Federal Student Aid - IFAP
PublicationDate: March
PublicationTitle: All About Direct Loans
PublicationYear: 1997

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All About Direct Loans 1997


The U.S. Department of Education has several Direct Loan Servicing Center locations with separate mailing addresses and telephone numbers. The address and telephone number of the location servicing your loan will appear on all correspondence the Center sends you after you receive a Direct Loan. Always use that information if you have questions about your Direct Loan. If you should misplace that information, call this toll-free number for help:


The TDD number (for the hearing-impaired ONLY) is


Updated information about Direct Loans is also available on the Direct Loan Web site on the Internet at http://www.ed.gov/ offices/OPE/DirectLoan/ All About Direct Loans was updated in March 1997.

Direct Loans—Money for School Directly to You .............. 1
Types of Direct Loans ..............................................................3
Loan Amounts .......................................................................... 4
Limit per Academic Year .........................................................4
Total Limits ...............................................................................7
Interest Rates .................................................................... ....... 8
How to Apply for a Direct Loan ............................................ 9
After Loan Approval ...............................................................11
Entrance Counseling .............................................................11
Loan Payment ....................................................................... 12
What Happens While You’re in School ............................. 13
Repaying Your Loans ............................................................ 15
The Direct Loan Servicing Center ...................................... 15
Repayment Begins ............................................................... 16
Repayment Options ............................................................. 17
Choosing a Plan ................................................................... 20
Options for Postponing Repayment ................................... 21
Deferment .............................................................................. 21
Forbearance .......................................................................... 23
What Happens If You Don’t Repay—Default .................. 25
Loan Discharge ................................................................. .....27
Loan Consolidation ............................................................... 28
Borrower Rights and Responsibilities ................................ 33

Direct Loans—Money for School Directly to You

If you’ve decided to borrow money to help pay for your education after high school, the U.S. Department of Education offers a simple way to get a loan—through the William D. Ford Federal Direct Loan Program (“Direct Loans” for short). Here are some of this program’s benefits:

- You’ll borrow money directly from the federal government without having to find a bank (you’ll receive your funds through your school). So, you’ll get your money much faster.

- You’ll have only one lender to deal with (the U.S. Department of Education) once you begin repayment. Your loans will never be sold.

- You can select the repayment plan that’s right for your financial circumstances.

- You can change repayment plans if your financial circumstances change.

Because not all schools participate in the Direct Loan Program, check with your school to see if it participates. If it doesn’t, you may qualify to borrow under the Federal Family Education Loan (FFEL) Program, which includes the Federal Stafford Loan Program. If you’ve already gotten an FFEL, you may—under certain circumstances—convert it to a Direct Loan through the Federal Direct Consolidation Loan Program. (See page 28 for more information about consolidation.) Check out your options at your school’s financial aid office.

This booklet will give you the basic information you need about Direct Loans. You’ll learn about the types of Direct Loans and the amounts you can borrow. You’ll also learn how to apply for a loan, how you’ll be paid once you’re approved for a loan, and what repayment options you have. You’ll learn what to do if you’re having trouble making your loan payments and what your rights and responsibilities are as a borrower. Save this booklet—it can answer future questions.

Types of Direct Loans

There are four types of Direct Loans:

- Federal Direct Stafford/Ford Loans—also called Direct Subsidized Loans. If you have a subsidized loan, the federal government does not charge you interest while you’re in school at least half time, during your grace period, and during deferments (postponements of repayment). You must show financial need to receive this type of loan.

- Federal Direct Unsubsidized Stafford/Ford Loans—also called Direct Unsubsidized Loans. The federal government charges you interest on these loans while you’re in school, in your grace period, or in deferment. You can get this type of loan regardless of financial need.

- Federal Direct PLUS Loans—for parents without adverse credit histories who want to borrow for their dependent students.*1*

- Federal Direct Consolidation Loans—one or more federal education loans combined into a Direct Loan. Only one monthly payment is made to the U.S. Department of Education. (See page 28 for more information.)

