# Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program: Terms and Conditions for Borrowers > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3AR45931 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** October 15, 2024 - **Citation:** R45931 ## Text Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program: Terms and Conditions for Borrowers Updated October 15, 2024 Congressional Research Service https://crsreports.congress.gov R45931 SUMMARY Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program: Terms and Conditions for Borrowers R45931 October 15, 2024 Alexandra Hegji Specialist in Social Policy The William D. Ford Federal Direct Loan (Direct Loan) program is the single largest source of federal financial assistance to support students’ postsecondary educational pursuits. The U.S. Department of Education estimates that in FY2025, $93.1 billion in new loans will be made through the program. As of the end of the third quarter of FY2024, $1.4 trillion in principal and interest on Direct Loan program loans, borrowed by or on behalf of 37.5 million individuals, remained outstanding. For many individuals, borrowing a federal student loan through the Direct Loan program may be among their first experiences in incurring a major financial obligation. Upon obtaining a loan, a borrower assumes a contractual obligation to repay the debt over a period that may span a decade or more. Loans were first made through the Direct Loan program in 1994. Since then, Congress has periodically made changes to the program and the terms and conditions of loans. Changes have impacted program aspects such as the availability of loan types, interest rates, loan repayment, loan discharge and forgiveness, and the consequences of default. Over time, the accumulation of changes—many of which are differentially applicable to borrowers or loan types—has resulted in a set of loan terms and conditions that are voluminous and complex. Congress may contemplate making future changes to loan terms and conditions. This report has been prepared to provide Congress with a comprehensive description of the terms and conditions and borrower benefits that are applicable to loans made through the Direct Loan program. Emphasis is placed on discussing loan types, provisions related to borrower eligibility, amounts that may be borrowed, interest and fees, loan repayment, repayment relief, loan forgiveness benefits, the consequences of default, and the methods used to ensure borrowers are informed about the terms and conditions of their loans and their obligation to repay them. Direct Loan Types Four types of loans are available through the Direct Loan program. Direct Subsidized Loans are available only to undergraduate students with financial need. Direct Unsubsidized Loans are available both to undergraduate students and graduate students. Direct PLUS Loans may be borrowed by graduate students and by the parents of undergraduate students dependent on them for financial support. Direct Consolidation Loans allow borrowers to combine debt from multiple existing federal student loans into a single new loan. Eligibility and Amounts That May Be Borrowed Whether an individual may borrow a loan, and the amount they may borrow, are determined by the interaction of many factors. Eligibility to borrow varies by loan type, borrower characteristics, program level, and class level. The amount an individual may borrow is subject to annual and aggregate borrowing limits, and federal need analysis and packaging procedures. Loans are made available in amounts constrained by program rules, but—with the exception of Direct PLUS Loans—without consideration of a borrower’s ability to repay. Eligibility to borrow a Direct PLUS Loan depends on an individual’s creditworthiness. Interest on Direct Loan Program Loans Procedures for calculating interest vary by loan type, repayment status, and the period during which a loan was made. In limited circumstances, the federal government subsidizes, or does not charge, interest that would otherwise accrue. Interest subsidies are mostly limited to Direct Subsidized Loans; however, certain interest subsidies may be provided on all loan types. Loan Repayment Plans Numerous repayment plans, each with different payment structures and maximum durations, are available. Among the various plans, income-driven repayment (IDR) plans cap monthly payments at a specific percentage of a borrower’s Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program discretionary income. For most repayment plans, monthly payments must cover the interest that accrues; however, the IDR plans allow for negative amortization, in which case monthly payments may be for less than the interest that accrues. Deferment and Forbearance Periods of deferment and forbearance offer a borrower temporary relief from the obligation to make monthly payments. In certain instances, interest subsidies may be provided during periods of deferment; however, with limited exceptions, interest subsidies are not available during periods of forbearance. Loan Discharge and Loan Forgiveness A borrower may be relieved of the obligation to repay their loans in certain circumstances. Student loan debt may be discharged on the basis of borrower adversity (e.g., death, total and permanent disability, school closure) or may be forgiven following an extended period of repayment according to an IDR plan or completion of a period of public service. Loan Default, Its Consequences, and Resolution If a borrower defaults, the loan becomes due in full and the borrower loses eligibility for many benefits, as well as access to other forms of federal student aid. The government also uses numerous means to collect on defaulted student loan debt. A limited set of options is available for a borrower to bring a defaulted loan back into good standing. Loan Counseling and Disclosures Student borrowers must undergo financial counseling, which is designed to provide them with comprehensive information on the terms and conditions of their loans as well as the rights and the responsibilities they assume as borrowers. Loan terms and conditions are specified in a promissory note, which is a contract that establishes the borrower’s obligation to repay the loan, and in a plain language disclosure document that uses simplified terms to explain a loan’s terms and conditions and the borrower’s rights and responsibilities. Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Contents Introduction ..................................................................................................................................... 1 Background on the Direct Loan Program ........................................................................................ 2 Direct Loan Types ........................................................................................................................... 4 Eligibility and Amounts That May Be Borrowed ............................................................................ 6 Factors Affecting Eligibility to Borrow..................................................................................... 6 General Student-Based Eligibility Criteria ......................................................................... 6 Student Dependency Status................................................................................................. 7 Program Level..................................................................................................................... 8 Undergraduate Class Level ................................................................................................. 9 Financial Need .................................................................................................................... 9 Eligibility Requirements for Direct PLUS Loans ............................................................. 10 Eligibility Requirements for Direct Consolidation Loans ................................................. 11 Amounts That May Be Borrowed ........................................................................................... 14 Annual Loan Limits .......................................................................................................... 14 Aggregate Loan Limits ..................................................................................................... 14 Limits on Borrowing Determined by Need Analysis and Packaging ............................... 16 Interest on Direct Loan Program Loans ........................................................................................ 19 Interest Rates ........................................................................................................................... 19 Procedures for Setting Student Loan Interest Rates.......................................................... 19 Interest Accrual ....................................................................................................................... 22 Subsidized Interest .................................................................................................................. 23 Interest Subsidy on Direct Subsidized Loans ................................................................... 23 Interest Rate Reduction for Automatic Debit Repayment................................................. 24 Interest Subsidies on Eligible Loans Repaid According to Certain Income-Driven Repayment (IDR) Plans During Negative Amortization ............................................... 24 No Accrual of Interest on Loans of Certain Active Duty Servicemembers ...................... 25 SCRA 6% Interest Rate Cap on Loans of Borrowers Who Enter Military Service .......... 25 Interest Subsidy on All Loan Types During Cancer Treatment Deferment ...................... 26 Deferred Payment of Accrued Interest .................................................................................... 26 Negative Amortization ...................................................................................................... 27 Interest Capitalization ............................................................................................................. 27 Loan Origination Fees ................................................................................................................... 27 Loan Repayment............................................................................................................................ 28 Grace Period ............................................................................................................................ 29 Loan Repayment Period .......................................................................................................... 29 Loan Repayment Plans ............................................................................................................ 30 Fixed Repayment Plans..................................................................................................... 39 Income-Driven Repayment (IDR) Plans ........................................................................... 42 Prepayment.............................................................................................................................. 61 Application of Payments on Delinquent Loans....................................................................... 63 Deferment and Forbearance .......................................................................................................... 63 Deferments .............................................................................................................................. 63 In-School Deferment......................................................................................................... 64 Graduate Fellowship Deferment ....................................................................................... 65 Rehabilitation Training Program Deferment..................................................................... 65 Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Unemployment Deferment................................................................................................ 66 Economic Hardship Deferment......................................................................................... 66 Military Service Deferment .............................................................................................. 67 Post-Active Duty Student Deferment ............................................................................... 67 Cancer Treatment Deferment ............................................................................................ 67 Dislocated Military Spouse Deferment ............................................................................. 68 Forbearance ............................................................................................................................. 68 General (Discretionary) Forbearance ................................................................................ 69 Mandatory Forbearance .................................................................................................... 69 Administrative Forbearance .............................................................................................. 71 Forbearance to Permit Borrower to Resume Honoring an Agreement to Repay a Defaulted Loan .............................................................................................................. 72 Loan Discharge and Loan Forgiveness.......................................................................................... 73 Loan Discharge for Borrower Adversity ................................................................................. 73 Discharge Due to Death .................................................................................................... 73 Total and Permanent Disability Discharge ........................................................................ 74 Closed School Discharge .................................................................................................. 75 False Certification and Unauthorized Payment Discharges .............................................. 77 Unpaid Refund Discharge ................................................................................................. 78 Borrower Defense to Repayment Discharge ..................................................................... 78 Bankruptcy Discharge ....................................................................................................... 