How Direct Loans Work

Direct loans are low-interest loans for college students funded by the federal government. See more college pictures.
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Paying for higher education is a daunting task. Few people have the ability to pay tuition and fees without borrowing money, and often they must turn to multiple sources to cobble together the necessary funds. Often, a portion of that money will come in the form of direct loans.

Direct loans are low-interest loans funded by the United States government. It doesn't matter how many different institutions you've borrowed money to attend; all of your direct loans are administered through the Department of Education.

There are a couple of advantages to direct loans. While interest rates for private loans fluctuate depending on the market and the borrower's credit score, direct loan rates are set on an annual basis. For the fiscal year 2009-2010, the rate for a subsidized undergraduate direct loan is 5.6 percent [source: Federal Student Aid]. Another point in their favor is that, unlike private loans, direct loans can never be sold to another lender. So, you're at least dealing with the same institution for the entire life of the loan.

Direct loans are offered in several forms. Figuring out which one is right for you will depend on your financial situation and what point you are in your education. Subsidized direct loans are for students who have demonstrated financial need, and no interest is charged during certain periods. Unsubsidized direct loans are not based on financial need, and interest is always charged. PLUS loans are for the parents of dependent students, as well as graduate or professional students. They also earn interest for the entire life of the loan.

One thing to keep in mind is that direct loans do have limits. For example, a first-year undergraduate with dependent status can borrow up to $5,500 for that year, of which $3,500 may be subsidized [source: Federal Direct Loans]. So, you will more than likely need to combine your direct loans with other funding sources in order to cover all the required expenses.

Before you begin the application process, you'll be required to complete an entrance counseling session. This will help answer your questions and budget your expenses.

See the next page for information about applying for direct loans.