*1* You’re a dependent student if you are NOT one of the following: married, a graduate or professional student, someone with legal dependents other than a spouse, an orphan or ward of the court, a veteran, or at least 24 years old by December 31 of the first year of the current award year. For example, for the 1997-98 award year, the cutoff date would be December 31, 1997. If you DO meet one of the conditions given, you’re an independent student, which means you report only your own income and assets (and those of a spouse) when applying for financial aid. Parents of independent students are not eligible for Direct PLUS Loans.

Loan Amounts

Limit per Academic Year

The maximum amount you may borrow each academic year depends on

- your year in school

- the length of your academic program

- whether you’re a dependent student or an independent student

The chart on the following page shows the maximum annual and total amounts you may borrow. The amount you may borrow each academic year is also limited by

- your school costs

- the amount of other financial aid you’ll receive

- (in the case of Direct Subsidized Loans) the Expected Family Contribution (EFC). The EFC—the amount you and your family are expected to pay from your own resources—is used in determining your financial need. Your financial need is used to decide the amount of your Direct Subsidized Loans. Your school can explain how your EFC is calculated.

[[This file contains the "Chart of Maximum Loan Amount" in Portable Document Format (PDF). It can be viewed with version 3.0 or greater of the free Adobe Acrobat Reader software.]]

If one of your parents gets a Direct PLUS Loan for you, the amount he or she may borrow is limited only by the cost of attendance at your school minus any other financial aid you receive.*2*

The amount of money you receive will not equal the amount you may be entitled to borrow. All Direct Loans except Direct Consolidation Loans have a loan origination fee of 4 percent, deducted proportionately from each loan disbursement. This money goes to the federal government to help reduce the cost of supporting these low-interest loans.

Even if you’ve borrowed from both the FFEL and Direct Loan programs, your annual and total loan limits cannot exceed the limits given in the chart on the previous page. Note that you may not receive both FFELs and Direct Loans for the same loan period.

*2* If your parents can’t borrow a Direct PLUS Loan for you because they have an adverse credit history, and if you’re a dependent undergraduate, you may be eligible to borrow additional amounts in the form of Direct Unsubsidized Loans. For more information, contact your financial aid office.

Total Limits

The overall limit for any subsidized loans you may receive (including a combination of Direct Subsidized Loans and subsidized Federal Stafford Loans) is

- $23,000 for undergraduate study

- $65,500 for graduate study, including loans for undergraduate study

The overall limit for subsidized and unsubsidized loans (including a combination of Direct Loans and Federal Stafford Loans) is

- $23,000 for a dependent undergraduate student

- $46,000 for an independent under-graduate student (and certain dependent students)

- $138,500 for a graduate or professional student (including loans for undergraduate study)

Interest Rates

Direct Loan interest rates are variable and are adjusted each year on July 1; however, the current maximum interest rate is 8.25 percent for Direct Subsidized Loans and Direct Unsubsidized Loans.

Direct PLUS Loan interest rates are variable also, but the current maximum interest rate is 9 percent.

Interest rates for Direct Subsidized and Unsubsidized loans will depend on when the loan was disbursed and whether the loan is in an in-school, grace, or deferment period. Contact your financial aid office for more information.

The interest rates for Direct Consolidation Loans are the same as the rates above, based on whether student loans and/or parent loans are included. (For more information on consolidation loans, see page 28.)

How to Apply for a Direct Loan

Applying is easy. Just fill out a Free Application for Federal Student Aid (FAFSA), which you can get from your school. Or, you may be able to apply electronically from your home computer or from a computer at a central location like your school or local public library, using FAFSA Express. You can get more information about downloading FAFSA Express at http://www.ed.gov/offices/OPE/ express.html. You might also be able to apply electronically through the financial aid office at the school you plan to attend.

Based on the information you give when you apply, your school will determine your financial aid award, including amounts of Direct Subsidized and Unsubsidized Loans, if you’re eligible. If your answers to certain application questions indicate you’re a dependent student (see the footnote on page 3 for the definition of this term), one of your parents may apply for a Direct PLUS Loan, using an application available from your school.

As part of the application process, you’ll receive a promissory note to complete. The promissory note is the legal document you sign agreeing to pay back the loan. The note also provides important information about your loan. If a parent is applying for a Direct PLUS Loan, he or she will receive a promissory note to complete for that loan.

Note: Before each academic year begins, you must reapply for financial aid.