80 Loan Forgiveness Following IDR Plan Repayment ................................................................ 80 Loan Forgiveness for Public Service....................................................................................... 81 Teacher Loan Forgiveness Program .................................................................................. 81 Public Service Loan Forgiveness (PSLF) Program .......................................................... 82 Tax Treatment of Discharged and Forgiven Debt ................................................................... 85 Loan Default, Its Consequences, and Resolution .......................................................................... 87 Consequences of Default for Borrowers ................................................................................. 87 Resolution of Default .............................................................................................................. 90 Loan Rehabilitation........................................................................................................... 90 Loan Consolidation ........................................................................................................... 92 Calculated $0 Monthly Payment under an IDR Plan ........................................................ 93 Loan Counseling and Disclosures ................................................................................................. 93 Entrance Counseling ............................................................................................................... 94 PLUS Loan Credit Counseling For Borrowers with Adverse Credit ...................................... 95 Master Promissory Note and Plain Language Disclosure ....................................................... 95 Exit Counseling ....................................................................................................................... 96 Additional Information on Loan Terms and Conditions ......................................................... 97 Figures Figure 1. Direct Loan Repayment Plan ......................................................................................... 31 Tables Table 1. Annual and Aggregate Loan Limits, by Borrower Type and Program Level: July 1, 2012, to Present ...................................................................................................................... 15 Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Table 2. Interest Rates on Loans Made Through the Direct Loan Program: July 1, 2023, through June 30, 2024, and July 1, 2024, through June 30, 2025 .............................................. 22 Table 3. Origination Fees on Loans Made Through the Direct Loan Program, FY2024 and FY2025 ....................................................................................................................................... 28 Table 4. Selected Characteristics of Loan Repayment Plans Generally Available to Borrowers: Fixed Repayment Plans, Income-Driven Repayment Plans, and Alternative Repayment Plans ........................................................................................................................ 33 Table 5. Repayment Periods: Standard Repayment Plan (34 C.F.R. §685.208(c)) and Graduated Repayment Plan (34 C.F.R. §685.208(h))................................................................. 39 Table 6. Repayment Periods: Extended Repayment Plan (34 C.F.R. §685.208(d)) and Graduated Repayment Plan (34 C.F.R. §685.208(f)) ................................................................. 40 Table 7. 2024 Poverty Guidelines for the 48 Contiguous States and the District of Columbia ................................................................................................................... 43 Table 8. SAVE Repayment Plan Maximum Repayment Periods and Monthly Payment Numbers ....................................................................................................... 55 Table 9. Maximum Repayment Period and Equivalent Number of Monthly Payments ............... 81 Table C-1. History of Annual and Aggregate Loan Limits for Direct Loan Program Loans, by Borrower Type and Academic Level ....................................................................... 103 Table C-2. History of Interest Rate Formulas for Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans ......................................................................... 108 Table C-3. History of Interest Rate Formulas for Direct Consolidation Loans ............................ 110 Table C-4. History of Interest Rates in Effect for Direct Loan Program Loans ........................... 111 Table C-5. History of Direct Loan Origination Fees ................................................................... 122 Appendixes Appendix A. Directory of Resources............................................................................................. 98 Appendix B. Glossary of Terms .................................................................................................... 99 Appendix C. Historical Tables on Selected Loan Terms and Conditions .................................... 103 Appendix D. COVID-19 Flexibilities ......................................................................................... 123 Contacts Author Information...................................................................................................................... 128 Congressional Research Service Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Introduction The William D. Ford Federal Direct Loan (Direct Loan) program makes several types of federal student loans available to individuals to assist them with financing postsecondary education expenses. It represents the single largest source of federal financial assistance to support students’ postsecondary educational pursuits. The U.S. Department of Education (ED) estimates that in FY2025, 14.9 million new loans totaling $93.1 billion, will be made through the Direct Loan program to undergraduate and graduate students, and to the parents of undergraduate students.1 In addition, ED estimates that 875,000 Direct Consolidation Loans,2 totaling $41.5 billion, will be made to existing borrowers of federal student loans.3 As of the end of the third quarter of FY2024, $1.4 trillion in principal and interest on Direct Loan program loans (including Direct Consolidation Loans), borrowed by or on behalf of 37.5 million individuals, remained outstanding.4 This report presents a comprehensive overview of the terms and conditions that apply to federal student loans made through the Direct Loan program.5 It begins by providing background information on the history of the Direct Loan program. This is followed by a brief description of the various types of loans that are offered through the program. The report then presents a thorough description of the terms and conditions for loans made through the Direct Loan program. In identifying and describing loan terms and conditions, it focuses on provisions that are generally applicable to loans regardless of special circumstances (e.g., not temporarily in place due to a national emergency) and applicable to loans that are currently being made or that have been made in recent years. Emphasis is placed on discussing Direct Loan program provisions that relate to borrower eligibility, amounts that may be borrowed, interest rates and fees, procedures for loan repayment, repayment relief, the availability of loan discharge and loan forgiveness benefits, and the consequences of defaulting. The final section of the report provides a summary of the methods that are used to ensure that borrowers are informed about the terms and conditions of the loans they obtain and their obligation to repay them. 1 U.S. Department of Education, FY2025 Justification of Appropriation Estimates to the Congress, Volume II, “Student Loans Overview,” p. 25, https://www.ed.gov/sites/ed/files/about/overview/budget/budget25/justifications/tsloverview.pdf. In some instances, more than one loan will be borrowed by a student or on the student’s behalf. 2 Direct Consolidation Loans allow individuals who have at least one loan borrowed through either the Direct Loan program or the Federal Family Education Loan program to refinance their eligible federal student loan debt by borrowing a new loan and using the proceeds to pay off their existing federal student loan obligations. 3 U.S. Department of Education, FY2025 Justification of Appropriation Estimates to the Congress, Volume II, “Student Loans Overview,” p. 25, https://www.ed.gov/sites/ed/files/about/overview/budget/budget25/justifications/tsloverview.pdf. 4 U.S. Department of Education, Office of Federal Student Aid, Federal Student Aid Data Center, “Federal Student Aid Portfolio Summary,” FY2024 Q3, https://studentaid.gov/sa/sites/default/files/fsawg/datacenter/library/ PortfolioSummary.xls. 5 This report focuses on describing the terms and conditions of federal student loans made through the Direct Loan program as specified by the Higher Education Act of 1965 (HEA) and other laws and their implementing regulations. In addition to the generally applicable loan terms and conditions that are summarized in this report, the Higher Education Relief Opportunities for Students (HEROES) Act authorizes a number of waivers and regulatory flexibilities that may be used to extend benefits to certain classes of borrowers. The waivers and flexibilities made available by the HEROES Act are beyond the scope of this report. For additional information, see CRS Report R42881, EducationRelated Regulatory Flexibilities, Waivers, and Federal Assistance in Response to Disasters and National Emergencies. Additionally, in response to the current COVID-19 pandemic, Congress and the Administration provided additional student loan relief measures to Direct Loan program borrowers. These measures are briefly described in Appendix D. For additional information, see CRS Report R46314, Federal Student Loan Debt Relief in the Context of COVID-19. Congressional Research Service 1 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program This report has been prepared as a resource for Members of Congress, congressional committees, and congressional staff to support them in their legislative, oversight, and representational roles related to federal student loan policy. It is intended to provide a thorough, but nonexhaustive, description of loan terms and conditions and borrower benefits. It is not intended to be relied upon by borrowers as a resource for validating individual eligibility for specific borrower benefits. Appendix A to this report contains a directory of resources on topics relating to loans made through the Direct Loan program. Appendix B consists of a glossary of terms.6 Appendix C contains a set of tables that present historical information on borrowing limits, interest rates, and fees that have applied to loans made through the Direct Loan program. Appendix D briefly describes temporary Direct Loan program flexibilities and debt relief that were made available to borrowers in light of the COVID-19 pandemic. Background on the Direct Loan Program The Direct Loan program is authorized under Title IV, Part D of the Higher Education Act of 1965 (HEA; P.L. 89-329 , as amended). It was established by the Student Loan Reform Act of 1993 (SLRA), Title IV of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66).7 Federal student loans were first made through the Direct Loan program in 1994. In the Direct Loan program, loans are made by the government using federal capital (i.e., funds from the U.S. Treasury), and once made, outstanding loans constitute an asset of the federal government. Some important characteristics of loans made through the Direct Loan program are that the federal government assumes the risk for losses that may occur as a result of borrower default, and that it pays for the discharge of loans in cases of borrower death, total and permanent disability, and other instances. The federal government also assumes the cost of loans that are not required to be paid in full due to borrowers satisfying criteria that make them eligible to have a portion or all of the balance of their loans discharged under any of several loan forgiveness programs. For federal budgeting purposes, the program is classified as a direct loan program, which is a type of federal credit program for which mandatory spending authority is provided.8 ED’s Office of Federal Student Aid (FSA) is the primary entity tasked with administering the Direct Loan program. The institutions of higher education (IHEs) that participate in the Direct Loan program originate loans to borrowers through FSA’s Common Origination and Disbursement (COD) system. Contractors hired by ED service and collect on the program’s loans.9 When the Direct Loan program was first established, it was intended to expand gradually and then ultimately fully replace the Federal Family Education Loan (FFEL) program, a guaranteed 6 In the process of describing loans made through the Direct Loan program, numerous terms with precise meanings are used. When some of these terms are introduced, it is not always practical to fully describe or define the term, as a subsequent section in the report may be better suited to providing a detailed description. Definitions for selected terms are presented in the Glossary in Appendix B. 7 A Federal Direct Loan Demonstration Program was enacted under the Education Amendments of 1992 (P.L. 102325); however, prior to being fully implemented, the demonstration program was succeeded by the Direct Loan program that was enacted under P.L. 103-66. 8 Federal credit may be extended in the form of a direct loan or a loan guarantee. For additional information, see CRS Report R42632, Budgetary Treatment of Federal Credit (Direct Loans and Loan Guarantees): Concepts, History, and Issues for Congress. 