The U.S. government’s Federal Direct Loan Program provides a lifeline for students and parents requiring financial aid for post-secondary education. Administered by the U.S. Department of Education, this is the only government-backed student loan program in the country.
Offering multiple types of loans such as subsidized direct loans, unsubsidized direct loans, direct PLUS loans, and direct consolidation loans for refinancing, the Federal Direct Loan Program effectively caters to diversity of student needs. Notably, subsidized direct loans are the only loans provided by the federal government that factor in an applicant's financial need, with the Department of Education covering interest charges while the student is studying.
There are limits set on these loans, with fixed maximum annual/aggregate allowances depending on progress in the course. If seeking such funding, students are tasked to submit the Free Application for Federal Student Aid (FAFSA) first and foremost.
Each category of the student population has different limits; undergraduate students can borrow from $5,500 to $12,500 per year, whereas professional and graduate students can borrow up to $20,500 annually in direct unsubsidized loans. Parents of undergraduate students also have the option to get additional assistance via direct PLUS loans.
Interestingly, these federal loans are part of the student loan forgiveness scheme proposed by President Joe Biden. This scheme, however, excludes private loans. Although this proposal was ruled unconstitutional by the Supreme Court on June 30, 2023, a new SAVE repayment program was immediately introduced.
The financial aid amounts are determined by colleges and universities based on individual circumstances of students. Direct subsidized loans, for example, are designated for undergraduates in financial need due to personal or familial economic hardships. They can cover an individual's education at a professional career school, college, or university, up to $12,500 per year or an aggregate of $57,000 over the undergraduate years.
Unsubsidized loans cater to eligible undergraduate, graduate, and professional students, regardless of their financial status, with borrowing limits up to $57,000 for undergraduates and $138,500 for graduate and professional students. Parents of undergraduate students and graduate or professional students are also eligible for these loans. These loans also cater to those with a less-than-perfect credit score if they fulfil additional requirements.
Noteworthy among student aids are direct consolidation loans that allow the combination of all eligible federal student loans into one loan, facilitating singular payments.
When seeking financial aid, parents should especially note that there is no minimum credit score for PLUS loans, but adverse credit is a deterrent.
Undeterred by the Supreme Court’s dismissal of his original student loan forgiveness plan, President Biden announced the Saving on a Valuable Education (SAVE) plan. SAVE allows loan forgiveness for an original principal amount of $12,000 or less after 10 years of payment rather than the previous 20-25 years.
While the federal direct student loan program has numerous advantages, including low and fixed interest rates and flexible repayment programs, it also has drawbacks such as caps on borrowing amounts. Plus, graduate students only have access to unsubsidized direct loans, and parents who take PLUS loans must bear associated fees.
Even though the federal program offers competitive interest rates and attractive loan consolidation and forgiveness programs, it caps loan amounts, unlike private loan companies. Private loans, despite their higher interest rates and fees, offer flexibility in usage. Thus, those seeking student loans should thoroughly examine all options.
The federal loans defer payments until after the students graduate, whereas not all private loans give this leeway. Federal loans might also qualify for loan forgiveness and special repayment plans, opportunities typically not available for private loans.
Considering the various elements of federal loans, an undergraduate student loan issued between July 1, 2023, and July 1, 2024, has an interest rate of 5.50%, while a graduate student's unsubsidized loan carries a 7.05% rate. Direct PLUS loans have an even higher rate of 8.05%. With certain repayment plans, loans may be forgiven after a set period.
On considering whether federal student loans are the right fit, remember to weigh the pros such as low and fixed interest rates against the limitations such as the capped amounts for borrowing each year. Always consider every available financing option before making an informed decision for your academic future.