Direct Student Loans

College Funding Straight from the Federal Government

Paying for college places extraordinary financial burdens on families; especially in light of continually rising higher education costs.  Unless your college fund is well-stocked, you’ll be scraping for student financial aid along with your school-mates.  Scholarships, grants and loans are funding staples for university students, who use them to pay for tuition, books, housing and other college fees.  While each form of aid tackles school expenses, there are important distinctions to be made between the types of available assistance.

Grants and scholarships provide assistance that is not repaid.  Generally, grants help those with the highest levels of financial need, while scholarships cover college expenses for students who exhibit high standards in academics and athletics.  Some blended hybrid-type awards consider a combination of performance and need to determine winners, so the difference between scholarships and grants is not always clear cut in black and white.  The important thing to remember about both of these coveted forms of financial aid is that you are never required to pay the money back.

Whenever possible, pay for college with financial aid that doesn’t get paid back; but when free-money gift aid doesn’t cover all your bills, turn to student loans to bridge your higher education affordability gap.

Student Loan Options

College-aged individuals are not exemplary credit risks. Credit reports are summations of every credit encounter a person has logged during his or her lifetime – with greater numbers of successful interactions leading to positive credit scores.  The problem for most college students is not a history of bad credit, but rather a credit history that simply does not include enough entries.

Without a long history of repayment successes, your ability to secure funds from traditional independent lenders may be limited to risky high-interest loans.  Loans with unmanageable credit terms lead to subsequent defaults, and should be avoided.  If your college financial aid package requires a loan from a private bank or credit union, your best bet is to apply with the help of a creditworthy cosigner.  By adding another credit reference to your loan, your interest rate and repayment terms are improved.

Guarantee your private college loan with the help of a co-signer, but when you are on your own in your quest for student aid, your best path to success includes Federal Direct Loans from The United States Department of Education.

William D. Ford Federal Direct Loan Program

The U.S. Federal Government provides deep financial aid resources for college students.  Pell Grants and other free-money programs lift disadvantaged students into higher education, by granting educational assistance to the neediest qualified applicants.  To increase college access for a wider cross-section of potential students, the Federal Government also puts forth low-interest long-term loans.

The popular Stafford Loan program, a long-time federal financial aid stalwart, has recently been changed to accommodate modern students.  Historically, campus financial aid offices worked to provide college financial aid packages that included guaranteed Stafford Loan awards.  To utilize the funds, students were required to enter into borrowing agreements with private lenders, who administered each student’s guaranteed Stafford Loan.

Involving private lenders in the process created a perception of patronage between banks and government, so efforts have long been underway to sever the entities’ student loan relationships. As part of the Health Care and Education Reconciliation Act of 2010, Barack Obama and the 111th Congress cut out the middlemen and ended the private lender subsidy arrangement.  The move designates the student assistance effort as the only U.S. Government-backed lending program, and leaves the Federal Government as the sole administrator for Federal Direct Student Loans.

While the name and precise lending protocols of the program may have changed, the bottom line for students is that Federal Direct Loans provide the best source for low-interest fixed-rate school financing.

All forms of federal financial aid are initiated using a standardized request form called the Free Application for Federal Student Aid (FAFSA).

FAFSA

Grants and loans from the Department of Education are issued according to information submitted by students and their parents.  The FAFSA compiles family data related to income and assets, to create accurate snapshots of each applicant’s ability to pay for college.  Family size, and the number of members who are attending college influence federal financial aid awards.  Students may apply as ‘dependent’ candidates, or as ‘independent’ FAFSA filers.  Dependent students are claimed on their parents’ income tax returns, so parental financial information is also submitted with the student’s FAFSA.  Independent students are not claimed, so applications are limited to student data.  And maximum financial aid awards, including Federal Direct Loans, are higher.

FAFSA formulas distill family data to forecast where each student stands in terms of meeting education expenses.  Expected Family Contribution (EFC) is an important reference number that is submitted along with your Student Aid Report to each of the colleges you are considering attending. Campus financial aid offices match your FAFSA status with available student aid, until your college financing needs are met.  Formal financial aid offers include Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), TEACH Grants, Military Service Grants Federal Direct Student Loans and any other forms of institution-specific assistance that are available at your school.

Direct Subsidized and Direct Unsubsidized Loans

An important distinction exists between federally issued student loans : Some are subsidized, while others are not.   Direct subsidized student loans are reserved for the neediest applicants, and interest payments are guaranteed by the Federal Government during certain periods of the life of each loan. Direct subsidized loan participants do not pay interest on student loans:

• While they are enrolled in college
• During a six-month grace period after leaving school
• During any approved loan deferment period

Important change to subsidized loan repayment policy:  For loans issued after July 1st, 2012, the Department of Education will not pay interest due during the six-month grace period following school.  Interest that is not paid by students during this period will be capitalized and added to the principle balance of the loan.

Unsubsidized loans are granted to undergraduates and graduate students without a financial hardship requirement.  Interest is always paid by the borrower, even during school, so students who choose not to pay interest installments along the way are responsible for capitalized payments later on.

Both loan types are earned without formal credit checks; making them appealing financing avenues for limited credit college students.  Fixed interest rates provide payment planning possibilities, currently at 3.4% for subsidized and 6.8% for unsubsidized loans.

Filing status, as dependant or independent, influences the maximum annual loan disbursed to each qualified borrower.  An applicant’s  year in school also has an impact on how much he or she can borrow.  Currently, first year undergraduates are eligible for up to $5500 annually, if they are dependents.  Independent applicants in the same category can request up to $9500.

Second year Direct Loan participants have access to $6500 and $10,500 respectively.

The scale continues upward until graduate school, when eligible participants qualify for over twenty-thousand dollars worth of annual educational funding.  Lifetime limits are set at $31,000 for dependent undergraduate borrowers, who may not exceed the amount during their college careers. And for graduate students; career borrowing may not go beyond $138,500.

Federal Direct Consolidation Loans

For students or graduates with multiple loans, the Federal Direct Consolidation Program provides a path to prompt repayment that simplifies student debt management.  Like other college funding alternatives, consolidation comes with benefits and pitfalls.  On one hand, if you are struggling to make monthly student loan payments, consolidating your student debt creates a repayment structure you can meet.  But to do it, you’ll extend the life of your loan repayments, including higher interest payments over the course of the loan.

Consolidating stretches loan repayment up to 30 years, but provides opportunities for borrowers to lock-in to fixed interest rates, discarding volatile variable terms that came with their original loans.  Under Direct Consolidation, multiple student loan payments are replaced by a single monthly obligation, but changes are irreversible.  Once you sign-up to consolidate, your original loans are wiped from existence.  Before you proceed, make sure your current student loan terms will not be negatively impacted by consolidation; rebates and other benefits are sometimes lost during the transition.