9 For more detailed information on the administration of the Direct Loan program, see CRS Report R44845, Administration of the William D. Ford Federal Direct Loan Program. Congressional Research Service 2 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program student loan program authorized under Title IV, Part B of the HEA, and through which most federal student loans were being made.10 The FFEL program had descended from the Guaranteed Student Loan (GSL) program, which was enacted under Title IV of the HEA in 1965 to enhance access to postsecondary education for students from low- and middle-income families by providing them access to low-interest federal student loans. In the FFEL program, loan capital was provided by private lenders who also originated and serviced loans. The federal government guaranteed lenders against loss due to factors such as borrower default, death, total and permanent disability, and in certain instances, bankruptcy. State and nonprofit guaranty agencies administered the federal guarantee. The federal government was also responsible for making several different types of payments to lenders and guaranty agencies to support the operation of the program. The FFEL program was administratively complex and the Direct Loan program was established with the aims of streamlining the federal student loan delivery system and achieving cost savings.11 Several years into the implementation of the Direct Loan program, the Higher Education Amendments of 1998 (P.L. 105-244) repealed statutory provisions specifying that it ultimately succeed the FFEL program.12 From 1994 to 2010, the Direct Loan program and the FFEL program operated side-by-side. During this period, IHEs could elect to participate in the program of their choice. As this decision was made at the institutional level, the program through which an individual could borrow federal student loans was dependent upon the program participation decisions made by the institution a student attended. During the period while loans were being made through both the FFEL and Direct Loan programs, from the perspective of the borrower, the terms and conditions of loans offered through the programs were similar in most respects. However, the degree of similarity varied over time. Notable differences included certain characteristics of the repayment plans offered and, beginning in 2008, the availability of the Public Service Loan Forgiveness (PSLF) program only to borrowers of loans made through the Direct Loan program.13 The SAFRA Act, Title II of the Health Care and Education Reconciliation Act of 2010 (HCERA; P.L. 111-152) terminated the authority to make loans through the FFEL program, effective July 1, 10 At the time the Direct Loan program was established, federal student loans were also being made through the Federal Perkins Loan program, authorized by HEA, Title IV, Part E, and through several smaller health education loan programs authorized under the Public Health Services Act (PHSA). These other loan programs are beyond the scope of this report. For additional information on the loan programs authorized under the PHSA, see CRS Report R46720, Student Loan Programs Authorized by the Public Health Service Act: An Overview. 11 See CRS Report 95-110 EPW, The Federal Direct Student Loan Program, October 16, 1996 (available to congressional clients upon request). 12 During the early years of implementation of the Direct Loan program, concerns were raised about the capacity of ED to transition from overseeing lending through the FFEL guaranteed loan program to lending completely through the Direct Loan program. For additional information, see U.S. Congress, Senate Committee on Labor and Human Resources, Subcommittee on Education, Arts and Humanities, Oversight of the Direct Student Loan Program, 104th Cong., 1st sess., March 30, 1995, S.Hrg. 104-28 (Washington, DC: GPO, 1995). 13 When the PSLF program was enacted, it was made available only through the Direct Loan program, with the expectation that it would encourage increased borrowing through the Direct Loan program at the expense of the FFEL program. The legislative history of the College Cost Reduction and Access Act of 2008 (CCRAA; P.L. 110-84) shows that when the establishment of a program of “loan forgiveness for certain public service jobs” was approved in the House-passed version of H.R. 2669, it was estimated that the costs of establishing such a program would be offset with savings that would result from borrowers switching from the FFEL program to the Direct Loan program for purposes of taking advantage of loan forgiveness benefits. U.S. Congress, House Committee on Education and Labor, College Cost Reduction Act of 2007, H.R. 2669, 110th Cong., 1st sess., June 25, 2007, H.Rept. 110-210 (Washington, DC: GPO, 2007), pp. 71-72. Congressional Research Service 3 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program 2010.14 While loans are no longer being made through the FFEL program, as of the end of the third quarter of FY2024, $169 billion in principal and interest on FFEL program loans, borrowed by or on behalf of 7.5 million students, remained outstanding and due to be repaid over the coming years.15 Over the history of the Direct Loan program, Congress has periodically made changes to loan terms and conditions. Such changes have often been made as part of comprehensive amendments to the HEA, which authorizes the Direct Loan program; as part of amendments contained in budget reconciliation measures; or as part of amendments included in annual appropriations measures. Congress may contemplate making future changes to loan terms and conditions. Direct Loan Types Individuals currently may borrow the following types of loans through the Direct Loan program: • • • Direct Subsidized Loans. These loans are available only to undergraduate students16 who demonstrate financial need. Direct Subsidized Loans are characterized by having an interest subsidy (i.e., interest that is not charged, or is only partially charged) that applies during an in-school period when a borrower is enrolled in an eligible program on at least a half-time basis, during a six-month grace period that borrowers receive prior to entering repayment on their loans, during periods of authorized deferment, and during certain other periods. The Direct Subsidized Loans currently being made have a fixed interest rate that remains constant for the duration of the loan.17 Direct Unsubsidized Loans. These loans are available to undergraduate students, graduate students, and professional students, without regard to the student’s financial need. Direct Unsubsidized Loans generally do not have an interest subsidy. The Direct Unsubsidized Loans currently being made have a fixed interest rate that remains constant for the duration of the loan. The interest rate on loans made to graduate and professional students is higher than the rate on loans made to undergraduate students. Direct PLUS Loans. These loans are available to graduate and professional students, and to the parents of undergraduate students who are dependent on them for financial support. They are available without regard to financial need and generally do not have an interest subsidy. The Direct PLUS Loans currently being made have a fixed interest rate, which remains constant for the duration of 14 For additional information on changes made to the FFEL and Direct Loan programs by the SAFRA Act, see CRS Report R41127, The SAFRA Act: Education Programs in the FY2010 Budget Reconciliation (available to congressional clients upon request). 15 U.S. Department of Education, Office of Federal Student Aid, Federal Student Aid Data Center, “Federal Student Aid Portfolio Summary,” FY2024 Q2, https://studentaid.gov/sites/default/files/fsawg/datacenter/library/ PortfolioSummary.xls. 16 Direct Subsidized Loans were once available to graduate and professional students for periods of instruction beginning prior to July 1, 2012. The Budget Control Act of 2011 (BCA; P.L. 112-25) eliminated the availability of Direct Subsidized Loans to graduate and professional students for periods of instruction beginning on or after July 1, 2012. 17 Procedures for setting interest rates on Direct Loan program loans have varied over the years, as specified in statute. At some points in time, Direct Loan program loans have been made with variable interest rates, while at other points in time, they have been made with fixed interest rates. See “Procedures for Setting Student Loan Interest Rates” for additional information. Congressional Research Service 4 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program • the loan; and the interest rate is higher than the rate on both Direct Subsidized Loans and Direct Unsubsidized Loans. Direct Consolidation Loans.18 These loans allow individuals who have at least one loan borrowed through either the Direct Loan program or the FFEL program to borrow a new loan and use the proceeds to pay off their existing federal student loan obligations, including loans that are in default. This is essentially a form of debt refinancing. Direct Consolidation Loans are available without regard to financial need. The Direct Consolidation Loans currently being made have fixed interest rates. In general, the interest rate for a Direct Consolidation Loan is determined by calculating the weighted average of the interest rates on the loans that are consolidated, and rounding the result up to the next higher oneeighth of a percentage point. For a Direct Consolidation Loan that was the result of the separation of a Joint Consolidation Loan (JCL), the interest rate is equal to the interest rate on the JCL as of the date before the separation of the JCL.19 Typically, when an individual obtains a Direct Consolidation Loan, a new repayment period begins, which may be for a longer period than applied to the loans originally borrowed.20 A Direct Consolidation Loan may have a subsidized component21 and an unsubsidized component.22 18 A number of variations of Direct Consolidation Loans were once available. Married individuals who both had federal student loans were once able to obtain Joint Direct Consolidation Loans for purposes of repaying their combined student loan debt. Borrowers of these loans became jointly and severally liable for the debt—even in the event of divorce. The authority to make new Joint Direct Consolidation Loans was repealed effective July 1, 2006, under the Higher Education Reconciliation Act of 2005 (HERA; P.L. 109-171). Also, Special Direct Consolidation Loans were available during a limited period from January 17, 2012, through June 30, 2012, to borrowers who had both (1) one or more student loans made through the FFEL program and held by a commercial lender, and (2) one or more loans made through either the Direct Loan program or made through the FFEL program and held by ED. Eligible borrowers were afforded the opportunity to consolidate their commercially held FFEL program loans into a Special Direct Consolidation Loan, and in doing so simplify the repayment of their loans by having them all serviced by a single entity. A number of special repayment incentives were available to borrowers who consolidated their loans under this program. U.S. Department of Education, Office of Postsecondary Education, “Special Direct Consolidation Loan Information - Short-Term Consolidation Opportunity Offered from January - June 30, 2012,” October 26, 2011, https://fsapartners.ed.gov/knowledge-center/library/electronic-announcements/2011-10-26/loans-subject-special-directconsolidation-loan-information-short-term-consolidation-opportunity-offered-january-june-30-2012. 19 HEA §455(g)(2)(B)(i)(II). Prior to October 11, 2022, a JCL could not be separated, even if the individuals who borrowed the loan were no longer married. The Joint Consolidation Loan Separation Act (P.L. 117-200) authorized borrowers of JCLs to separate those loans into two new Direct Consolidation Loans, one for each borrower of the JCL. Beginning September 30, 2024, borrowers may apply to separate their JCLs into separate Direct Consolidation Loans. U.S. Department of Education, “Update on Implementation of the Joint Consolidation Loan Separation Act for FFEL Loan Holders and Servicers,” Electronic Announcement, LOANS-24-10, October 1, 2024, https://fsapartners.ed.gov/ knowledge-center/library/electronic-announcements/2024-10-01/update-implementation-joint-consolidation-loanseparation-act-ffel-loan-holders-and-servicers. 20 Loan consolidation is essentially a form of debt refinancing. Under current law, borrowers may use the proceeds of a Direct Consolidation Loan to pay off debt owed on one or more previously borrowed federal student loans and to begin a new repayment period of up to 30 years. Doing so may allow borrowers to lower their required monthly payment amount. Borrowers may not, however, obtain a lower interest rate on their federal student loan debt as a result of loan consolidation. 21 The subsidized component of a Direct Consolidation Loan (also referred to as a Direct Subsidized Consolidation Loan) is the portion of a Direct Consolidation Loan attributable to the following loan types (some of which may have been made through programs authorized under Title IV, Part B of the HEA): (1) Subsidized Federal Stafford Loans, (2) Guaranteed Student Loans, (3) Federal Insured Student Loans, (4) Direct Subsidized Loans, (5) Direct Subsidized Consolidation Loans, and (6) the portion of a Federal Consolidation Loan that is eligible for interest benefits during a period of deferment. 34 C.F.R. §685.220(c)(1). 