The Federal Guaranteed Student Loan program, created as part of the 1965 Higher Education Act, was renamed the Robert T. Stafford Student Loan Program in honor of US Senator Robert Stafford of Vermont in 1988. For a period of twenty-six years college students, for better or for worse, signed up in droves for Stafford Loans to finance their education. In 2014 the government overhauled the Stafford Loan and changed the name to the catchy, “Direct Loan”. While there are similarities to the old Stafford Loan, it is important to understand the differences.

The Direct Loan Program offers three types of loans for students.

Unsubsidized:

The Unsubsidized Direct Loan is not dependent on financial need. Most students will be “awarded” an unsubsidized loan. (However the loan is means tested and is not available to the most affluent families.) Students are responsible for all of the interest that accrues for the life of the loan, but the interest may be deferred. Unpaid interest that is deferred until after separation is capitalized, i.e. added to the loan principal.  (As a result, when your student takes out a $1,000 unsubsidized loan, he might end up some time in the future making payments on a $1,500 loan. If the budget permits, he could make interest only payments while in school and avoid the unpleasant consequences of capitalization.)

Subsidized:

The subsidized loan is awarded to students with financial need as determined by the federal methodology. The interest on subsidized loans is paid by the federal government while the student is in school, during any authorized deferment period, and during the six month grace period after a student separates from school. The payment of this interest is the government subsidy.

Consolidation:

Eligible federal student loans can be combined into one Direct Consolidation Loan. This simplifies the bookkeeping involved in making payments, and it may reduce the overall monthly payment.

If you have submitted the FAFSA, your college awards letter is likely to list the availability of Direct Loan money. You are not required to take these loans. If you have to have a loan to meet school expenses, start with the subsidized loan.

No payments are expected on subsidized or unsubsidized loans while the student is enrolled as a full-time or half-time student. This is referred to as in-school deferment. Deferment of repayment continues for six months after separation, i.e. when the student leaves school either by graduating, dropping below half-time enrollment, or withdrawing. This is called the grace period.

The maximum amount you can borrow each year in subsidized and unsubsidized loans depends on your grade level and on whether you are a dependent student or an independent student. For example a freshman who is a dependent student is eligible for $5500 in Direct Loans. The maximum portion of that total award that can be subsidized is $3500. The minimum is zero depending on financial need.

Direct Loan interest rates are tied to the Treasury rate. Once you are awarded a loan for a particular year the interest rate on that specific loan is locked for the life of the loan. The interest rates for new loans may change yearly. The lifetime maximum for a dependent undergraduate student is $31,000 including $23,000 in subsidized loans. If students were to take out the maximum in Direct Loans to earn a BA, they would be assuming a starting salary of approximately $50,000 (following “The 8% Rule”). This is an optimistic projection.

For details and current interest rates see:

www.direct.ed.gov/