If you have any general questions about Direct Loans, check with the school you plan to attend or contact the Federal Student Aid Information Center: 1-800-4- FED AID (1-800-433-3243).

After Loan Approval

Entrance Counseling

If you’re a first-time borrower, you’ll most likely attend an entrance counseling session, but you must, at a minimum, receive entrance counseling materials from your school before your loan money can be credited to your school account or delivered to you. Many of the topics covered in this booklet will be covered in greater detail in the counseling sessions and in the written entrance counseling materials.

Be sure you understand all the terms and conditions of your loan and your rights and responsibilities as a borrower. (See pages 33 through 34 of this booklet for a summary of those rights and responsibilities.)

Loan Payment
Your school will pay you in one of two ways:

- Credit your account with the school for tuition, fees, and other allowable charges. If you have a contract with the school for room and board, the school may also credit your school account to pay for your room and board. Any remaining amount will be paid to you by check, given to you as cash, or—with your permission— transferred electronically to your bank account.

- Pay you the entire amount by check or other method that requires your endorsement or certification.

What Happens While You’re in School

Each time you receive a loan payment, your financial aid administrator will make sure you’re still eligible for the loan proceeds. To stay eligible, you must be enrolled at least half time and making satisfactory academic progress in your course of study.

Here are some points to remember:

- You don’t have to make payments on your loans while you’re enrolled in school at least half time.

- You should keep the school informed if your enrollment status changes—for example, if you drop to less than half time.

- You’ll receive information about your loan while you’re still in school— this doesn’t necessarily mean
it’s time to begin repayment.

Before you leave school, you must attend an exit counseling session. At that time, your school will give you detailed information about your loan. You’ll be counseled about your loan obligations, with the emphasis on selecting a repayment plan and budgeting for loan repayment. You’ll also be told about options for postponing repayment, including deferment and forbearance. (See pages 21 and 23.) Your school will most likely tell you the current interest rate, the date you’ll begin repayment, the amount your loan will cost you, and the amount you’ll repay each month.

If you have questions about your loan, you should be able to get the answers during exit counseling. Keep any exit counseling materials your school gives you—this information will be helpful as you repay your loan.

Repaying Your Loans

The Direct Loan Servicing Center

Repayment will be simple because the U.S. Department of Education is your lender and will remain your lender. Your payments will go to the Department’s Direct Loan Servicing Center. Although the Department has several Servicing Center locations (with separate addresses and telephone numbers), you’ll always have only one Servicing Center to deal with— even if you take out several Direct Loans or transfer from one school to another.

Once you get a Direct Loan, you’ll be notified of your Servicing Center location (the telephone number and address will appear on all correspondence and on all monthly statements you receive.) The Servicing Center then becomes your point of contact for information about your Direct Loans. You must make sure the Servicing Center always has your correct address and telephone number, and you should contact the Servicing Center if you have any questions about, or problems with, loan repayment.

Repayment Begins
Repayment of your loan begins six months after the day you leave school or drop below half-time enrollment. This six-month period is called the “grace period.” If you return to school at least half time before the grace period ends, repayment of your loan will again be delayed until six months after you finally leave school. The first payment on Direct Subsidized and Direct Unsubsidized Loans is due within 60 days after the grace period ends. The first payment on a Direct PLUS Loan is due within 60 days after the final loan disbursement. You’ll receive a bill letting you know your monthly payment amount and its due date.

If you have a Direct Subsidized Loan, you don’t pay any interest until the grace period ends. If you have a Direct Unsubsidized Loan, interest accumulates on the loan while you’re in school and during the grace period. You can either pay this interest as it accumulates or wait until you begin repaying the loan principal (the amount of money you borrowed). If you decide to delay interest repayment, the interest that accumulates will be “capitalized,” that is, will be added to your loan principal when you begin repayment. As a result, the total amount you’ll have to repay will increase.

Whether you have a Direct Subsidized or Unsubsidized Loan, once repayment begins, you’ll pay interest plus the loan principal; therefore, the total amount you repay will be more than you borrowed. You may prepay your loan—that is, pay all of your loan or make a payment larger than agreed upon—at any time without penalty.

Repayment Options
There are four ways you can repay a Direct Subsidized Loan or Direct Unsubsidized Loan. Direct PLUS Loan borrowers may choose only from the first three options given here. Borrowers can choose a plan to fit their financial circumstances and can change plans if their financial circumstances change.

