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Department of Education Student Loan Guide

By The Room 241 Team September 12, 2012

Students planning to attend college and graduate school can rely on a wide range of student loan programs offered by the Department of Education. These student loans are designed to make college affordable for every student by allowing them to borrow money to pay for tuition, room, board, books and personal expenses not covered by other types of financial aid. This guide covers the details on each of the five major types of student loans the Department of Education currently offers.

Need-based Direct Subsidized Loan

This loan currently has the lowest interest rate on any federal student loan at a fixed 3.4 percent. In addition, borrowers benefit from having the interest paid by the federal government during periods of enrollment and deferment. Because of these benefits, the Direct Subsidized Loan is available only to some undergraduate borrowers who have significant financial need, based on information provided on the Free Application for Federal Student Aid (FAFSA). In addition, borrowers can get no more than $5,500 per year in Direct Subsidized Loans, and first and second-year students can borrow only up to $3,500 and $4,500 per year, respectively.

Direct Unsubsidized Loan

All students who meet basic federal financial aid eligibility guidelines, which include enrollment in qualified schools, are eligible for Direct Unsubsidized Loans regardless of their financial situation. These loans are a great way for students to borrow for their education, even if they do not qualify for any need-based financial aid. Direct Unsubsidized Loans have a fixed interest rate of 6.8 percent, which starts accruing immediately. Loan limits range from $5,500 per year for dependent first-year undergraduates to $20,500 per year for graduate students.

Need-based Federal Perkins Loan

This loan program is available only at select schools, but it is an additional need-based program for students with exceptional financial need. The participating schools award loans to their students with the most financial need, up to loan amounts of $5,500 per year for undergraduates and $8,000 per year for graduate students. Federal Perkins Loans have a fixed interest rate of 5 percent and students make repayments to the school or its loan servicer.

Direct PLUS Loan

This federal student loan is actually for both graduate students and parents of dependent undergraduate students. It is designed to meet the full remaining cost of attending school after all other financial aid has been applied. However, the Direct PLUS Loan also requires a credit check, and if the borrower has an adverse credit history, he or she must have a co-signer. The PLUS Loan has a fixed interest rate of 7.9 percent and an origination fee of 4 percent of the amount borrowed, which is deducted from the loan funds disbursed.

Direct Consolidation Loan

The final type of student loan is not borrowed for the purpose of attending school, but instead is to consolidate payments on all other federal student loans. Borrowers who apply for a Direct Consolidation Loan have all other loans replaced with the one large consolidation loan with an interest rate that is the weighted average of the rates on the loans it is replacing. Borrowers can then make just one monthly payment and qualify for a wider range of repayment plans and loan forgiveness options.

Students may take out one or more student loans through the Department of Education each school year. Some students even find that they or their parents end up with one of each type of loan each school year. The federal government’s loan programs make attending college and graduate school more affordable for millions of students in the United States.

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