Once you have maximized your gift aid/free money (scholarships and grants) to help pay for college, Federal Direct Student Loans may be a sound investment in yourself. Federal Direct Student Loans is a way to borrow funds affordably in your own name. Most colleges participate in the Federal Direct Student Loan Program, so ensure you complete the Free Application for Federal Student Aid (FAFSA) to be eligible.
Here are seven things you should know about the Federal Direct Student Loans:
1. Just because you are awarded a Federal Direct Student Loan doesn’t mean you have to borrow one.
Colleges and universities automatically add Federal Direct Student Loan to financial aid offers to all FAFSA applicants. No one can force you to borrow money. You are in the driver's seat to decide if you want to borrow all, some, or none of your Federal Direct Student Loan eligibility. If you want to decline it all or reduce the amount, simply contact the financial aid office and ensure that you get an updated financial aid offer.
2. Subsidized Federal Direct Student Loans are different from unsubsidized ones.
Subsidized are the best type of federal student loans. The federal government pays the interest on the loan while you are enrolled at least half-time, during your grace period, and during eligible deferment periods when you would otherwise be in repayment.
For unsubsidized loans, interest accrues on a daily basis. While you are enrolled at least half-time, in your grace period, or during any eligible deferment, you don’t have to make any payment of interest or principal. However, all the interest the accrues will be capitalized once prior to entering in repayment. In other words, the accumulated interest will be added to the principal so you will pay some interest on interest while in repayment.
Pro Tip: Focus on subsidized Federal Direct Student Loan funds first when you are borrowing to pay for college.
3. Each disbursement subtracts a loan fee.
Federal Direct Student Loans have a finance charge called a loan fee that is deducted from each disbursement. This means that you actually receive less funds than you actually borrowed. Loan fees are set at the start of the new federal fiscal year which started on October 1st. Currently, Federal Direct Student Loans have a 1.059% loan fee.
4. Each year you are limited in the amount you can borrow.
Federal Direct Student Loans are not limitless. The federal government established annual loan limits for each academic year for undergraduate students. In the first year, a student can borrow up to $3,500 in subsidized funds if they show financial need and an additional $2,000 in unsubsidized funds. In the second year, the borrower can have up to $4,500 in subsidized funds plus $2,000 in unsubsidized funds. For third undergraduates and beyond, the cap of subsidized loan funds is $5,500, and the cap for unsubsidized funds is $2,000. Be aware that your annual loan limit may be less based on other financial aid received and the cost of attendance while enrolled. If you are an independent undergraduate student, you can borrow an additional $4,000 in unsubsidized loan funds.
5. Every year you borrow will have a different interest rate.
The federal government sets the interest rate for Federal Direct Student Loans each year. Using the May sale of the 10-year Treasury, the US Department of Education announces the next year’s interest rate. For loans borrowed from July 1, 2019 to June 30, 2020, the Federal Direct Student Loan interest rate is 4.53%. This means that any interest that accrues while you are in school, your grace period of in deferment on an unsubsidized loan will be calculated monthly based on the 4.53%. Also, this same interest rate will be used to calculate interest while the loan borrower is in repayment or in forbearance.
6. You have to be enrolled at least half-time or you’ll start your 6-month grace period.
In order to borrow a Federal Direct Student Loan and not start the countdown to repayment, you must be continuously enrolled at least half time. Because most colleges consider summer as an optional enrollment period, this typically means that you have to take 6 credit hours in the fall and spring semesters. Hopefully, you are considering taking 15 or more credits per semester in order to have enough credits to graduate for an undergraduate degree in 4 years.
Once you graduate or cease to be enrolled at least half time, you trigger a 6 month grace period, a period of time that requires no payment of interest and principal. The idea of the grace period is give you to give you time to find a job and establish yourself before you start your loan repayment.
7. Federal Direct Student Loans help you to build a credit history.
You don’t need a credit history in order to be eligible to Federal Direct Student Loans. Just like other forms of credit and loans, Federal Direct Student Loans are reported to the major credit reporting agencies. This means that when you borrow these federal student loans, you are establishing a credit history. How you handle your student loan repayment will determine if having your Federal Direct Student Loan helps you to establish a positive credit history or a negative one. Pay on time when you are required to make student loan payments or ensure that you have been granted a deferment or forbearance, then you will build a positive credit history. If you pay late, skip a payment, or assume an application for deferment or forbearance means you will immediately be eligible, then your credit score will fall, it will be harder to get other forms of credit, or it will be more expensive when you are wanting to take out new forms of credit.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.