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.
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.
- 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.
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 using LoanBuddy to help you select 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.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.