22 The unsubsidized component of a Direct Consolidation Loan (also referred to as a Direct Unsubsidized Consolidation (continued...) Congressional Research Service 5 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Eligibility and Amounts That May Be Borrowed Eligibility for an individual to borrow a loan through the Direct Loan program and the amount they may borrow are governed by HEA provisions and by policies and procedures implemented by ED. All loan types except Direct PLUS Loans are available without consideration of a borrower’s ability to repay the loan. Eligibility to borrow a Direct PLUS Loan depends on an individual’s creditworthiness. The following section identifies and describes factors that determine an individual’s eligibility to borrow one or more types of loans made available through the Direct Loan program. This is followed by a section that describes policies and procedures for determining amounts that may be borrowed. Factors Affecting Eligibility to Borrow For an individual to be eligible to borrow a loan through the Direct Loan program, the student borrower, or the student on whose behalf a parent borrower would obtain a Direct PLUS Loan, must meet a number of eligibility requirements. A broad set of general eligibility criteria applies to students who may benefit from a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan. An additional set of requirements applies specifically to applicants seeking to borrow a Direct PLUS Loan. Still other requirements apply to applicants for Direct Consolidation Loans. Eligibility to borrow various types of loans is also affected by a student’s dependency status, program level (e.g., undergraduate, graduate, or professional), undergraduate class level, financial need, cost of attendance (COA)23 of the academic program, estimated financial assistance (EFA) they expect to receive from other sources, and certain other factors. Factors that affect eligibility to borrow through the Direct Loan program are discussed below. General Student-Based Eligibility Criteria In general, for a student to be eligible to borrow a Direct Subsidized Loan, a Direct Unsubsidized Loan, or a Direct PLUS Loan, or for a parent to borrow a Direct PLUS Loan on behalf of a student, the student must • be enrolled on at least a half-time basis as a regular student in either an eligible program at a participating eligible IHE24, a preparatory program necessary for Loan) is the portion of a Direct Consolidation Loan attributable to the following loan types (some of which may have been made through programs authorized under Title IV, Part B and Part E of the HEA and Title VII and Title VIII of the Public Health Service Act [PHSA]): (1) Federal Perkins Loans, (2) National Direct Student Loans, (3) National Defense Student Loans, (4) Federal PLUS Loans, (5) Parent Loans for Under Graduate Students (PLUS), (6) Direct PLUS Loans, (7) Direct PLUS Consolidation Loans, (8) Unsubsidized Federal Stafford Loans, (9) Federal Supplemental Loans for Students (SLS), (10) Direct Unsubsidized Loans, (11) Direct Unsubsidized Consolidation Loans, (12) Auxiliary Loans to Assist Students (ALAS), (13) Health Professions Student Loans (HPSL), (14) Loans for Disadvantaged Students (LDS), (15) Health Education Assistance Loans (HEAL), (16) Nursing Loans, and (17) the portion of a Federal Consolidation Loan that is ineligible for interest benefits during a period of deferment. 34 C.F.R. §685.220(c)(2). Furthermore, the term Direct PLUS Consolidation Loan refers to the portion of a Direct Consolidation Loan attributable to (1) Direct PLUS Loans, (2) Direct PLUS Consolidation Loans, (3) Federal PLUS Loans, and (4) Parent Loans for Undergraduate Students that were repaid by the Direct Consolidation Loan. 23 Cost of attendance is defined at HEA §472. COA is determined by the IHE attended and generally includes tuition and fees, an allowance for books, supplies and transportation, room and board, and other expenses related to school attendance. 24 For additional information on institutional and program eligibility requirements for participation in the HEA Title IV (continued...) Congressional Research Service 6 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program • • • • • • enrollment in an eligible program (for up to one year), or a teacher certification program;25 not be incarcerated; be a U.S. citizen or national, U.S. permanent resident, or other eligible noncitizen;26 have a high school diploma or recognized equivalent, such as a general education development (GED) certificate, or meet other academic requirements;27 maintain satisfactory academic progress as defined by the school and in accordance with the HEA;28 not be in default on a federal student loan, nor owing a refund on a grant or loan made under HEA, Title IV without having made satisfactory repayment arrangements; and have on file at the IHE attended a statement of educational purpose stating that the loan will be used solely for educational expenses.29 Student Dependency Status For purposes of awarding federal student aid, dependency status determines whether a student is considered dependent on their parents’ financial support or is independent of their support. Dependency status is determined by a student’s responses to questions on the Free Application for Federal Student Aid (FAFSA), which they must complete and submit to ED when applying for federal student aid. A student is considered an independent student if they • • • • • • are, or will be, 24 years of age or older before January 1 of the award year; are married at the time of completing the FAFSA; will be a graduate or professional student at the start of the award year; are currently serving on active duty in the Armed Forces for other than training purposes; are a veteran of the U.S. Armed Forces; have legal dependents other than a spouse; student financial aid programs, see CRS Report R43159, Institutional Eligibility for Participation in Title IV Student Financial Aid Programs. 25 Loans may be obtained through the Direct Loan program for purposes of financing postsecondary expenses at both domestic and foreign institutions. The Direct Loan program is the only HEA, Title IV program that makes federal student aid available for purposes of enrolling in a foreign institution. 26 Individuals who are citizens of the Freely Associated States (the Federated States of Micronesia, the Republic of Palau, and the Republic of the Marshall Islands) are ineligible to borrow Direct Loans. 34 C.F.R. §668.33(b). 27 For additional information, see U.S. Department of Education, 2024-2025 Federal Student Aid Handbook, vol. 1, p. 7-12 (hereinafter, “FSA Handbook”). 28 See also 34 C.F.R. §668.34. For example, in part, “if a student is enrolled in an educational program of more than two academic years, the policy specifies that at the end of the second academic year, the student must have a GPA of at least a ‘C’ or its equivalent, or have academic standing consistent with the institution’s requirements for graduation.” 29 Prior to award year 2021-2022, students were ineligible if they did not meet applicable Selective Service System requirements or if they had been convicted of a federal or state offense of selling or possessing illegal drugs that occurred during a period of enrollment for which the student was receiving federal student aid and their eligibility had not been otherwise restored under specified circumstances. The FAFSA Simplification Act of 2020 (Title VII, Division FF of P.L. 116-260, Consolidated Appropriations Act, 2021) eliminated these eligibility restrictions. Congressional Research Service 7 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program • • • • were an orphan, in foster care, or a ward of the court, at any time since age 13; are an emancipated minor or are in legal guardianship as determined by a court of competent jurisdiction in the individual’s state of legal residence, or were when reaching the age of majority; are an unaccompanied youth who is homeless, or self-supporting and at risk of being homeless; or are a student for whom a financial aid administrator makes a documented determination of independence by reason of other unusual circumstances or based upon a documented determination of independence that was previously made by another financial aid administrator in the same award year.30 A student who does not satisfy any of the criteria to qualify as an independent student is classified as a dependent student.31 Dependency status determines the types of loans students and their families may borrow, which in turn affects the amounts that may be borrowed. Of particular importance with regard to undergraduate students is the fact that Direct PLUS Loans—the loans with the most flexible borrowing limits—are available to the parents of dependent students but not to the parents of independent students. However, independent undergraduate students are extended higher personal borrowing limits than are dependent students.32 These differential borrowing limits are predicated on the expectation that the postsecondary education expenses of dependent students will be financed by some combination of students and their parents, whereas the postsecondary education expenses of independent students will typically be financed without parental assistance. Dependency status also determines which individuals in a student’s family will have their income and assets considered in need analysis calculations for the student (discussed below). Need analysis calculations for a dependent student are based on the income and assets of both the student and the student’s parents,33 whereas need analysis calculations for an independent student are based on the income and assets of the student (and if applicable, the student’s spouse). Program Level The academic level of the program in which a student is enrolled impacts both the types of loans that they may borrow and certain terms and conditions of such loans. 30 HEA, §480(d); U.S. Department of Education, 2024-2025 Handbook, Application and Verification Guide, pp. 12-16. Effective July 1, 2023, institutions may use a documented determination of independence made by another institution in the same or a prior award year. U.S. Department of Education, Dear Colleague Letter GEN-22-15, “FAFSA Simplification Act Changes for Implementation in 2023-24,” November 04, 2022, https://fsapartners.ed.gov/ knowledge-center/library/dear-colleague-letters/2022-11-03/fafsar-simplification-act-changes-implementation-202324. 31 34 C.F.R. §668.2(b). 32 Dependent undergraduates may be eligible to borrow additional amounts in the form of Direct Unsubsidized Loans up to the larger loan limits available to independent undergraduate students (displayed in Table 1) in instances where a financial aid administrator determines that the student’s parents are unable to borrow Direct PLUS Loans due to certain exceptional circumstances. Exceptional circumstances may apply in instances of a student whose parent is unable to qualify to borrow Direct PLUS Loans due to having an adverse credit history, whose parent’s only income is from public assistance or disability benefits, whose parent is incarcerated, whose parent’s whereabouts are unknown, or whose parent is not a U.S. citizen or permanent resident. 34 C.F.R. §685.203(c). 33 Parental income and assets can be defined in a variety of ways in cases where a student’s parents are not married to each other. For additional information, see CRS Report R44503, Federal Student Aid: Need Analysis Formulas and Expected Family Contribution. Congressional Research Service 8 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Undergraduate Studies Undergraduate students may borrow Direct Subsidized Loans and Direct Unsubsidized Loans, and the parents of undergraduate students who are dependent upon them for financial support may borrow Direct PLUS Loans on the student’s behalf. Direct PLUS Loans may not be borrowed by undergraduate students nor by parents on behalf of undergraduate independent students. Graduate and Professional Studies Graduate and professional students may borrow Direct Unsubsidized Loans and Direct PLUS Loans. To be eligible to borrow as a graduate or professional student, an individual must be enrolled in a program above the baccalaureate level or in one that leads to a first professional degree, must have completed at least the equivalent of three years of full-time study either prior to entering the program or as part of it, and must not be concurrently receiving Title IV aid as an undergraduate student.34 Graduate and professional students, all of whom are classified as independent students, are extended higher borrowing limits than undergraduate students. Undergraduate Class Level For undergraduates, a student’s class level determines the maximum amount the student may borrow on an annual basis. A student’s class level is based on their progression according to the academic standards of the school the student attends. For undergraduate students, progression to a higher grade level for purposes of awarding a loan through the Direct Loan program does not necessarily correspond to the start of a new academic year (AY). For instance, a student who continues to make satisfactory academic progress but does not progress to the next grade level due to having completed an insufficient number of credits could borrow a loan through the Direct Loan program more than once as a first-year student. Once the student accrues enough credits to progress to the next higher grade level, they would become eligible for the higher borrowing limits available to second-year students, and so on.35 Financial Need Direct Subsidized Loans are need-based and may only be borrowed by students who demonstrate having financial need according to federal need analysis procedures.36 Applicants seeking to borrow Direct Subsidized Loans must undergo a need test through which a student’s student aid 34 34 C.F.R. §668.2(b). 35 34 C.F.R. §685.203. 36 From July 1, 2013, to August 13, 2021, a student who had no outstanding balance of principal or interest on a Direct Loan program or FFEL program loan on July 1, 2013, or on the date the borrower obtained a loan after July 1, 2013, could only borrow Direct Subsidized Loans for a period not to exceed 150% of the published length of the academic program in which they were enrolled (the maximum eligibility period). In addition, if a Direct Subsidized Loan borrower subject to this rule remained enrolled in the same program for which the loan was obtained, or another undergraduate academic program of equal or shorter length beyond the applicable maximum eligibility period, the borrower would lose the interest subsidy otherwise available on their Direct Subsidized Loans and would become responsible for paying the interest that accrued on their Direct Subsidized Loans after the date that the maximum eligibility period was exceeded. These rules were known as Subsidized Usage Limit Applies (SULA) and were repealed by the FAFSA Simplification Act of 2020 (Title VII, Division FF of P.L. 116-260). For additional information, see U.S. Department of Education, “Repeal of the William D. Ford Federal Direct Loan Program Subsidized Usage Limit Restriction,” 86 Federal Register 31432-31438, June 14, 2021. Congressional Research Service 9 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program index (SAI)37 is calculated. The SAI is the amount of funds a student, and, if applicable, a student’s family, is expected to pay toward the student’s postsecondary education expenses as determined on the basis of the financial resources available to the student. According to federal student aid need analysis procedures, the sum of the student’s SAI and the amount of estimated financial assistance (EFA) they expect to receive from sources other than programs authorized under Title IV of the HEA is subtracted from the estimated COA of the institution the student attends to determine the amount of need-based financial aid that they are eligible to receive. Additional procedures are followed to determine the composition of the student’s federal student aid package. For instance, undergraduate students must receive a determination of their eligibility to receive a Federal Pell Grant38 (a form of need-based