These are the four repayment options:

- The Standard Repayment Plan requires fixed monthly payments (at least $50) over a fixed period of time (up to 10 years). The length of the repayment period depends on the loan amount. This plan usually results in the lowest total interest paid be-cause the monthly payment is higher and the repayment period is shorter than under the other plans.

- The Extended Repayment Plan allows loan repayment to be extended over a period from generally 12 to 30 years, depending on the total amount borrowed. You’ll still pay a fixed amount each month (at least $50), but usually your monthly payments will be less than under the Standard Repayment Plan. These lower monthly amounts may make repayment more manageable; however, usually you’ll pay more interest because the repayment period is longer.

- The Graduated Repayment Plan allows payments to be low at first and increase generally every two years. Graduated Repayment may be helpful if your income starts out low but will increase steadily. Your monthly payments must be at least half, but may not be more than one-and-a-half, of what you would pay under Standard Repayment. As in the Extended Repayment Plan, the repayment period will vary from generally 12 to 30 years, depending on the total amount borrowed. This extended repayment means your monthly payments may be lower but, again, you’ll pay more interest than you would under Standard Repayment.

- The Income Contingent Repayment Plan bases monthly payments on your adjusted gross income (AGI) and the total amount of your Direct Loans. As your income rises or falls each year, your repayment amounts will be adjusted accordingly. Your required monthly payments will not exceed 20 percent of your discretionary income.*3* The repayment period for this plan will not exceed 25 years. After 25 years, any unpaid amount will be discharged, but you’ll have to pay taxes on the amount discharged. (Remember, this plan is not an option for Direct PLUS Loan borrowers.)

If, because of exceptional circumstances, you can’t repay your loans using one of the repayment plans described, you may be able to work out an alternative repayment plan with the Servicing Center. Such a plan would be provided only on a case-by- case basis.

*3* Discretionary income equals your AGI minus an amount based on the poverty level for your family size, as determined by the U.S. Department of Health and Human Services. You can get more information from your financial aid office.

Choosing a Plan
You’ll receive more detailed information about repayment options at exit counseling and from the Direct Loan Servicing Center, so you can select the plan that’s right for you. You’ll be told what your monthly repayment amounts would be under each plan. Once you’ve selected a plan, the Servicing Center will send you a repayment schedule for all your Direct Loans, listing the plan you selected, your monthly payment amount, and the date your payments will be due. (If you don’t choose a plan, you’ll be placed in the Standard Repayment Plan.) You can always change your plan later, if you choose. Parents with a Direct PLUS Loan will receive a repayment schedule after the final disbursement of the loan.

Options for Postponing Repayment

If you ever have a problem making your monthly loan payments, you may be able to postpone repayment through deferment or forbearance. Each has separate conditions and requirements.

If you have a deferment, you may post-pone making payments on your loan under certain specific conditions. If you have Direct Loans only, you may defer repayment if you are

- enrolled at least half time in a pro-gram of study that meets the U.S. Department of Education’s requirements for program eligibility (you may not defer repayment while in a medical internship or residency program, except a residency program in dentistry)

- enrolled in a graduate fellowship program approved by the U.S. Department of Education

- enrolled in a rehabilitation training program for persons with disabilities that the U.S. Department of Education has approved

You also may be eligible for deferment for a period of up to three years if you are

- seeking, but unable to find, full-time employment

- experiencing, or will experience, economic hardship (talk to the Servicing Center for more information on this deferment)

You may be eligible for additional deferments if, at the time you obtain a Direct Loan, you have an outstanding balance on an FFEL. You can find out about these extra deferments from your financial aid office.

During deferment of Direct Subsidized Loans, you don’t have to pay any principal, and interest isn’t charged. For Direct Unsubsidized Loans and Direct PLUS Loans, payments on the principal may be deferred, but interest is charged. You may choose to pay this interest or have it capitalized (added to your principal balance) at the end of the deferment period.

If you have a Direct Consolidation Loan (see page 28 for more information about this type of loan), payment of principal may be deferred. Interest may, however, accumulate during deferment, depending on what loans you’ve consolidated. Check with the financial aid office or the Direct Loan Servicing Center to find out whether interest will accumulate on your Direct Consolidation Loan.

