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 probably got a Direct Loan.

Since 2010, all federal loans have been direct student loans. Before that, most loans were FFEL loans. More on this below. It’s called a “direct” loan because, unlike the old FFEL loans, direct loans are directly On loan by the US 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 U.S. Department of Education. Any federal student loans issued after July 1, 2010 are direct federal loans.

Before July 1, 2010, federal loans could also be Federal Family Education Loan (FFEL) program loans. FFEL loans do not have the same perks as Direct Student Loans, but it is generally possible to consolidate FFEL Loans into a Direct Consolidation Loan.

Four types of Direct Student Loans

There are four main types of direct student loans including:

• Direct Subsidized Loans: Direct subsidized loans are loans in which the borrower does not pay the interest accrued on the loan while in school or during deferment periods.
• Unsubsidized Direct Loans: Unlike interest on subsidized loans, interest on unsubsidized loans accrues during school and during deferment periods. The balance of these loans will grow while you study unless you are actively paying them back.
• Direct Supplemental LoansDirect PLUS loans are issued to graduate students or parents of dependent students. These loans may cover certain expenses that are not covered by subsidized or unsubsidized loans. If you are a parent who has received a Direct PLUS loan, it is important to understand your repayment and forgiveness options because Parent Direct PLUS loans are treated differently than other Direct loans. Grad PLUS loans will be phased out in 2026.
• Direct Consolidation Loans: A Direct Consolidation Loan combines at least two federal loans into one loan with one monthly payment. Consolidating is not the same as refinancing a loan, but it can be risky. If you’re making payments that qualify for Public Service Loan Forgiveness (PSLF) under another loan, you don’t want to consolidate your loans, or else you’ll reset the clock on PSLF.

Each type of loan has its 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 for nonprofit organizations or in government are eligible for full loan forgiveness after 120 months of on-time payments while working in a qualifying job.
• They come with a variety of Income-based repayment plansOne huge advantage of direct (student) loans over other debt is the variety of repayment options. Borrowers can choose one of six income-driven repayment programs, and borrowers may be eligible for deferment or forbearance. If you refinance into a private loan, you will likely lose this benefit.

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.
• Generally, these loans cannot be discharged in bankruptcy: The biggest drawback to direct student loans is that they cannot be easily discharged in the event of bankruptcy. If you borrow too much for your education, you’ll need to make payments for 20 or 25 years before your loans are forgiven. You will also need to make payments if all of your other debts are paid through bankruptcy.

Three things to consider before paying off direct student loans

Are you eligible for Public Service Loan Forgiveness or another forgiveness program?

If you’re a teacher, military member, police officer, someone who works for a nonprofit, or other government employee, you may be eligible for PSLF or another student loan forgiveness program.

If you work full-time at a PSLF-qualifying organization, your loans can be forgiven after 120 payments under qualifying plans. Learn more about PSLF.

Is an income-driven repayment plan beneficial for you?

Income-driven repayment plans tend to be useful in two scenarios. First, if you’re seeking 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-based repayment makes sense. If an income-driven repayment plan might make sense for you, consider researching the best plan for your situation.

Many people find income-driven repayment plans 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 pay off your loan payments for two decades (or more). If you don’t qualify for loan forgiveness, do everything you can to attack the debt as quickly as possible.

Is your goal to pay off your student loans as quickly as possible?

Once you get really 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 years at very low interest rates. Refinancing can save you hundreds or thousands of dollars over the life of your loans.

But you have to be careful with refinancing. Once you refinance, you will lose all of the protections associated with direct student loans.

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

Frequently asked questions

Here are frequently asked 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 is the most common type of student loan.

What Types of Direct Student Loans Are There?

Direct student loans can be subsidized or unsubsidized, and can be Direct loans as well as graduate student or parent loans, 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 for combining multiple federal student loans. This could be a logical convenience. Refinancing your student loan means replacing it with a private student loan, and this is not recommended for the majority of borrowers.

Who is eligible for a Direct Student Loan?

Almost all U.S. 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 occurs when you combine multiple federal student loans.

Can Direct Student Loans be discharged in bankruptcy?

Yes, but it is 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, deferral, and forbearance repayment plans.

How do interest rates on direct student loans compare to private loans?

Interest rates on direct student loans are usually better or at least comparable to private loans. It’s always better for borrowers who may not have good credit. Only borrowers with strong credit and income usually outperform direct student loan interest rates.

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

No one ever regrets paying off their student loans, but if you’re looking for loan forgiveness through programs like Public Service Loan Forgiveness, it may not make sense to make extra payments.