aid available only to undergraduates) prior to being certified by their school as being eligible to borrow a Direct Subsidized Loan. This procedure is designed to first provide maximum grant aid to low-income students before they incur student loan debt. The amount a student may borrow with a Direct Subsidized Loan may not exceed the amount of the student’s unmet financial need after other forms of need-based federal student aid available under HEA, Title IV have been awarded. (For additional information, see the “Limits on Borrowing Determined by Need Analysis and Packaging” section.) Since July 1, 2012, only undergraduate students have been eligible to borrow Direct Subsidized Loans. Eligibility Requirements for Direct PLUS Loans In addition to satisfying the general student-based eligibility criteria, an individual must meet certain other eligibility criteria specifically applicable to Direct PLUS Loans. Parent Borrower Eligibility Criteria Direct PLUS Loans may be borrowed by one or both parents of a dependent undergraduate student who meets the general student-based eligibility criteria described above. Eligible parents include biological parents, adoptive parents, and stepparents (if the stepparent’s income and assets are taken into account in determining a student’s SAI). A legal guardian may not borrow a Direct PLUS Loan on behalf of a student as a parent borrower. Parent borrowers must also meet the same citizenship and residency requirements as student borrowers; may not be in default on a federal student loan, nor owe a refund on a grant or loan made under Title IV without having made satisfactory repayment arrangements; and may not be incarcerated. For a parent to be eligible to borrow a Direct PLUS Loan on behalf of a dependent undergraduate student, the student must have completed a FAFSA. A parent borrower is not required to complete a separate FAFSA. The eligibility of a noncustodial parent to borrow a Direct PLUS Loan on behalf of their child is not impacted by that parent’s financial information not appearing on the student’s FAFSA.39 37 Prior to award year 2024-2025, the SAI was called the expected family contribution (EFC). The FAFSA Simplification Act (Title VII, Division FF of P.L. 116-260) made significant changes to the underlying processes and methodologies for determining federal student aid eligibility, including renaming EFC to SAI. For additional information on need analysis, see CRS Report R44503, Federal Student Aid: Need Analysis Formulas and Expected Family Contribution. For additional information on the FAFSA Simplification Act, see CRS Report R46909, The FAFSA Simplification Act. 38 For additional information on the Federal Pell Grant program, see CRS Report R45418, Federal Pell Grant Program of the Higher Education Act: Primer. 39 U.S. Department of Education, 2023-2024 Federal Student Aid Handbook, vol. 8, p. 5 (hereinafter, “2023-2024 FSA Handbook”). Congressional Research Service 10 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Creditworthiness Requirements to Borrow Direct PLUS Loans Eligibility for an individual to borrow a Direct PLUS Loan also depends on that individual’s creditworthiness. Only individuals who do not have an adverse credit history, as determined according to procedures specified in regulations, may borrow Direct PLUS Loans.40 The creditworthiness criteria apply to both parent borrowers and to graduate and professional student borrowers. Creditworthiness is assessed on the basis of a credit report on the applicant obtained from at least one consumer reporting agency. An applicant is considered to have an adverse credit history if they either • • have one or more debts totaling more than $2,085 that are 90 days or more delinquent as of the date of the credit report, or that have been placed in collection or been charged off by the creditor as a loss within the two years prior to the credit report;41 or have been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a debt under HEA, Title IV within the five years prior to the credit report. An applicant who is determined to have an adverse credit history may not obtain a Direct PLUS Loan unless they either obtain an endorser42 or demonstrate that extenuating circumstances exist with regard to the applicant’s credit history.43 Extenuating circumstances may include an updated credit report or a letter from a creditor stating that the applicant has made satisfactory repayment arrangements on a derogatory debt.44 In addition, to obtain a Direct PLUS Loan an applicant who has an adverse credit history must also complete credit counseling. (See the “PLUS Loan Credit Counseling For Borrowers with Adverse Credit” section) An applicant may not, however, be rejected for a Direct PLUS Loan on the basis of having no credit history. A dependent undergraduate student whose parents are unable to obtain a Direct PLUS Loan due to their having an adverse credit history may borrow a larger amount in the form of a Direct Unsubsidized Loan.45 In such a case, the student may borrow up to the borrowing limit applicable to a similarly situated independent undergraduate student. (These amounts are discussed in the “Amounts That May Be Borrowed” section.) Eligibility Requirements for Direct Consolidation Loans Two differing sets of borrower eligibility criteria apply for Direct Consolidation Loans. One set generally applies across borrowers seeking Direct Consolidation Loans, while another set applies to borrowers seeking to separate their Joint Consolidation Loans into one or two Direct Consolidation Loans. 40 34 C.F.R. §685.200. 41 Regulations specify that the $2,085 threshold will periodically be adjusted for inflation “when the Secretary determines that an inflation adjustment … would result in an increase of $100 or more.” It appears the Secretary has not adjusted the threshold since the regulations’ implementation in 2015. 34 C.F.R. §685.200(c)(2)(viii)(C). 42 An endorser is an individual who does not have an adverse credit history, who signs a promissory note, and who agrees to repay the loan should the borrower not do so. 34 C.F.R. §685.102(b). 43 A dependent student on whose behalf the loan would be made to a parent borrower may not be an endorser. 20232024 FSA Handbook, vol. 8, p. 5. 44 34 C.F.R. §685.200(c)(2)(viii)(G). 45 34 C.F.R. §685.203(c)(iii). Congressional Research Service 11 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program General Direct Consolidation Loan Criteria In general, to be eligible to obtain a Direct Consolidation Loan, a borrower must have an outstanding principal balance on at least one loan that was made through either the Direct Loan program or the FFEL program. In addition, with respect to the loans being consolidated, the applicant must be (1) in the grace period prior to entering repayment; (2) in repayment status, but not in default; or (3) in default, but having made satisfactory repayment arrangements.46 For the purposes of including a defaulted loan in a Direct Consolidation Loan, making “satisfactory repayment arrangements” means that the defaulted borrower has made at least three consecutive voluntary full monthly payments within 20 days of the due date, or has agreed to repay according to one of the Income-Driven Repayment (IDR) plans (described below).47 A borrower of a defaulted loan who is subject to a court judgment or wage garnishment is ineligible to obtain a Direct Consolidation Loan. In general, a set of loans may be consolidated only once.48 However, in select circumstances a borrower may add additional loans to their preexisting Direct Consolidation Loan or may use a Direct Consolidation Loan to repay a previously obtained Direct Consolidation Loan or a FFEL Consolidation Loan. Loans made to borrowers within 180 days prior to or after the date of obtaining a Direct Consolidation Loan may be added to that Direct Consolidation Loan. A borrower who has an existing Direct Consolidation Loan and also has other eligible loans that have not been consolidated, or who subsequently obtains other eligible loans, may consolidate those loans with their existing loans for purposes of obtaining a new Direct Consolidation Loan. A borrower who has an existing FFEL Consolidation Loan and whose loan is in default or has been referred to a guaranty agency for default aversion assistance49 may consolidate their loan into a Direct Consolidation Loan for purposes of repaying according to one of the IDR plans. A borrower who has an existing FFEL Consolidation Loan may consolidate that loan into a Direct Consolidation Loan for the purposes of applying for loan forgiveness through the PSLF Program or to receive the No Accrual of Interest on Loans of Certain Active Duty Servicemembers benefit that is only available to borrowers of loans made through the Direct Loan program. Borrowers with a JCL made under either the FFEL or the Direct Loan program may apply to separate that loan into two new Direct Consolidation Loans or one new Direct Consolidation Loan and a remaining JCL, depending on the circumstances (see the ““Criteria to Separate a Joint Consolidation Loan into One or More Direct Consolidation Loans”” section). A Direct Consolidation Loan must consist of at least one eligible loan made through either the Direct Loan or FFEL programs, and may also contain other types of federal student loans.50 The eligible types of federal student loans made through the Direct Loan and FFEL programs include Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, Direct Consolidation Loans, FFEL Subsidized Stafford Loans, FFEL Unsubsidized Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.51 The eligible types of federal student loans made outside of the Direct Loan and FFEL programs are Federal Perkins Loans, Guaranteed Student Loans, Federal 46 HEA §428C(a). 47 34 C.F.R. §685.102(b). 48 HEA §428C(a)(3)(B). 49 Default aversion activities are means of assistance provided by a guaranty agency to a lender that holds a delinquent loan prior to the loan legally entering default status. HEA §§422(h)(8) and 422B(d). 50 HEA §428C(a)(4). 51 Over the history of the Direct Loan program and the FFEL program, the terminology used to refer to various types of loans has changed. A complete listing of loan types eligible for inclusion in a Direct Consolidation Loan is specified in regulations at 34 C.F.R. §685.220(b). Congressional Research Service 12 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Insured Student Loans, National Direct Student Loans, National Defense Student Loans, Supplemental Loans for Students (SLS), Auxiliary Loans to Assist Students (ALAS), Health Education Assistance Loans (HEAL), Health Professions Student Loans (HPSL), Loans for Disadvantaged Students (LDS), and Nurse Faculty Loans, and Nursing Student Loans.52 Criteria to Separate a Joint Consolidation Loan into One or More Direct Consolidation Loans Between October 1, 1992, and July 1, 2006, married borrowers who each had eligible FFEL program and/or Direct Loan program student loans could consolidate their debt into a single JCL. To do so, each spouse was required to agree “to be held jointly and severally liable for the repayment of the consolidation loan, without regard to the amounts of the respective loan obligations” that were to be consolidated and without regard to any subsequent change in the couple’s marital status.53 On October 11, 2022, the Joint Consolidation Loan Separation Act (P.L. 117-200) was enacted to enable borrowers of FFEL and Direct Loan program JCLs to separate their loans into one or two new Direct Consolidation Loans. Each new Direct Consolidation Loan is to be in an amount equal to the proportion of the unpaid principal, interest, and fees of the JCL attributable to the loans of the individual borrower for whom the separate, new Direct Consolidation Loan is being made. The portion of the JCL attributable to the loans of an individual borrower is to be determined on the basis of the original loan obligation of the borrower as of the date the JCL was made, or if requested by both borrowers, on the basis of the debt’s distribution described in a divorce decree, court order, settlement agreement, or other document. For a Direct Consolidation Loan that was the result of a separation of a JCL, the interest rate is to be equal to the interest rate on the JCL as of the date before the separation of the JCL. Under the Joint Consolidation Loan Separation Act, borrowers may separate JCLs in one of two ways. First, a married couple (or two individuals who were previously a married couple) may each apply to ED to separate the loan. Second, an individual borrower in a married couple (or previously married couple) may apply to separate the loan without regard to whether the other individual borrower in the married couple (or previously married couple) applies for the separation of the loan. To do so, the applicant borrower must certify to ED that they have experienced an act of domestic violence or economic abuse from the other borrower54 or are “unable to reasonably reach or access the loan information from the other individual borrower.”55 If an individual borrower receives a new Direct Consolidation Loan after separating the JCL without application from the other borrower, the nonapplicant borrower becomes solely liable for any remaining balance of the JCL following the loan separation. Unlike a general Direct Consolidation Loan, a JCL for which a borrower(s) seeks separation may be in default and applicants need not have entered into a satisfactory repayment arrangement to be eligible to separate a JCL. 52 Several of these loan types were once made through programs that have since been discontinued. 53 20 U.S.C. §1078-3 (2018), “Editorial Notes.” 54 Domestic abuse and economic abuse are defined in 34 U.S.C. §12291. 