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Financial Aid 101: Federal Direct Loans


All students who submit a FAFSA are offered a Federal Direct Subsidized and/or Unsubsidized loan as a part of their financial aid package. One of the comments we frequently hear from students is that loans should not be considered a form of financial aid. However, all schools (and the U.S. Department of Education) consider loans to be a form of "self-help" financial aid. In fact, most students borrow at least one federal student loan to help finance their college education. At DU, the average federal student loan debt at graduation for those who borrowed loans is $23,575lower than the national average of $29,214 for similar institutions!

What are Federal Direct Subsidized and Unsubsidized loans?
Federal Direct loans are student loans made available by the U.S. Department of Education to help cover the cost of higher education.

Who is eligible for Federal Direct loans?
Students who submit the FAFSA, meet the eligibility requirements for all types of federal student aid, and are enrolled at least half-time (6 credits or more) can borrow these loans.

What is the difference between Subsidized and Unsubsidized loans?
Subsidized loans are available to students who demonstrate financial need (which is determined by the FAFSA). The U.S. Department of Education pays the interest on these loans while you are enrolled at least half time and during the grace period. This means that until you begin repayment, they're basically interest-free!

Unsubsidized loans are available to all students, even if they do not demonstrate financial need. Interest begins accruing on these loans immediately after they're disbursed (paid out).

What are the terms of Federal Direct loans?
Here's a quick rundown:

Federal Direct Loan Terms:
Lender: U.S. Department of Education
Maximum Loan Amount: Depends on your dependency status and grade level
Interest Rate: 3.86% fixed. Interest does not accrue on subsidized loans while you are enrolled at least half time (6 credits or more) or during the grace period.
Origination Fee: 1.072% of the loan
Requirements to Receive Funds: Complete both a Master Promissory Note and Entrance Counseling online at, and be enrolled at least half time.
Repayment Terms:
Grace Period: 6 months
Repayment Length:
Between 10 and 25 years, depending on total borrowing and chosen repayment plan.
Payment Due:
Payment Amount:
Depends on chosen repayment plan

Let's review these terms in more detail:

  • Lender: The lender for Federal Direct loans is the U.S. Department of Education. However, once your loan has completely disbursed (or paid out) to DU, you will be assigned a loan servicer who will handle billing and other services related to your loan.
  • Maximum Loan Amount: Most students will be offered a total of $5,500 in Direct loans for their first year in school. Depending on the results of the FAFSA, many students will be offered a combination of both Subsidized and Unsubsidized loans. However, the total amount you can borrow depends on your dependency status and your year in school. (See the chart below for more details.)
  • Interest Rate: Currently, the interest rate is fixed at 3.86% for both Subsidized and Unsubsidized Federal Direct loans. This rate is set by Congress, and may change for the 2014-2015 academic year. (Interest rates are typically announced in May.)
  • Origination Fee: A 1.072% origination fee—charged by the U.S. Department of Education—is deducted from each installment of the loan at disbursement. This means the amount you receive will be slightly lower than the amount you'll repay. The fee on a $5,500 loan, for example, is $58.96.
  • Requirements to Receive Funds: If you accept a Direct loan, you must complete both a Master Promissory Note (which is your agreement that you will repay the loan) and Entrance Counseling (which will help you understand the terms of the loan) online at before any funds can be sent to DU on your behalf.
  • Grace Period: This is the period of time after you graduate (or drop below half-time enrollment) during which you do not have to make loan payments. You won't have to start paying back your Federal Direct loans until 6 months after you graduate.
  • Repayment Length: There are multiple repayment plans available, which have repayment terms that range from 10 to 25 years. The amount of time you have to pay back your Direct loans depends on which plan you choose.
  • Payment Due: Once you begin repaying your loans, you will need to make a payment to your servicer every month.
  • Payment Amount: Your monthly payments will depend on the repayment plan you choose and the total amount you've borrowed. If you choose the Standard Repayment Plan, for example, your payments will be at least $50 (although most students will have higher payments than that). If you choose a plan such as Income-Based Repayment, however, your payment amount will be based on your income. Learn the differences between each repayment plan through the Federal Student Aid website.

How much can I borrow?
As mentioned above, the total amount of Direct loan you can borrow depends on your dependency status (derived by FAFSA data) and year in school. (You are considered to be an independent student on the FAFSA if you are married, have children, are at least 24 years old, a graduate student, a veteran, a member of the armed forces, or an orphan, ward of the court or homeless.) Here are the maximum annual and lifetime loan limits:

Year in School Dependent Students* Independent Students
1st Year: $5,500 (no more than $3,500 may be in subsidized loans)  $9,500 (no more than $3,500 may be in subsidized loans)
2nd Year: $6,500 (no more than $4,500 may be in subsidized loans)  $10,500 (no more than $4,500 may be in subsidized loans)
3rd & Year: $7,500 (no more than $5,500 may be in subsidized loans)  $12,500 (no more than $5,500 may be in subsidized loans)
Maximum Total
Loan Debt:
$31,000 (no more than $23,000 may be in subsidized loans)  $57,500 (no more than $23,000 may be in subsidized loans)

*Dependent students whose parents are unable to borrow a PLUS loan are eligible for an additional $4,000 in unsubsidized loans during the 1st and 2nd years, and an additional $5,000 in unsubsidized loans during the 3rd year and beyond.

Is there a time limit on how long I can receive loans?
Yes, but only for Direct Subsidized loans. You cannot receive these loans for more than 150% of the length of your program. So, for a four-year bachelor's degree program, the maximum period you can receive Direct Subsidized loans is six years (150% of 4 years = 6 years). 

How will I receive my loan money?
As with all other types of financial aid, your loan(s) will first be sent to the Bursar's Office at DU (who is responsible for the collection and billing of tuition-related charges) and then applied directly to your University bill. The total amount of your loan will be disbursed evenly over three separate installments—one each for fall, winter and spring quarters. 

What if I am unable to make my loan payments?
Under some circumstances, you can request a deferment or forbearance on your loan, which means you can postpone payments for a period of time. Circumstances that may warrant a deferment or forbearance include enrolling in graduate school, inability to find employment, and economic hardship. Requests for a deferment or forbearance are made directly with your loan servicer.

Can my loan ever be cancelled or forgiven?
You must repay your loans even if you don't finish school or can't find a job. However, your loans may be forgiven if you take part in the Teacher Loan Forgiveness or Public Service Loan Forgiveness program.

Want more information?
Here are some additional resources:

We know there is a lot of information about Federal Direct loans here, so if you still have questions, please don't hesitate to contact us!

Up next week: The Federal Direct Parent PLUS Loan

Want to review past Financial Aid 101 emails? Check out the archives!

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