If you meet one of the deferment conditions, and you want to postpone repayment of your loan, contact the Servicing Center and ask for the appropriate deferment form. You’ll have to provide documentation to prove you meet the requirements for the deferment you’re seeking. The deferment form will explain what information you must provide. Be sure to make loan payments while you’re waiting for your deferment to be approved; if you don’t, your loan may become delinquent or even go into default (see descriptions of those terms under “What Happens If You Don’t Repay— Default”).

If you can’t make payments on your Direct Loan for reasons such as unexpected personal problems or poor health, and you don’t qualify for a deferment, you may request forbearance of loan payments. During forbearance, you can temporarily stop making payments, or you can make smaller payments than originally scheduled. You may request forbearance of principal, interest, or both. Even if you receive a forbearance for the interest, it will continue to accumulate during the forbearance period and will be capitalized (added to your loan principal) when the forbearance ends.

You may also receive forbearance if you meet one of the following conditions:

- You serve in a medical or dental internship or residency.

- You serve in a position under the National and Community Service Trust Act of 1993. (This deferment applies to Direct Stafford Loan borrowers only.)

- You are obligated to make payments on your federal student loans that are equal to, or greater than, 20 percent of your total monthly gross income.

Contact the Servicing Center to request forbearance. In most cases, you’ll be asked to provide documentation showing you qualify. As with deferments, continue to make payments on your loan while you’re waiting for forbearance approval.

What Happens If You Don’t Repay—Default

Defaulting on your loan has severe and long-lasting consequences. Avoid them by informing the Servicing Center if you think you’ll have problems meeting your repayment terms. It’s also very important to inform the Servicing Center if your ad-dress or telephone number changes so that your payment notices will continue to reach you, and the Center can contact you when necessary.

If you fail to make a payment on time, you’re considered delinquent in repaying your loan. If you don’t make payments for 180 days, your loan will go into default. If your loan defaults, you will have serious problems. For example

- the U.S. Department of Education can immediately demand repayment of the total amount due on the loan.

- the Department will attempt to collect the debt and may charge you for collection costs.

- your default will be reported to national credit bureaus; negative reports will damage your credit rating and make it very difficult for you to borrow money or make purchases such as a car or house. The default notation will remain on your credit report for up to seven years, even if you arrange to repay the debt before then—unless you “rehabilitate” the loan (see page 27).

- you won’t receive any additional federal student aid, and you may lose eligibility for other types of federal aid.

- you can’t receive a deferment for your defaulted loans unless you rehabilitate them.

- the Internal Revenue Service can withhold your federal income tax refund(s).

- your wages may be garnished.

Obviously, you should avoid default if at all possible. However, if it happens, you can contact the Servicing Center to make satisfactory repayment arrangements that will reestablish your eligibility for federal student aid. Six consecutive, voluntary, on time, full monthly payments constitute satisfactory repayment arrangements. The payment amounts will be reasonable and affordable, based on your total financial circumstances.

To “rehabilitate” your loan—that is, to bring it out of default—you must make 12 consecutive, voluntary, reasonable, and affordable monthly payments under an agreement with the Servicing Center. Once you make these 12 payments, default information will be removed from your credit record.

Loan Discharge

Under the few circumstances listed below, your loan can be discharged, which means you are released from all obligation to repay your loans:

- You become totally and permanently disabled. A physician must certify total and permanent disability. Also, the impairment can’t have existed before you applied for your Direct Loans, unless a doctor certifies that the impairment has substantially deteriorated since the loans were made.

- You die. Your loans will be discharged, and any Direct PLUS Loans a parent borrowed for you will be discharged.

- You cannot complete a course of study because your school closed or because the school falsely certified your eligibility. If your parent borrowed a Direct PLUS Loan for you, that loan will be discharged also.

- You file for bankruptcy and your loan is discharged. (This discharge occurs only in rare cases.)

Contact the Servicing Center to apply for a discharge. If you die, your representative should contact the Servicing Center so that your loan can be discharged.

