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December 5, 2022
Direct Loan Program Student Loans: Terms and Conditions
The William D. Ford Federal Direct Loan (Direct Loan)
amounts constrained by program rules, regardless of a
program is the single largest source of federal financial aid
borrower’s ability to repay. Eligibility to borrow a Direct
supporting students’ postsecondary educational pursuits. As
PLUS Loan depends on an individual’s creditworthiness.
of June 30, 2022, $1.4 trillion in principal and interest on
Direct Loan program loans, borrowed by or on behalf of 37
Table 1. Annual and Aggregate Loan Limits by
million individuals, remained outstanding. Upon obtaining
Borrower Type and Program Level
a loan, a borrower assumes a contractual obligation to repay
the debt over a period of time that may span a decade or
Borrower Type
more.
and Program
Aggregate
Levela
Annual Limit
Limit
Under the program, the government makes loans to
individuals using federal capital. Once made, the loans are
Undergraduate Students
an asset of the federal government, and the government
Total Subsidizedb and Unsubsidized Loans—
assumes the risk of losses that may occur as a result of
Dependent Studentsc
borrower default, loan discharge, or loan forgiveness. The
Department of Education’s (ED’s) Office of Federal
1st year
$5,500
Student Aid (FSA) is the primary entity tasked with
administering the program. Working with FSA, institutions
2nd year
$6,500
$31,000
of higher education originate loans to borrowers, and FSA
3rd year and above
$7,500
contractors service and collect on program loans.
This In Focus provides a brief overview of the terms and
Total Subsidizedb and Unsubsidized Loans—
conditions of loans made under the Direct Loan program.
Independent Studentsc
For a comprehensive description of these terms and
1st year
$9,500
conditions, see CRS Report R45931, Federal Student Loans
Made Through the William D. Ford Federal Direct Loan
2nd year
$10,500
$57,500
Program: Terms and Conditions for Borrowers. This In
Focus does not provide information on student loan
3rd year and above
$12,500
flexibilities and debt relief available to borrowers in light of
the COVID-19 pandemic. For information on those topics,
Graduate Students
see CRS Report R46314, Federal Student Loan Debt Relief
Unsubsidized Loans,
$20,500
$138,500d
in the Context of COVID-19.
in general
Direct Loan Types
PLUS Loans, in
COA-EFAe
Not limited
Under the Direct Loan program, four types of loans are
general
available. Direct Subsidized Loans are available only to
undergraduate students with financial need. Direct
Parents of Dependent Undergraduate Students
Unsubsidized Loans are available both to undergraduate
and graduate students. Direct PLUS Loans are available to
PLUS Loans, in
COA-EFAe
Not limited
graduate students and parents of dependent undergraduate
general
students. Direct Consolidation Loans allow borrowers to
Source: HEA §§428, 428H, 451, and 455; 34 C.F.R. §685.203.
combine debt from multiple existing federal student loans
a.
into a single new loan. The latter three loan types are
Table depicts borrowing limits for undergraduate and graduate
educational programs in general. Different annual and aggregate
available to borrowers regardless of financial need.
loan limits may apply to specified educational programs, such as
Eligibility and Amounts That May Be
preparatory coursework for an undergraduate program or
Borrowed
graduate health professions programs.
Eligibility to borrow a Direct Loan varies by loan type,
b. Annual and aggregate limits apply to Direct Subsidized Loans
borrower characteristics (e.g., dependency status, financial
(not displayed in table) and the total combined amount that may
need), program level (e.g., undergraduate or graduate), and
be borrowed through Direct Subsidized and Unsubsidized Loans
class level (e.g., 1st year, 2nd year). The amount an
(displayed). Aggregate borrowing limits for Direct Subsidized
individual may borrow is subject to annual and aggregate
Loans equal $23,000.
borrowing limits (Table 1), and federal need analysis and
c. In determining Direct Loan eligibility, parents’ income and assets
packaging procedures. In general, loans are available in
are used for dependent students, and the student’s income and
https://crsreports.congress.gov
link to page 2 Direct Loan Program Student Loans: Terms and Conditions
assets (and their spouse’s, if applicable) are used for
Loan Repayment Plans
independent students.
