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What is a Direct Loan and How Does It Work?

If you have exhausted your resources from your grant and scholarships, considering borrowing money federal might be the solution to your problems.

It is essential to see your chances of borrowing money from the government first before looking into parent education loans or private education loans. This is because federal loans are much cheaper in terms of interest, availability, and it has better repayment terms in both Direct Subsidized and Unsubsidized loans.

What are Direct Loans?

This is a type of loan between a borrower and a lender that does not involve any third-party organization. These direct loans are often given by the government, banks, and other big financial institutions.

However, you can still do a direct loan from smaller lenders, but when they don’t have enough money to lend you, they will get funds from a third-party organization, making the interest rate higher and the borrowing cost go up.

If you are considering applying for federal student loans, it might be a good move considering there are perks that may come with it.

Federal student loans have a low and fixed interest rate. They won’t usually look into your credit score and credit history, and they don’t typically require a cosigner. Most students can apply as it is not that strict in terms of requirements.

Also, the money you will get from federal student loans can be used for different purposes such as tuition fees, transportation, school requirements, food, and other expenses that college might bring. The money that you borrowed can be paid through income-based payment or pay-as-you-earn payment, public loan forgiveness, generous forbearance, and deferments or other flexible repayment terms that your government might offer.

However, federal student loans don’t go without their disadvantages. There is a situation where if you are enrolled at a high-cost college, the cost might be over the annual and cumulative limit. You might have to look for other funding in other private institutions. You also need to have satisfactory academic progress. Typically, the government will continue subsidizing your college if you have a 2.0 GPA (read explanation on references).

But as mentioned above, you can also apply for a direct loan from other money lending institutions such as banks and other financial organizations. The term ‘direct loan’ is usually meant for student loans. But actually, it can be said for any different lending situation that does not involve a middleman like direct payday, installment loans, and mortgages.

Here are some of the benefits that direct loans can offer:

Fixed Interest Rate

Direct loans always have fixed interest, no matter where you apply. For undergraduates, both from direct subsidized or not, have a fixed rate of 4.53%. For graduate students, they have a fixed rate of 6.08 %. Take note, though, that these fixed interest rates can change every year, but if you got your loan approved in a specific year, the interest rate for that particular year would always stay the same.

Repayment Only Required Until Post-Graduation

If you are worried because of the repayment, don’t worry too much as direct loans don’t require payment six months after graduation. Furthermore, the government pays the interest for direct subsidized loans.

Annual Loan Limits

If you are still an undergraduate student, you can borrow between 5,500 dollars to 12,200 dollars in unsubsidized loans and direct subsidized loans. Take note that the amount that you can borrow depends on the year you are currently in and your dependency status. If you are a graduate student, you can borrow up to 20,500 dollars yearly in direct unsubsidized loans.

Note that each government has its own rules and regulations for its federal student loans, and they can change over time. Choose which kind of direct investment can be most beneficial for you and always study its terms and conditions that directly apply to you.

Even if you are better off with some government loan, it can still be a good idea to consolidate your loans as long as it is still under the direct loan umbrella. Also, combining your loan can be beneficial as there might be other perks that you can get from it.

An excellent example of this is government employees because they work for the government. They are qualified for loan forgiveness depending on the loan program they are currently enrolled in, which are also applicable to teachers. But still, as mentioned earlier, these terms depends highly on the government sector you are under.


Direct loans can refer to a lot of types of loans, as long as it does not involve an intermediary. But usually, it is mostly referred to as federal student loans. Other direct loans can also mean mortgages, direct payday, and direct installment loans. People often go for direct loans from the government than those from private institutions as they are cheaper and easier to repay.

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