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Paying for college with Direct student loans

Shelly  Gigante

Posted on October 17, 2022

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
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Describe the four types of Direct loans, including both subsidized and unsubsidized student loans. 

Outline the limit for how much you can borrow in student loans, which depends partly on your tax status. 

Explain the pros and cons of Direct Consolidation loans.

If you’re planning to pursue a college degree, chances are you’ll need to apply for student loans to cover the cost of tuition, fees, and room and board.

While private loans exist from banks and other financial institutions, federal student loans are generally the cheapest, easiest to qualify for, and most flexible in terms of repayment plans.

Called Direct Loans, they are the largest federal loan program.

Offered through the William D. Ford Federal Direct Loan Program, eligible students and parents may borrow directly from the Department of Education through participating schools. (Calculator: How much do I need to save for college?)

To apply for a Direct Loan, you must complete the Free Application for Federal Student Aid, or FAFSA, which your school will use to determine how much student aid you are eligible to receive. Direct Loans are typically included as part of a financial aid package.

There are limits on the amount you may borrow each academic year, and the total amount you may borrow for undergraduate and graduate study under the Direct Loan program, which depend on what year you are in school and your dependency status. (Related: Big changes for the FAFSA)

Dependent students, for example, may borrow up to $31,000 in total using a combination of subsidized and unsubsidized loans, with no more than $23,000 of that amount coming from subsidized loans, according to the latest Department of Education guidelines. (Dependent students whose parents do not qualify for a Direct PLUS Loan may be able to receive additional Direct Unsubsidized Loan funds.) 1

Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS Loans) may borrow up to $57,500 for undergraduate education, with no more than $23,000 of that coming from subsidized loans. Independent graduate or professional students may borrow up to $138,500, with no more than $65,500 coming from subsidized student loans.

Four types of Direct Loans exist:

Here’s more about what each type of Direct Loan entails.

Direct (Stafford) subsidized loans

Direct subsidized loans, sometimes called subsidized Stafford loans, are available to undergraduate students based on financial need.

The school you attend determines the amount of student aid you may borrow, which may not exceed your financial need.

Subsidized loans offer lower interest rates than their unsubsidized sibling and most commercial student loans.

Another advantage is that the federal government pays the interest on subsidized Stafford loans that accrues while the borrower is in school at least half time, during the grace period for the first six months after you graduate, and during periods of authorized deferment.

(For Direct subsidized loans first disbursed between July 1, 2012 and July 1, 2014, borrowers are responsible for paying any interest that accrues during their grace period. If the interest is not paid during the grace period, the interest will be added to the loan’s principal balance, according to the government’s website.)

Students must start repaying their loan six months after they cease being a half-time student.

During the COVID-19 pandemic, the White House temporarily paused payments and interest on all federal student loans. Most recently, that student loan relief program was extended through Dec. 31, 2022. (Learn more: Federal student loan relief to end at year’s end. Next steps.)

Direct (Stafford) unsubsidized loans

By comparison, Direct unsubsidized Stafford loans are available to both undergraduate and graduate or professional degree students. They are not need-based.

According to the Department of Education, your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive.

The biggest difference between a subsidized and unsubsidized loan is that interest on unsubsidized loans accrues while the student is attending school and continues through the life of the loan.

If you choose not to pay the interest while you are in school and during grace periods and deferment or forbearance periods, the government notes your interest will accumulate and be added to the principal amount of your financial aid loan.

Direct Plus loans

Federal Direct PLUS loans are available to graduate or professional students, and parents of dependent undergraduate students.

Borrowers must qualify for PLUS loans based on a credit check (you must not have an adverse credit history) and may borrow any amount needed that is not covered by other forms of financial aid — up to the cost of attendance.

Take note, however. Parents who borrow on behalf of their children are on the hook for repaying PLUS loans.(Learn more: Parent Plus Loans: Digging out of debt)

Thus, if their child agrees to make the payments, but fails to do so, the parent is on the hook financially, warns, a free financial aid education site.2 

Stafford loans have a lower interest rate than PLUS loans. As such, suggests students and parents take full advantage of any Stafford loans for which they may qualify first.

Direct Consolidation loans

Finally, Direct Consolidation loans allow borrowers to lump together all their federal education loans into one loan.

Such loans can greatly simplify repayment by centralizing your loans into one bill and can lower monthly payments by giving you up to 30 years to repay, according to the Department of Education.

They may also offer access to alternative repayment plans that would not be otherwise available, and you’ll be able to switch from a variable to a fixed interest rate.

Just remember that by stretching the length of your student loan, you will also be making more payments and therefore will pay more interest in the end.

You may also lose some of the borrower benefits offered through your original student loan, the Department of Education warns, including interest rate discounts, principal rebates, or some loan cancellation benefits, which can significantly reduce the cost of repaying your loans.

Before you consolidate, compare your current monthly payments to what monthly payments would be if you consolidated your student loans. If short-term payment relief is needed, consider deferment or forbearance of your original loan as an alternative to consolidation, the government suggests.3

Once you consolidate, you can’t go back.

Student loan fees and tax credits

In addition to interest, borrowers pay a fee on all Direct Subsidized and Unsubsidized Loans, which is a percentage of the loan amount and is proportionately deducted from each loan disbursement.

As you look to minimize the cost of your degree, don’t forget to take advantage of any tax credits for which you may qualify.

The federal government allows borrowers to deduct up to $2,500 per student per year for the first four years of school under the American Opportunity Credit, which can help make college more affordable.4

Similarly, the Lifetime Learning Credit also allows taxpayers to claim up to $2,000 per student per year for any college or career school tuition and fees, as well as for books, supplies and equipment that were required for the course and had to be purchased from the school.5

Even if you don’t normally file a tax return, the Department of Education urges students and parents to do so.

Otherwise, you could leave money on the table.

A college education is a worthy investment, but it doesn’t come cheap.

For those who qualify, Direct Loans can lighten the college financial aid burden. Just be sure you borrow smart.

The Department of Education recommends students and parents keep track of how much they borrow, understand the terms of their student loan, make payments on time, and research their field to determine whether salaries will support their future debt.

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This article was originally published in September 2018. It has been updated.


1 Department of Education, “The U.S. Department of Education offers low-interest loans to eligible students to help cover the cost of college or career school.”

2 FinAid, “Parent Loans.”

3 Federal Student Aid, “Get temporary relief..”

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.