What Is A Direct Student Loan? Pros And Cons

A Direct Student Loan is another name for a federally issued student loan in the United States. If you borrowed money from the U.S. Department of Education, you likely took out a Direct Loan.

Since 2010, all federal loans have been Direct student loans. Prior to this, most loans would have been FFEL loans. More on this below. It's called a "Direct" loan because, unlike the old FFEL loans, Direct loans are directly loaned by the U.S. government.

Here’s what you need to know about these loans. If you're just shopping for loans, here's where to find the best student loans.

What Is a Direct Student Loan?

Direct Student Loans are student loans issued directly by the United States Department of Education. Any Federal student loans issued after July 1, 2010 are federal Direct Loans.

Prior to July 1, 2010, federal loans could also have been Federal Family Education Loan (FFEL) Program loans. FFEL loans don’t have the exact same privileges as Direct Student Loans, but it is generally possible to consolidate FFEL loans to a Direct Consolidation Loan.

Four Types of Direct Student Loans

There are four major types of Direct Student Loans including:

• Direct Subsidized Loans: Direct Subsidized Loans are loans where the borrower doesn’t pay for interest that accrues on the loan while they are in school or during deferment periods.
• Direct Unsubsidized Loans: Unlike the interest on subsidized loans, interest on unsubsidized loans accrues during school and during deferment periods. The balance on these loans will grow during school unless you’re actively paying them down.
• Direct PLUS Loans: Direct PLUS Loans are issued to grad students or the parents of dependent students. These loans may cover certain expenses that aren’t covered by subsidized or unsubsidized loans. If you’re a parent who took out a Direct PLUS Loan it is important to understand your repayment and forgiveness options because the Parent Direct PLUS Loans are treated differently than other Direct Loans. Grad PLUS loans phase out in 2026.
• Direct Consolidation Loans: A Direct Consolidation Loan combines at least two Federal loans into a single loan with a single monthly payment. Consolidating is not the same as refinancing a loan, but it can be risky. If you’ve been making eligible payments for Public Service Loan Forgiveness (PSLF) under another loan, you won’t want to consolidate your loans, otherwise you will reset the clock on PSLF.

Each type of loan has it's own student loan borrowing limit.

Pros and Cons of Direct Loans

Like most forms of debt, Direct Student Loans have advantages and disadvantages. Here are some of the most important pros and cons of Direct Student Loans.

Pros

• They are eligible for Public Service Loan Forgiveness: The largest loan forgiveness program in the United States is PSLF. PSLF forgives Direct Student Loans only. People who work in nonprofit organizations or for the government qualify for total loan forgiveness after 120 months of on-time payments while working in an eligible job.
• They come with a variety of income-driven repayment plans: One of the massive advantages of Direct (Student) Loans compared to other debt is the variety of repayment options. Borrowers can opt for one of six repayment programs that are driven by income, and borrowers may qualify for deferment or forbearance. If you refinance to a private loan, you’ll probably lose this advantage.

Cons

• Interest rates may be higher than private loans: Direct Student Loans have modest interest rates, but they can be lower, especially for people with great credit. If you want the lowest interest rates, you may have to refinance.
• These loans generally cannot be discharged in bankruptcy: The biggest drawback to Direct Student Loans is that they cannot easily be discharged in bankruptcy. If you over-borrowed for your schooling, you’ll need to make 20 or 25 years of payments before your loans will be forgiven. You’ll even need to make payments if all your other debts are discharged through bankruptcy.

Three Things to Consider Before Paying Off Direct Student Loans

Do You Qualify for Public Service Loan Forgiveness or Another Forgiveness Program?

If you’re a teacher, a military member, a police officer, someone who works for a nonprofit, or another public servant, you may qualify for PSLF or another student loan forgiveness program.

If you’re working full-time for an eligible organization under PSLF, your loans can be forgiven after 120 payments under qualifying plans. Learn more about PSLF.

Is an Income-Driven Repayment Plan Helpful for You?

Income-driven repayment plans tend to be helpful in two scenarios. First, if you’re pursuing loan forgiveness, you’ll want your payments to be as low as possible. An income-driven repayment plan makes a lot of sense in those scenarios. Second, if your current income is low, you may need lower payments.

In those cases, income-driven repayment makes sense. If an income-driven repayment plan may make sense for you, consider researching the best plan for your situation.

Many people find that income-driven repayment plans are useful for a few years while their income grows. But as a word of caution, you don’t want to become overly reliant on repayment plans (unless you qualify for loan forgiveness).

Income-driven repayment plans can drag out your loan payments for two decades (or longer). If you won’t qualify for loan forgiveness, do everything in your power to attack the debt as soon as possible.

Is Your Goal to Pay Off Your Student Loans as Quickly as Possible?

Once you become very serious about paying off your student loans quickly, you may find that federal Direct Loans aren’t the best loans for you.

If you have great credit, you may be able to refinance your student loans for five- to seven-year repayment terms with very low interest rates. Refinancing can save you hundreds or thousands of dollars over the life of your loans.

But you need to be careful with refinancing. As soon as you refinance, you lose all the protections associated with Direct Student Loans.

If you decide to refinance, be sure to shop around using a loan comparison site like Credible.

Common Questions

Here are common questions about Direct student loans:

What is a Direct Student Loan?

A Direct student loan is a federal loan issued by the United States under the Direct Loan Program. It's the most common type of student loan. 

What types of Direct Student Loans exist?

Direct student loans can be subsidized or unsubsidized, they can be Direct PLUS loans to grad students or parents, or consolidation loans.

Should I consolidate or refinance my Direct Student Loans?

You can consolidate your Direct student loan into a Direct consolidation loan. This is a free service to combine multiple federal student loans. This can make sense for convenience. Refinancing your student loan means replacing it with a private student loan, and that's not recommended for the majority of borrowers.

Who is eligible for a Direct Student Loan?

Nearly all US citizen borrowers are eligible for a Direct student loan up to the loan limits.

What is a Direct Consolidation Loan?

A Direct consolidation loan is the new loan that happens when you combine of multiple federal student loans.

Can Direct Student Loans be discharged in bankruptcy?

Yes, but it's very rare and requires undue hardship.

What happens if I can’t make my loan payments?

There are a variety of hardship options for Direct student loans, including income driven repayment plans, deferment, and forbearance. 

How do interest rates for Direct Student Loans compare to private loans?

Interest rates for Direct student loans are usually better or at least comparable to private loans. They are nearly always better for borrowers that may not have good credit. Only borrowers with strong credit and income usually beat the rates on Direct student loans.

What should I consider before paying off my Direct Student Loans early?

Nobody ever regrets paying off their student loans, but if you're looking for loan forgiveness through programs like Public Service Loan Forgiveness, it might not make sense to make additional payments.