Loan Consolidation

If you have student loans other than Direct Loans, you may want to apply for a Direct Consolidation Loan. Consolidation means making only one monthly payment to cover all your loans. There may be several advantages for you if you consolidate. Because the interest rate will be the same as for Direct Loans, you may be able to pay less interest than you’re paying on your current loans. You may be able to reduce your monthly payments. You can also choose the repayment plan that best suits your financial circumstances.

To consolidate under Direct Loans, you must have at least one Direct Loan or FFEL Program loan. Listed below are the types of loans that may be consolidated:

- Direct Stafford/Ford Loans (subsidized and unsubsidized)

- FFEL Stafford Loans (subsidized and unsubsidized)

- Direct and Federal PLUS Loans

- Guaranteed Student Loans (GSL)

- Federal Insured Student Loans (FISL)

- Federal Supplemental Loans for Students (SLS)

- Auxiliary Loans to Assist Students (ALAS)

- Federal Perkins Loans

- National Direct/Defense Student Loans (NDSL)

- Health Professions Student Loans (HPSL)

- Health Education Assistance Loans (HEAL)

- Loans for Disadvantaged Students (LDS)

- Nursing student loans

- Direct and Federal Consolidation Loans

You can consolidate your loans at any time—while you’re still in school, during your six-month grace period, or after you begin repayment. If you consolidate while you’re in school, you’ll receive a grace period on your consolidation loan. Note that you can consolidate only Direct Loans and FFELs while you’re in school; the other types of loans listed in this section may be consolidated only after you leave school.

If you want to consolidate while you’re in school and you’re attending a Direct Loan school, you must have at least one fully disbursed Direct Loan or FFEL in an “in-school” period. If you’re attending a non-Direct Loan school, you must have a Direct Loan, and you must have either a Direct Loan or FFEL in an “in-school” period. An “in-school period” is the period before a loan enters the grace period and while the borrower is enrolled at least half time at an eligible school.

Note: If you want to consolidate during your grace period, wait to apply until two months before the grace period ends. Repayment on consolidation loans begins within 60 days of the first loan disbursement, which means your grace period will be cut short if you apply too early.

If you have only FFEL Program loans, once you leave school you can consolidate them under Direct Loans only if you can’t get an FFEL consolidation loan, or you can’t get one with income-sensitive repayment terms acceptable to you.

Similar conditions apply to parents. They must have an outstanding balance on a Direct PLUS Loan or a Federal PLUS Loan (under the FFEL Program). Parents must not have an adverse credit history or, if so, must either document extenuating circumstances or obtain an endorser for the loan who has no adverse credit history. You may not be an endorser for your parent.

Even defaulted loans may be consolidated if you agree either to repay your Direct Consolidation Loan under the Income Contingent Repayment Plan or make satisfactory repayment arrangements (for
consolidation purposes, defined as three consecutive, voluntary, on time, full monthly payments).

Note: A married couple may consolidate their loans jointly if at least one spouse meets the requirements for loan consolidation. Both will be responsible for repayment of the loan, even if one spouse dies or they separate or divorce.

For more information on consolidation, contact your financial aid office or the Direct Loan Consolidation Department at 1-800-557-7392.

Borrower Rights and Responsibilities

As a Direct Loan borrower, you have certain rights and responsibilities. You’ll receive a complete list of these when you receive your promissory note. Listed below are some to keep in mind. You have a right to

- written information about your loan obligation—including information on loan consolidation—and a list of your rights and responsibilities as a borrower

- information—before you begin repayment— on interest rates, loan fees and how they are collected, and the balance owed on your loans

- a loan repayment schedule

- an explanation of default and its consequences

- an explanation of the grace period and of federal interest benefits, if you qualify for those benefits

- prepayment of your loan without penalty

- forbearance and deferments, if you qualify (these benefits are not granted automatically; you must request them, and the U.S. Department of Education determines if you qualify)

It is your responsibility to

- repay the loan according to the loan repayment schedule

- notify the Direct Loan Servicing Center in advance if you will be late making a payment

- notify the Servicing Center of anything that affects your ability to repay or affects your eligibility for deferment or discharge

- notify your school (if you are still enrolled) and the Servicing Center if your or your employer’s name or address changes

- notify the Servicing Center if you fail to enroll for the period covered by the loan; or if you graduate, withdraw from school, begin attending less than half time, or transfer to another school

- attend an exit counseling interview before you leave school