There are two federal loan programs: the William D. Ford Federal Direct Loan Program (often called the Direct Loan Program) and the Federal Perkins Loan Program, though the Perkins Loan Program is being phased out. As of September 30, 2017, no new Perkins Loans are being distributed. Though both are federal programs, only the Direct Loan Program is managed by the U.S. Department of Education. Individual postsecondary schools manage Perkins Loans. No two loans are exactly the same. Learn the differences here.
What is the Direct Loan Program?
The Direct Loan Program is the largest federal student loan program and is maintained by the U.S. Department of Education. It administers four different types of loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Direct Consolidation Loans. Students borrow money directly from the government, typically at lower interest rates than private lenders offer. To qualify for Direct Loans, students typically need to enroll in a degree or certificate program at least half-time.
Direct Subsidized Loans
- Amount: Each institution determines the amount that can be borrowed. Undergraduates can receive loans ranging from $3,500 to $5,500 each year depending on their dependency status and what year of school they’re in. First- and second-year students have lower annual loan limits, so they can borrow less.
- Eligibility: This option is available to undergraduate students who demonstrate financial need and are enrolled at least half-time in degree- or certificate-seeking programs. Graduate students are not eligible for Direct Subsidized Loans.
- Interest: The current fixed interest rate is 4.45%. The U.S. Department of Education pays interest on these loans while a student is enrolled at an institution at least half-time, for the first six months after a student graduates or leaves school, and during a period of deferment.
- There is also a 1.066% loan fee deducted from each disbursement of the loan. This means that the amount borrowed is slightly more than the amount actually received.
- Repayment: There is a six-month grace period that begins immediately after graduation, leaving school, or dropping below half-time enrollment after which the student must begin repayment. Interest will be paid by the U.S. Department of Education during the grace period, but becomes the responsibility of the student immediately after it ends.
Direct Unsubsidized Loans
- Amount: Each institution determines the amount that can be borrowed based on the cost of attendance and other financial aid that the student will receive. Undergraduates can receive loans from $5,500 to $12,500 each year. Graduate students can receive up to $20,500 each year.
- Eligibility: This option is available to undergraduate, graduate, and professional students. Students do not have to demonstrate financial need, but they do need to be enrolled at least half-time in a degree or certificate program.
- Interest: For undergraduate students, the current fixed interest rate is 4.45%. For graduate and professional students, the current interest rate is 6.0%.
- The student is completely responsible for paying the interest on the loan.
- If the student chooses not to pay interest while attending school, during grace periods, or during deferment, interest will accumulate and be added to the principal amount of the loan.
- There is also a 1.066% loan fee deducted from each disbursement of the loan.
- Repayment: There is a six-month grace period that begins immediately after graduation, leaving school, or dropping below half-time enrollment after which the student must begin repayment. Interest will accrue during this time.
Direct PLUS Loans
- Amount: The maximum amount that can be borrowed is the total cost of attendance at an institution minus all other financial aid received.
- Eligibility: This option is available to graduate or professional students and parents of dependent undergraduates to be put toward educational expenses that are not covered by other financial aid. Students must be enrolled at least half time. The borrower, whether student or parent, will undergo a credit check and must have good credit history to qualify.
- Should the borrower not have acceptable credit history, a cosigner (or endorser) with good credit history must agree to repay the loan should the primary borrower fail to make payments. If the borrower is a parent, the student on whose behalf they are taking out the PLUS Loan cannot be a cosigner.
- Interest: The current fixed interest rate is 7.0%. There is a 4.264% loan fee deducted from each disbursement of the loan. Depending on the number of disbursements and the total amount of the loan, this can add up to a significant chunk of change for which a student is liable but will never touch.
- Repayment: Once the loan is fully paid out, the loan must begin to be repaid.
- The loans of graduate and professional students will be deferred while enrollment is at least half-time and for another six months after enrollment falls below half-time.
- Parents may request a deferment while their child is enrolled at least half-time and for another six months after the child’s enrollment falls below half-time.
- Interest will accrue during deferments. This can be paid during the deferment, or interest can capitalize for the duration of the deferment.
Direct Consolidation Loans
- Amount: The total amount depends on the total amount a student has in federal loans. This loan allows a student to combine all eligible federal student loans into a single loan with a single servicer with a single monthly payment instead of multiple loans with multiple payments.
- Eligibility: A student must have at least one Direct Loan or Federal Family Education Loan (a type of loan issued before 2011; this program has now been fully replaced by the Direct Loan Program) in a grace period or repayment. Students are eligible to consolidate loans after graduating, leaving school, or falling below half-time enrollment. Private loans and loans in default do not qualify. Students can apply to consolidate their loans here.
- Interest: The interest rate is the weighted average of the interest rates of all loans being consolidated. There is no upper limit on the interest rate, and the calculated interest rate will be fixed for the duration of loan repayment.
- Repayment: Repayment begins 60 or fewer days after the disbursement of the loan. Loan servicers can provide more information.
- Pros: Consolidation will simplify repayment. Instead of multiple bills, there will only be one bill each month. It can also lower monthly payments by extending the duration of loan repayment and lower overall interest rates by switching variable interest to fixed interest. There may be alternative repayment plans that were unavailable for individual loans.
- Cons: If the life of the loan is extended, the number of payments and the amount of interest paid overall will increase. Borrower benefits such as interest discounts, principal rebates, and loan cancellation benefits may be lost.
- For better or for worse, consolidation cannot be undone.
What is the Federal Perkins Loan Program?
The Federal Perkins Loan Program effectively ended on September 30, 2017, when Congress elected not to approve an extension. When active, the program was administered by individual institutions, not by the U.S. Department of Education. Graduate and undergraduate students with exceptional financial need were permitted to borrow money directly from their schools at a 5.0% interest rate. Each school had limited funds, and not all schools participated in the program, so not everyone who qualified for a Federal Perkins Loan received one.
- Amount: Through September 30, 2017, undergraduates could receive up to $5,500 each year (for a maximum of $27,500). Graduate students could receive up to $8,000 each year (for a maximum of $60,000, including previous undergraduate loans), but have not been permitted to receive new Perkins Loans since September 30, 2016.
- Eligibility: The Perkins Loan Program ended on September 30, 2017. No new loans are being distributed. Students who currently have Perkins Loans will not be offered additional funds.
- Interest: For students who received Perkins Loans, the interest rate is fixed at 5.0%. Interest does not accrue while the student is enrolled at least half-time at an institution.
- Repayment: There is a nine-month grace period that begins immediately after graduating, leaving school, or dropping below half-time enrollment after which the student must begin repayment. Interest will not accrue during this period.
Page last updated: 05/2018