55 ED is also authorized to permit borrowers to apply individually to separate their JCLs if doing so would be in the best fiscal interest of the federal government. Congressional Research Service 13 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Beginning September 30, 2024, borrowers may apply to separate their JCLs into separate Direct Consolidation Loans.56 Amounts That May Be Borrowed The maximum amounts that a student or a parent may borrow in loans made through the Direct Loan program are determined by the interaction of annual and aggregate borrowing limits and federal need analysis and packaging procedures. Limitations on borrowing vary by loan type, borrower characteristics, program level, and class level. Annual Loan Limits For undergraduate students, annual loan limits cap both the maximum amount that may be borrowed in Direct Subsidized Loans and the total combined amount that may be borrowed through Direct Subsidized Loans and Direct Unsubsidized Loans during a single academic year. Annual loan limits for Direct Subsidized Loans vary by undergraduate class level; however, at any particular class level these limits are the same for both dependent undergraduate students and undergraduate independent students. Annual loan limits for the total combined amount of Direct Subsidized Loans and Direct Unsubsidized Loans that may be borrowed by undergraduate students vary by both undergraduate class level and by student dependency status. For graduate and professional students, annual loan limits cap the maximum that may be borrowed in Direct Unsubsidized Loans, irrespective of class level. However, higher exceptional annual loan limits are extended to students enrolled in certain health professions programs. There is no specified dollar limit to the amount that may be borrowed in Direct PLUS Loans by either parent borrowers or by graduate and professional students. The annual loan limits apply to the maximum principal amount that may be borrowed in an academic year. Any loan origination fees that the borrower is required to pay (see the “Loan Origination Fees” section) are included in the amount to be borrowed that is subject to these limits. Borrowing limits for a student who is enrolled for less than one year are prorated based on the fraction of the academic year for which the student is enrolled. An academic year is defined in statute as a minimum of 30 weeks of instruction for courses of study measured in credit hours, or 26 weeks for courses of study measured in clock hours and during which a full-time student is expected to complete a minimum of 24 semester or trimester hours, 36 quarter hours, or 900 clock hours.57 Aggregate Loan Limits Aggregate loan limits cap the total cumulative amount of outstanding loans that a student may borrow through certain loan types. One limit applies to the total amount that may be borrowed in Direct Subsidized Loans and another limit applies to the total combined amount that may be borrowed in Direct Subsidized Loans and Direct Unsubsidized Loans.58 No aggregate limits are 56 U.S. Department of Education, “Update on Implementation of the Joint Consolidation Loan Separation Act for FFEL Loan Holders and Servicers,” Electronic Announcement, LOANS-24-10, October 1, 2024, https://fsapartners.ed.gov/ knowledge-center/library/electronic-announcements/2024-10-01/update-implementation-joint-consolidation-loanseparation-act-ffel-loan-holders-and-servicers. 57 HEA §481(a)(2)(A). 58 Aggregate loan limits for Direct Subsidized Loans also include Subsidized Stafford Loan amounts borrowed through (continued...) Congressional Research Service 14 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program placed on Direct PLUS Loan borrowing. The aggregate loan limits apply only to the aggregate outstanding principal balance (OPB) of the loans a student has borrowed. They do not apply to accrued or capitalized interest.59 Annual and aggregate limits that have applied to loans made through the Direct Loan program since July 1, 2012, are presented in Table 1. Table 1. Annual and Aggregate Loan Limits, by Borrower Type and Program Level: July 1, 2012, to Present (dollars) Borrower Type and Program Level Direct Subsidized Loans Direct Subsidized Loans and Direct Unsubsidized Loans, Combined All Eligible Borrowers Dependent Students Independent Students Direct PLUS Loans All Eligible Borrowers Undergraduate Students Annual Loan Limits Preparatory coursework for an undergraduate program 2,625 2,625 8,625a n.a. 1st year 3,500 5,500 9,500a n.a. 6,500 10,500a n.a. 7,500 12,500a n.a. n.a. n.a. 2nd year 3rd year and above 4,500 5,500 Preparatory coursework for a graduate programb 5,500 5,500 12,500a Teacher certificationb 5,500 5,500 12,500a 23,000 31,000 57,500a n.a. In general n.a. n.a. 20,500f Up to COA-EFAg Health professions programsh n.a. n.a. 40,500 to 47,167f Up to COA-EFAg Health professions programsi n.a. n.a. 33,000 to 37,167f Up to COA-EFAg In general 65,000k n.a. 138,500 Not limitedg Health professions programse,h,i 65,000k n.a. 224,000 Not limitedg Aggregate Loan Limitsc,d In generale n.a. Graduate Students Annual Loan Limits Aggregate Loan Limitsc,d,j Parents of Dependent Undergraduate Students Annual Loan Limits the FFEL program. Aggregate loan limits for Direct Subsidized Loans and Direct Unsubsidized Loans, combined, also include Subsidized Stafford Loans and Unsubsidized Stafford Loans, combined, borrowed through the FFEL program. 59 In addition, recipients of TEACH Grants who fail to meet the requirements of the program may be required to repay the amount of their TEACH Grant award in the form of a Direct Unsubsidized Loan. For such individuals, this Direct Unsubsidized Loan amount is determined separately from otherwise applicable annual borrowing limits. Congressional Research Service 15 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Borrower Type and Program Level All Direct Subsidized Loans Direct Subsidized Loans and Direct Unsubsidized Loans, Combined All Eligible Borrowers Dependent Students Direct PLUS Loans Independent Students All Eligible Borrowers n.a. n.a. n.a. Up to COA-EFAg n.a. n.a. n.a. Not limitedg Aggregate Loan Limitsc,d In general Source: HEA, §§428, 428H, 451, and 455; 34 C.F.R. §685.203; and U.S. Department of Education, Office of Postsecondary Education, Dear Colleague Letters GEN-05-09, GEN-08-04, and GEN-08-08. Notes: “n.a.” means not applicable. “COA” means cost of attendance. “EFA” means estimated financial assistance. a. These loan limits also apply to dependent undergraduate students whose parents are unable to obtain a Direct PLUS Loan. b. Applies to individuals who have obtained a baccalaureate degree. c. Accrued interest and capitalized interest do not count toward aggregate loan limits. d. If a borrower has a Direct Consolidation Loan, any Direct Subsidized Loans or Direct Unsubsidized Loans that have been included in the Direct Consolidation Loan remain attributable to the aggregate limits for Direct Subsidized Loans and Total Direct Subsidized Loans and Direct Unsubsidized Loans combined, in accordance with their proportionate share of the Direct Consolidation Loan. Aggregate loan limits also include amounts of comparable loan types borrowed through the FFEL program (e.g., Subsidized Stafford Loans, Unsubsidized Stafford Loans). e. Includes Subsidized Stafford Loans and Unsubsidized Stafford Loans borrowed through the FFEL program. f. Direct Subsidized Loans are not currently available to graduate students. g. There is no statutorily specified dollar limit on borrowing amounts for Direct PLUS Loans; however, all aid combined may not exceed COA. h. Students enrolled in programs in the following disciplines are eligible to annually borrow an additional $20,000 more than regular students in Direct Unsubsidized Loans for programs with 9-month academic years, and an additional $26,667 for programs with 12-month academic years: Doctor of Allopathic Medicine, Doctor of Osteopathic Medicine, Doctor of Dentistry, Doctor of Veterinary Medicine, Doctor of Optometry, Doctor of Podiatric Medicine; and, effective May 1, 2005, Doctor of Naturopathic Medicine and Doctor of Naturopathy. Amounts are prorated for 10- and 11-month programs. i. Students enrolled in programs in the following disciplines are eligible annually to borrow an additional $12,500 more than regular students in Direct Unsubsidized Loans for programs with 9-month academic years, and an additional $16,667 for programs with 12-month academic years: Doctor of Pharmacy, Graduate in Public Health, Doctor of Chiropractic, Doctoral Degree in Clinical Psychology, and Masters or Doctoral Degree in Health Administration. Amounts are prorated for 10- and 11-month programs. j. Aggregate loan limits for graduate and professional students include amounts borrowed for undergraduate study. k. The aggregate loan limit for Direct Subsidized Loans to graduate and professional students applies to loans borrowed for programs of instruction beginning before July 1, 2012. A listing of the annual and aggregate loan limits that have applied throughout the history of the Direct Loan program is presented in Table C-1. Limits on Borrowing Determined by Need Analysis and Packaging The process of awarding one or more forms of federal student aid to a student in accordance with federal student aid need analysis procedures and individual program rules is referred to as packaging. Financial aid administrators at IHEs are afforded a degree of discretion in determining how aid is packaged. The packaging of aid may affect the amounts and types of Direct Loans that a student (or parent on behalf of a student) may borrow. The process for packaging aid provided Congressional Research Service 16 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program through the Direct Loan program is briefly described below. The following terms are instrumental in describing this process. • • • • • Cost of Attendance (COA). This is an institution-determined amount indicative of a student’s educational expenses for a period of enrollment (e.g., an academic year) at the IHE. It is determined by the institution a student attends and may include tuition and fees, and allowances for room and board, books, supplies, transportation, loan fees, personal expenses, child or dependent care, and other costs.60 For the Direct Loan program, a student’s COA represents an absolute limit on the maximum amount of aid they may receive during an academic year. Student Aid Index (SAI).61 This is the dollar amount a student and the student’s family (e.g., parents or spouse) are expected to contribute toward their education expenses for a year.62 A student’s SAI is calculated according to procedures specified in law using information supplied by the student on the FAFSA.63 The formula for calculating a student’s SAI takes into account myriad factors including taxed and untaxed income, financial assets, and family size. Other Financial Assistance (OFA). This is the amount of aid anticipated to be made available to a student from federal, state, institutional, or other sources for a period of enrollment.64 It includes grant, scholarship, fellowship, loan, and needbased employment assistance. For purposes of need analysis and packaging, two variations of OFA are relevant: (1) OFA not received under HEA, Title IV programs, and (2) OFA from all sources. OFA does not include qualifying federal veterans’ education benefits (e.g., GI Bill benefits); payments and services received under Title IV, Part E of the Social Security Act to a child or youth in foster care, or formerly in foster care (e.g., Education and Training Vouchers); and emergency financial assistance provided to students for unexpected expenses. For purposes of awarding Direct Subsidized Loans, OFA does not include Segal AmeriCorps Education Awards.65 Financial Need. This is the amount determined by subtracting a student’s SAI and OFA not received under HEA, Title IV from the student’s COA.66 Unmet Financial Need. This is the amount determined by subtracting the sum of a student’s SAI and OFA from the student’s COA.67 60 HEA §§472 and 479A. For additional information on COA, see FSA Handbook, vol. 3, Chapter 2—Cost of Attendance (Budget). 61 The FAFSA Simplification Act makes significant changes to the underlying processes and methodologies for determining federal student aid eligibility, including renaming EFC as the student aid index (SAI). The act’s general effective date is July 1, 2024, although some provisions of the act may be implemented before then. For additional information on need analysis, see CRS Report R44503, Federal Student Aid: Need Analysis Formulas and Expected Family Contribution. For additional information on the FAFSA Simplification Act, see CRS Report R46909, The FAFSA Simplification Act. 62 HEA Title IV, Part F—Need Analysis. For additional information on the EFC, see CRS Report R44503, Federal Student Aid: Need Analysis Formulas and Expected Family Contribution. 63 For additional information, see HEA, Title IV, Part F, and FSA Handbook, Application and Verification Guide, Chapter 3—Student Aid Index (SAI) and Pell Grant Eligibility. 64 HEA §§480(i), 428(2)(a)(C)(ii)(I)(aa), and 455(a)(1). 65 For additional information on the EFA, see HEA, §§428(a)(2)(C)(ii) and 480(j), 34 C.F.R. §685.102(b), and FSA Handbook, vol. 3, Chapter 3—Packaging Aid. 66 HEA §471. 67 For additional information, see FSA Handbook, vol. 3, pp. 40-43. Congressional Research Service 17 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program When packaging Title IV aid, the total amount of need-based aid awarded to a student may not exceed the amount of the student’s financial need. A common packaging strategy is to award need-based aid that is not required to be repaid (e.g., Federal Pell Grant, Federal Supplemental Educational Opportunity Grant [FSEOG], and Federal Work-Study [FSW] awards) before awarding loan aid, which must be repaid. With respect to loans made through the Direct Loan program, only Direct Subsidized Loans are need-based. Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans may all be awarded to satisfy a student’s unmet financial need. Additionally, once a student’s unmet financial need has been satisfied, non-needbased aid, such as Direct Unsubsidized Loans and Direct PLUS Loans, may be awarded to replace some or all of a student’s SAI. Overall, when packaging Title IV aid, the total amount awarded (including both need-based and non-need-based aid) may not exceed the student’s COA, less OFA. Processes for determining the amount of aid that may be awarded through the various types of loans offered through the Direct Loan program are described below. Direct Subsidized Loans Direct Subsidized Loans are need-based. They may be awarded to satisfy a student’s unmet financial need. Students are eligible to borrow Direct Subsidized Loans in amounts up to the lesser of (1) the results of subtracting the sum of the student’s SAI and OFA from COA, or (2) the statutorily specified applicable annual loan limits. The calculation shown in the text box below is used to determine the amount that a student may borrow through a Direct Subsidized Loan. Direct Subsidized Loan Eligibility Direct Subsidized Loan eligibility = min[(COA - (SAI + OFA)), Direct Subsidized Loan limit68] Direct Unsubsidized Loans Direct Unsubsidized Loans are non-need-based. Students are eligible to borrow Direct Unsubsidized Loans irrespective of the amount of their SAI, in amounts up to the lesser of (1) the result of subtracting the student’s OFA (including, for undergraduate students, any amount borrowed through a Direct Subsidized Loan) from COA, or (2) the result of subtracting the amount borrowed through a Direct Subsidized Loan from the annual Direct Subsidized Loan and Direct Unsubsidized Loan combined borrowing limit applicable to the student’s program level and class level. The calculation shown in the text box below is used to determine the amount that a student may borrow through a Direct Unsubsidized Loan. Direct Unsubsidized Loan Eligibility Direct Unsubsidized Loan eligibility = min[(COA - OFA), (total Direct Loan limit69 - Direct Subsidized Loan amt.)] Direct PLUS Loans Direct PLUS Loans are non-need-based. Graduate and professional students and the parents of dependent undergraduate students may borrow Direct PLUS Loans irrespective of the student’s SAI. The amount that may be borrowed through a Direct PLUS Loan is limited to the result of subtracting the OFA (including any amount borrowed through a Direct Subsidized Loan or a Direct Unsubsidized Loan) of the student on whose behalf the loan will be made from the COA of 68 For information on Direct Subsidized Loan limits, see Table 1. 