How Direct Loans Work

Applying for a Direct Loan

A good deal of paperwork lies between you, your loan and your degree -- but for many, it's worth it.
A good deal of paperwork lies between you, your loan and your degree -- but for many, it's worth it.
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Since direct loans are a government program, it probably won't surprise you to know that they involve a lot of paperwork, guidelines and red tape. However, many others have successfully navigated this path before, so there's hope. Here's what you need to keep in mind before you begin your application.

The most important element in your direct loan application is the Free Application for Federal Student Aid (FAFSA). This application will contain all of the pertinent financial information that the Department of Education -- and, sometimes, other lenders -- use to determine what kind of aid is appropriate. You can either fill out the FAFSA electronically or mail in a hard copy. If you're planning to go the electronic route, applying for a PIN -- a four-digit number used to identify you on federal student aid Web sites -- ahead of time will make the process a little smoother.

When filling out the FAFSA, you'll include a code representing each of the schools to which you are applying. Once the application has been processed by the Department of Education, you and the schools will receive a Student Aid Report (SAR) that includes your Expected Family Contribution (EFC). The schools will use all of this information to determine what kind of federal financial aid eligibility you have, and then they'll present you with a financial aid package [source: FAFSA Overview].

Once you've determined which school you'll be attending and negotiated the financial aid package, you'll sign a Master Promissory Note (MPN). The MPN is a binding contract between you and the Department of Education and states that you promise to repay the loan. It also outlines the terms of the loan, penalties for late payments and defaulting, and repayment procedures. The Federal Student Aid Web site has a number of sample MPNs available for viewing. As with the FAFSA, you can fill out the MPN either electronically or in paper format.

So, now you've jumped through the hoops and settled on a financial aid package. But what are the options for repaying your direct loans?