Numerous repayment plans, each with different payment
d. Aggregate loan limits for graduate students include amounts
structures and maximum durations, are available to
borrowed for undergraduate study.
borrowers. Except for the five income-driven repayment
e. There is no statutory borrowing limit for Direct PLUS Loans;
(IDR) plans, all repayment plans require borrowers to make
however, al estimated financial aid (EFA) may not exceed cost
fixed or graduated monthly payments, and monthly
of attendance (COA).
payments must cover the interest that accrues. Borrowers
must pay off the entire balance of their loan (including
Interest
interest that accrues) within a maximum timeframe (10-30
Interest is charged on Direct Loan program loans. All loans
years).
currently being made through the program have fixed
interest rates that remain constant from the time the loan is
The IDR plans cap monthly payments at a specific
made until it is paid in full. For new loans made during
percentage (10%, 15%, or 20%, depending on the plan) of a
each 12-month period from July 1 through June 30 (with
borrower’s discretionary income. Under these plans, a
the exception of Direct Consolidation Loans), the
borrower’s monthly payment may be as low as $0. The IDR
applicable interest rate (Table 2) is determined by
plans allow for monthly payments to be less than the
summing: (1) the bond equivalent rate of the 10-year U.S.
interest that accrues. Any remaining loan balances after a
Treasury notes auctioned at the final auction preceding June
specified period (e.g., 20 or 25 years) are forgiven.
1, and (2) an add-on rate, which varies by loan type and
program level for which the loan was borrowed. Interest
Deferment and Forbearance
rate caps apply. For Direct Consolidation Loans, interest
Deferment is a temporary period during which a borrower’s
rates are determined by calculating the weighted average of
obligation to make regular monthly payments on their loan
the interest rates in effect on the loans being consolidated,
is suspended, and during which an interest subsidy may be
and rounding the result to the nearest highest one-eighth of
provided. Deferments are available for a variety of reasons,
1%. Interest subsidies are largely limited to Direct
such as when a student is pursing postsecondary education,
Subsidized Loans; however, subsidies may be provided on
performing military service, or experiencing economic
all loan types in certain cases.
hardship.
Table 2. Interest Rates on Direct Loans Made July 1,
Forbearance is a temporary period during which a borrower
2022-June 30, 2023
may cease making monthly payments, make payments in
reduced amounts, or make payments over an extended
Borrower
Subsidized Unsubsidized
PLUS
period. In most cases, an interest subsidy is unavailable
Type
Loan
Loan
Loan
during forbearance periods. Forbearance is available for a
variety of reasons, such as when a borrower is experiencing
Undergraduate
4.99%
4.99%
n.a.
temporary hardship or during periods when ED is
students
processing certain loan benefits.
Graduate
n.a.
6.54%
7.54%
students
Loan Discharge and Loan Forgiveness
A borrower may be relieved of the obligation to repay all or
Parent of
n.a.
n.a.
7.54%
a portion of their loans in certain circumstances. Student
dependent
loan debt may be discharged on the basis of borrower
undergraduate
hardship (e.g., total and permanent disability, bankruptcy,
students
school closure) or may be forgiven following an extended
Source: U.S. Department of Education, Office of Federal Student
period of repayment according to an IDR plan or
Aid, “Interest Rates for Direct Loans First Disbursed on or After July
completion of a period of public service.
1, 2022 and Before July 1, 2023,” https://studentaid.gov/understand-
aid/types/loans/interest-rates#rates.
Loan Default
Note: n.a.=not available.
A Direct Loan is considered to be in default once the
borrower fails to make payments when due or has otherwise
Loan Origination Fees
not adhered to the terms of the loan for 270 days. Upon
default, the loan balance becomes due in full and the
Loan origination fees are charged to borrowers of Direct
Subsidized Loans, Direct Unsubsidized Loans, and Direct
borrower loses eligibility for many borrower benefits (e.g.,
deferment, forbearance, loan forgiveness), as well as access
PLUS Loans; no fees are charged to borrowers of Direct
to other forms of federal student aid. The government uses
Consolidation Loans. These fees help offset federal loan
subsidy costs by passing along some of the costs to
numerous means to collect on defaulted student loan debt
such as administrative wage garnishment and offset of
borrowers. Origination fees are calculated as a proportion
federal income tax returns and Social Security benefits.
of the loan principal borrowed and are deducted from the
loan before it is disbursed to a borrower. The HEA specifies
Options are available for a borrower to bring a defaulted
loan back into good standing.
a loan origination fee of 1% for Direct Subsidized and
Unsubsidized Loans and of 4% for Direct PLUS Loans.
Budget sequestration orders that apply to direct
Alexandra Hegji, Analyst in Social Policy
(mandatory) spending may require the origination fee to be
IF12267
increased in a given fiscal year.
https://crsreports.congress.gov
Direct Loan Program Student Loans: Terms and Conditions
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