69 For information on loan limits for Direct Subsidized Loans and Direct Unsubsidized Loans, combined, see Table 1. Congressional Research Service 18 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program the institution attended. The calculation shown in the text box below is used to determine the amount that a student or a parent may borrow through a Direct PLUS Loan. Direct PLUS Loan Eligibility Direct PLUS Loan eligibility = COA - OFA With regard to parent borrowing, the total Direct PLUS Loan eligibility amount may be borrowed by one parent, or it may be divided among more than one parent (including noncustodial parents) and borrowed in separate amounts by each. Interest on Direct Loan Program Loans Interest is charged on loans made through the Direct Loan program. It constitutes a charge for the use of borrowed money over a specified period of time. In the Direct Loan program, interest is calculated based on rates that are set according to formulas specified in the HEA. Interest accrual is calculated using a simple daily interest formula. The federal government offers several types of interest subsidies that may limit the amount of interest that accrues or must be paid on the outstanding principal balance of a loan. In certain circumstances, a borrower may be permitted to defer paying some or all of the interest that has accrued on their loan(s) until a later point in time. If a borrower does not pay the interest that has accrued, it may, in certain circumstances, be capitalized (i.e., added to the outstanding principal balance of the borrower’s loan). Interest Rates Interest rates on loans made through the Direct Loan program are set according to procedures specified by statute. Since the inception of the Direct Loan program in 1994, a variety of different procedures have been used for setting student loan interest rates. The loans currently being made through the Direct Loan program have fixed interest rates that remain constant from the time a loan is made until it is paid in full. Since July 1, 2013, Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans, have been made with fixed interest rates that are indexed to the interest rates on 10-year U.S. Treasury notes that are auctioned just prior to the start of the academic year during which the loans are made. Since February 1, 1999, Direct Consolidation Loans have been made with fixed interest rates that are based on the weighted average of the interest rates on the loans that are included in the Direct Consolidation Loan. Previously, other procedures had been used for setting student loan interest rates, and a number of loans that had been made according to these prior procedures remain outstanding. Procedures for Setting Student Loan Interest Rates The various procedures that have been used for setting interest rates on loans made through the Direct Loan program can be broadly categorized as follows: (1) variable interest rates that are indexed to the interest rates on short-term U.S. Treasury securities that are auctioned just prior to the start of the academic year during which the rate will be in effect, (2) fixed interest rates that are set according to the weighted average of the interest rates of the loans included in a Direct Consolidation Loan, (3) fixed interest rates that are specified in statute, and (4) fixed interest rates that are indexed to the interest rates on long-term U.S. Treasury securities that are auctioned just prior to the start of the academic year during which the loans are made. Because loans with interest rates that have been set according to each of these categories still remain outstanding, each is briefly discussed below. Appendix C presents a detailed history of the various procedures that have been used to set the interest rates that apply to Direct Subsidized Loans, Direct Congressional Research Service 19 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Unsubsidized Loans, and Direct PLUS Loans (Table C-2); the procedures that have been used to set the interest rates that apply to Direct Consolidation Loans (Table C-3); and the interest rates that have been in effect on these loans on a year-by-year basis (Table C-4). Variable Interest Rates Indexed to Short-Term U.S. Treasury Securities At the inception of the Direct Loan program in 1994, all loan types were made with variable interest rates that would adjust once per year on July 1.70 On variable rate loans, the applicable interest rate is determined according to a formula specified in statute. For each 12-month period that extends from July 1 through June 30, the applicable interest rate is indexed to the bond equivalent rate of 91-day U.S. Treasury bills (or other short-term U.S. Treasury securities) auctioned at the final auction held prior to the preceding June 1.71 An interest rate add-on increases the rate above the rate of the index. Different interest rate add-ons may apply to loans depending on the type of loan (e.g., Direct Subsidized Loan, Direct PLUS Loan), the status of the loan (e.g., in school, grace, repayment), and when the loan was made. An interest rate cap of 8.25% applies to variable rate Direct Subsidized Loans and Direct Unsubsidized Loans72 and the portion of a variable rate Direct Consolidation Loan attributable to such loans. An interest rate cap of 9.0% applies to variable rate Direct PLUS Loans73 and the portion of a variable rate Direct Consolidation Loan attributable to a PLUS Loan. Direct Consolidation Loans were made with variable interest rates through January 31, 1999, while all other types of Direct Loan program loans continued to be made with variable interest rates through June 30, 2006. Fixed Interest Rates on Direct Consolidation Loans Since February 1, 1999, Direct Consolidation Loans have been made with fixed interest rates that remain in effect for the duration of the loan.74 In general, the applicable interest rate on a fixedrate Direct Consolidation Loan is determined by calculating the weighted average of the interest rates in effect on the loans being consolidated, and rounding the result up to the nearest higher one-eighth of 1%.75 If a borrower obtains a Direct Consolidation Loan to repay one or more loans having a variable interest rate, the weighted average of the interest rates in effect on the loans being consolidated will be used to set the fixed rate that will apply for the duration of the new Direct Consolidation Loan.76 For Direct Consolidation Loans made during the period from 70 See HEA §455(b)(1). 71 The practice of using the rate of the final auction held prior to the preceding June 1 provides approximately one month of lead time for ED to determine interest rates for particular loan types and to communicate this information to current and prospective borrowers and loan servicers. 72 HEA §455(b)(1). 73 HEA §455(b)(4). 74 For Direct Consolidation Loans, the determination of whether certain terms and conditions apply to a given loan (e.g., which interest rate setting formula applies) is based on the date when the application for the Direct Consolidation Loan is received by the loan servicer. 75 See HEA §455(b)(6)(D) &(7)(C). For variable rate loans made through the FFEL program and the Direct Loan program during the period from July 1, 1995, through June 30, 2006, interest rates are 0.6 percentage points lower during in-school and grace periods than during repayment periods. A borrower may apply to obtain a Direct Consolidation Loan during the six-month grace period after ceasing to be enrolled on at least a half-time basis, and by doing so may lock in the lower grace period interest rate. 76 During the period when Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans were made with variable rates and Direct Consolidation Loans were made with fixed interest rates, the availability of fixed rate Direct Consolidation Loans essentially provided borrowers with an option to lock in rates determined according to the variable interest rate formula (rounded to the nearest higher one-eighth of 1%) that a borrower may have considered to (continued...) Congressional Research Service 20 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program February 1, 1999, through June 30, 2013, the maximum interest rate was capped at 8.25%.77 For a Direct Consolidation Loan that was the result of a separation a JCL, the interest rate is to be equal to the interest rate on the JCL as of the date before the separation of the JCL.78 There is no maximum interest rate for Direct Consolidation Loans made on or after July 1, 2013.79 Fixed Interest Rates Specified in the HEA During the period from July 1, 2006, through June 30, 2013, all loans made through the Direct Loan program, with the exception of Direct Consolidation Loans, were made with fixed interest rates that were determined by Congress and specified in statute.80 Different fixed interest rates applied depending on the type of loan (e.g., Direct Subsidized Loan, Direct PLUS Loan), the program level for which it was borrowed (e.g., undergraduate, graduate), and the academic year for which the first disbursement of the loan was made (e.g., AY2007-2008, AY2008-2009). For these loans, the interest rate that was in effect when the loan was made remains in effect for the duration of the loan. Fixed Interest Rates Indexed to Long-Term U.S. Treasury Securities With the exception of Direct Consolidation Loans, all loans made through the Direct Loan program on or after July 1, 2013, have market-indexed fixed interest rates.81 For these loans, the applicable interest rate is set according to a formula specified in statute and remains in effect for the duration of the loan. For new loans made during each 12-month period that extends from July 1 through June 30, the applicable interest rate is indexed to the bond equivalent rate of 10-year U.S. Treasury notes auctioned at the final auction held prior to the preceding June 1.82 An interest rate add-on increases the applicable borrower rate above the rate of the index. Different interest rate add-ons apply depending on the type of loan (e.g., Direct Subsidized Loan, Direct PLUS Loan) and the program level for which it was borrowed (e.g., undergraduate, graduate). An interest rate cap of 8.25% applies to Direct Subsidized Loans and to Direct Unsubsidized Loans made to undergraduate students; a cap of 9.5% applies to Direct Unsubsidized Loans made to graduate and professional students; and a cap of 10.5% applies to all Direct PLUS Loans. The interest rates applicable to loans being made through the Direct Loan program for loans first disbursed July 1, 2023, through June 30, 2024, and for loans first disbursed July 1, 2024, through June 30, 2025, are presented below in Table 2. be advantageous. The approximate one-month lead between when future interest rates become known and when they go into effect provided borrowers a window during which they could evaluate whether to obtain a Direct Consolidation Loan at the then-current rate (should rates for the next year be scheduled to increase) or defer the option to consolidate for another year (should rates for the next year be scheduled to decrease). 77 HEA §455(b)(6)(D). During the period when the 8.25% interest rate cap was in effect, a borrower who had one or more loans with an interest rate that was greater than the cap (e.g., a FFEL PLUS Loan made with an 8.5% interest rate) could lower the applicable interest rate by including the loan(s) in a Direct Consolidation Loan. 78 HEA §455(g)(2)(B)(i)(II). 79 HEA §455(b)(8)(D). 80 HEA §455(b)(7). 81 HEA §455(b)(8). 82 The final auction held prior to the preceding June 1 is generally held in May. See U.S. Department of the Treasury, Treasury Direct, “General Auction Timing,” https://www.treasurydirect.gov/instit/auctfund/work/auctime/ auctime.htm#:~:text=20%2Dyear%20bond%20and%2030,September%2C%20October%2C%20and%20December (accessed June 13, 2024). Congressional Research Service 21 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Table 2. Interest Rates on Loans Made Through the Direct Loan Program: July 1, 2023, through June 30, 2024, and July 1, 2024, through June 30, 2025 (percentage) Fixed Interest Rate in Effect Direct Subsidized Loans Direct Unsubsidized Loans Direct PLUS Loans Undergraduate students 5.50 5.50 n.a. Graduate and professional students n.a. 7.05 8.05 Parents of dependent undergraduate students n.a. n.a. 8.05 Undergraduate students 6.53 6.53 n.a. Graduate and professional students n.a. 8.08 9.08 Parents of dependent undergraduate students n.a. n.a. 9.08 Borrower Type Direct Loans disbursed July 1, 2023-June 30, 2024 Direct Loans disbursed July 1, 2024-June 30, 2025 Source: HEA §455(b); 20 U.S.C. §1087e(b); U.S. Department of Education, Office of Federal Student Aid, “FY23 Interest Rates for Direct Loans First Disbursed Between July 1, 2023 and June 30, 2024,” Electronic Announcement, DL-23-03, May 16, 2023, https://fsapartners.ed.gov/knowledge-center/library/electronicannouncements/2023-05-16/interest-rates-direct-loans-first-disbursed-between-july-1-2023-and-june-30-2024; and U.S. Department of Education, Office of Federal Student Aid, “Interest Rates for Direct Loans First Disbursed Between July 1, 2024 and June 30, 2025,” DL-24-03, May 14, 2024, https://fsapartners.ed.gov/ knowledge-center/library/electronic-announcements/2024-05-14/interest-rates-direct-loans-first-disbursedbetween-july-1-2024-and-june-30-2025. Note: “n.a.” means not applicable. Interest Accrual Interest accrual is the process through which interest accumulates over time. In the Direct Loan program, the accrual of interest is calculated using a simple daily interest formula.83 With this formula, interest accrues only on the OPB of the loan. This is in contrast to a compound interest formula, in which interest accrues on both the OPB of the loan and any interest that has accrued during a prior period. In a limited set of circumstances, accrued interest that has not been paid by a borrower may be capitalized, or added to the OPB of the loan. (This is discussed below in the “Interest Capitalization” section.) According to the simple daily interest formula used in the Direct Loan program, the amount of interest that accrues over a certain period of time is determined by first calculating the daily interest (per diem) that accrues on a loan. The per diem is computed by dividing the applicable interest rate by the number of days in a year (365.25) and multiplying the resulting quotient by the OPB of the loan.84 The per diem is then multiplied by the number of days of interest being calculated (e.g., days since the last payment was made). The result of this calculation is the 83 U.S. Department of Education, Office of Federal Student Aid, “Understand how interest is calculated and what fees are associated with your federal student loan: How is interest calculated?,” https://studentaid.gov/understand-aid/types/ loans/interest-rates#how-calculated (accessed June 13, 2024). 