ways around this.
If the parent applying for the loan has negative credit history that could potentially disqualify them for a loan, they have two choices that can get them approved. First, they can get an endorser who has good credit history. The endorser would be responsible for the loan if the parent defaults, just like a cosigner. The other option is for the parent to prove to the Department of Education that there were extenuating circumstances that led to the adverse credit.
If you receive a Parent Plus Loan, it will accrue interest from day one. In addition, there will be a fee assessed based on a percentage of the loan. Proceeds from the loan are given to the school who will deduct school tuition and fees. Any remaining loan proceeds will be disbursed after this.
When it comes time to repay the loan, the parent will have several options including a standard, graduated and extended plan. With the standard plan, the monthly loan payments will be the highest but the loan will be paid back the fastest. With the graduated plan, the loan repayment starts with lower payments that increase every two years. Finally, there is the extended plan which will have the lowest payment but the longest repayment term.
To qualify for a Grad Plus loan, the student must meet the requirements to receive financial aid, must be enrolled at least half time and must not have adverse credit. Essentially, almost everything is the same as a Parent Plus loan with the exception of the student being the borrower.
Direct Consolidation Loans
Direct Consolidation allows you to combine several federal loans into one. The benefit being that your payment will be lower and the repayment process will be less complicated.
The good thing is that you will be paying just one payment instead of multiple ones to different loan service companies. In addition, you can greatly reduce your payment by stretching your loan out, as much as thirty years. On the downside, you should be aware that you may lose any interest discounts that you are currently receiving on another loan. In addition, you might lose credit for payments that you have made going towards a loan forgiveness program such as PSLF.
If you are considering consolidating your loan, you become eligible to do so immediately after you graduate, leave school or drop below half time student status. Loans must be in repayment or their grace period. You can not consolidate a loan that has been defaulted on until you have first rehabilitated it by making timely payments.
When you apply for loan consolidation, you will have may repayment options available and will select one at that time. Your first payment will be made 60 days after funds are disbursed.
Payment options include standard repayment, graduated repayment, extended repayment, pay as you earn, income contingent repayment and income sensitive repayment. Look at your repayment options here. The first three on the list above are pretty standard while the remaining ones may allow for some of your loan to be forgiven.
Information Accurate At Time Of Writing 4/2019.