84 The per diem is calculated out to five decimal places and truncated. U.S. Department of Education, Office of Federal Student Aid, “Business Operations Servicing Requirements: Attachment 01,” version 0.0.5, February 23, 2023. Congressional Research Service 22 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program amount of interest that has accrued during the applicable time period.85 An example of the calculation of accrued interest over a 30-day period is provided in the text box below. Simple Daily Interest Formula: Example of the Calculation of Accrued Interest Days since last payment: 30 Outstanding principal balance: $4,500 Per diem: Applicable interest rate: 0.0653 Days in a year: 365.25 Accrued Interest = [30 x $4,500 x (0.0653 ÷ 365.25)] = $24.13 For loans made through the Direct Loan program, interest begins to accrue on the OPB once the first installment of a loan is disbursed. Unless it is subsidized (see the “Subsidized Interest” section), interest accrues during the entirety of the period that a loan is in effect, irrespective of whether the borrower is expected to be making payments on it. Subsidized Interest In certain circumstances, the federal government subsidizes some or all of the interest that would otherwise accrue on loans made through the Direct Loan program.86 During periods when an interest subsidy is provided, borrowers are not required to pay the interest that would accrue. The availability of an interest subsidy depends on factors such as the type of loan borrowed, eligibility for an authorized deferment, the repayment plan selected, and the borrower’s status as a servicemember in the Armed Forces.87 Interest subsidies that may be available on loans made through the Direct Loan program are described below.88 Interest Subsidy on Direct Subsidized Loans On Direct Subsidized Loans, and on the subsidized component of Direct Consolidation Loans, interest is subsidized by the government (i.e., interest does not accrue) during in-school periods while a borrower is enrolled in an eligible program on at least a half-time basis, during a sixmonth grace period, and during periods of authorized deferment. Due to amendments to the HEA made by the Consolidated Appropriations Act, 2012 (P.L. 112-74), interest is not subsidized 85 The result of the calculation is truncated at two decimal places and “shall not be rounded up.” U.S. Department of Education, Office of Federal Student Aid, “Business Operations Servicing Requirements: Attachment 01,” version 0.0.5, February 23, 2023, 86 In this report, the terms subsidized interest and interest subsidy refer to the government not charging a borrower for some or all of the interest that would otherwise accrue on a loan during a specified period of time. These terms are not used to refer to the interest rate on a loan made through the Direct Loan program being below the market rate that would typically be available on unsecured credit extended to a borrower without regard to the borrower’s employment, income, assets, or credit history. These terms are also in contrast to the term loan subsidy, which is used for budgeting purposes and is the estimated present value of the cash flows from the government (e.g., loan disbursements), excluding administrative expense, less the estimated present value of the cash flows to the government (e.g., repayments of principal and interest), resulting from a direct loan or loan guarantee, discounted to the time when the loan is disbursed, and taking into account estimated effects of defaults, prepayments, fees, penalties, loan deferments, loan forgiveness, etc. 87 In addition, in response to the COVID-19 pandemic, for March 13, 2020 through July 31, 2023, the accrual of interest on all types of Direct Loan program loans is suspended. This can be viewed as a limited-time interest subsidy. 88 In addition to the Direct Loan program interest subsidies described here, a student loan interest deduction is made available through the federal tax code. For information on this interest subsidy, see CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects. Congressional Research Service 23 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program during the grace period on Direct Subsidized Loans disbursed between July 1, 2012, and June 30, 2014.89 Interest Rate Reduction for Automatic Debit Repayment The HEA authorizes the Secretary of Education (the Secretary) to offer borrowers of loans made through the Direct Loan program an interest rate reduction as an incentive for having loan payments automatically debited from a bank account.90 The Secretary currently offers a 0.25 percentage point interest rate reduction for automatic debit repayment. This option helps ensure that borrowers make their student loan payments on time. The interest rate reduction for automatic debit repayment does not apply during in-school, grace, deferment, or forbearance periods. Interest Subsidies on Eligible Loans Repaid According to Certain IncomeDriven Repayment (IDR) Plans During Negative Amortization Interest subsidies are provided on certain types of loans repaid according to several of the IDR plans—both of the Income-Based Repayment (IBR) plans, the Pay As You Earn (PAYE) repayment plan, and the Saving on a Valuable Education (SAVE) repayment plan91—during periods when a borrower’s loans are in negative amortization.92 (Details of these IDR plans are described in the “Loan Repayment Plans” section.) A common characteristic of these IDR plans is that an interest subsidy is provided on Direct Subsidized Loans and on the subsidized component of Direct Consolidation Loans for a maximum of the first three consecutive years that the borrower repays according to the applicable IBR plan. In addition, in the SAVE repayment plan an extended, interest subsidy is provided on all eligible loan types. These IDR plan interest subsidies are described in greater detail below. 89 Between July 1, 2013, and August 13, 2021, individuals who were first-time borrowers on or after July 1, 2013, had their eligibility to both borrow a Direct Subsidized Loan and to receive the interest subsidy on such previously obtained loans limited to a period that could not exceed 150% of the published length of the academic program in which the student was enrolled (the maximum eligibility period). Borrowers subject to these limitations who remained enrolled beyond the maximum eligibility period would lose the interest subsidy and become responsible for paying the interest that accrued on their Direct Subsidized Loans after the date that they exceeded the maximum eligibility period. The FAFSA Simplification Act of 2020 (P.L. 116-260) repealed these limitations. Thus, for borrowers with Direct Subsidized Loans first disbursed on or after July 1, 2021, these limitations do not apply. In addition, for borrowers with Direct Subsidized Loans outstanding as of July 1, 2021, and on which the borrower was responsible for paying interest because they exceeded the maximum eligibility period, ED was to “adjust their account to remove the interest that accrued and reapply the borrower’s payments accordingly.” U.S. Department of Education, “Repeal of the William D. Ford Federal Direct Loan Program Subsidized Usage Limit Restriction,” 86 Federal Register 31433, June 14, 2021. 90 HEA, §455(b)(9); 34 C.F.R. §685.211(b). Until June 30, 2012, the Secretary was authorized to offer a variety of interest rate reductions to borrowers as a means of encouraging on-time repayment. These incentives were required to be cost neutral to the government. 91 Prior to June 30, 2023, the SAVE repayment plan was named the Revised Pay As You Earn (REPAYE) plan. Regulations now specify that the REPAYE repayment plan may also be referred to as the SAVE repayment plan. ED made this change as part of a series of updates to the REPAYE repayment plan’s terms. U.S. Department of Education “Improving Income Driven Repayment for the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan (FFEL) Program,” 88 Federal Register 43820, July 10, 2023 (SAVE Plan Final Rule). 92 Negative amortization is a period of time during which a borrower’s monthly payment amount is less than the amount of interest that accrues on their loans. Congressional Research Service 24 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program Three-Year Interest Subsidy on Direct Subsidized Loans Repaid According to Certain IDR Plans During Negative Amortization The structure of the IBR and PAYE repayment plans provide that in certain instances, a borrower’s required monthly payment amount may be insufficient to pay all of the interest that has accrued on the borrower’s Direct Subsidized Loans or on the subsidized component of a Direct Consolidation Loan. In such instances, the Secretary provides the borrower with an interest subsidy (i.e., does not charge the borrower) for the amount of the accrued interest that exceeds the applicable monthly payment amount (referred to as the remaining accrued interest) for a period of up to the first three years from the date the borrower began repaying according to one of those plans. For borrowers who switch repayment plans and repay their loans sequentially according to more than one of the IBR or PAYE repayment plans, a cumulative three-year limit on receipt of the interest subsidy applies to periods of repayment made under those plans.93 Any periods during which the borrower receives an economic hardship deferment and during which an interest subsidy is provided on Direct Subsidized Loans and on the subsidized component of Direct Consolidation Loans do not count toward the three-year eligibility limit. Periods during which the borrower receives an interest subsidy under the SAVE repayment plan do not count toward the three-year eligibility limit.94 Interest Subsidy on All Eligible Loan Types Repaid According to the SAVE Repayment Plan During Negative Amortization In the instance that a borrower’s required monthly payment amount is insufficient to pay all of the interest that has accrued on their loans, the SAVE repayment plan provides a subsidy equal to the remaining accrued interest for all periods of repayment on all Direct Loan types.95 No Accrual of Interest on Loans of Certain Active Duty Servicemembers For all types of loans made through the Direct Loan program that were first disbursed on or after October 1, 2008, no interest accrues during a period of up to 60 months while the borrower is serving on active duty in the Armed Forces or is performing qualifying National Guard duty in an area of hostilities during a war or national emergency. For Direct Consolidation Loans, the interest subsidy applies only to the portion of the loan that was used to repay other loans that were first disbursed on or after October 1, 2008.96 SCRA 6% Interest Rate Cap on Loans of Borrowers Who Enter Military Service The Servicemembers Civil Relief Act (SCRA) provides that for individuals who borrow loans after August 14, 2008, but prior to their entrance into military service, the interest rate on their loans must be capped at a rate of 6% for the duration of their military service.97 The federal government, as the creditor on loans made through the Direct Loan program, must forgive interest above the 6% rate and may not accelerate repayment of the loans. Loan servicers are required to 93 34 C.F.R. §685.209(h)(2). See also SAVE Plan Final Rule, 43870. With regard to Direct Consolidation Loans, the three-year period also includes periods during which an interest subsidy was provided on the underlying loans while they were being repaid according to an IDR plan during periods of negative amortization. 94 34 C.F.R. §685.209(h)(2). 95 34 C.F.R. §685.209(h)(2). 96 HEA §455(o). 97 SCRA §207; HEA §§428(d) and 455(a). For additional information on the SCRA, see CRS Report R45283, The Servicemembers Civil Relief Act (SCRA): Section-by-Section Summary. Congressional Research Service 25 Federal Student Loans Made Through the William D. Ford Federal Direct Loan Program regularly check with the U.S. Department of Defense Manpower Data Center (DMDC) to determine whether borrowers qualify for the SCRA 6% interest rate cap and to extend the benefit to borrowers. Borrowers also have the option of completing an SCRA Interest Rate Limitation Request and submitting it to their loan servicer to document their eligibility for the 6% interest rate cap.98 SCRA 6% Interest Rate Cap and Direct Consolidation Loans If a borrower repays one or more loans on which the interest rate has been reduced to 6% under the SCRA with a Direct Consolidation Loan, the 6% interest rate is required to be used as the applicable interest rate on those loans for purposes of determining the weighted average interest rate of the new Direct Consolidation Loan.99 In such an occurrence, because Direct Consolidation Loans are currently being made with fixed interest rates, the 6% rate would essentially be locked in and would remain in effect beyond the end of the borrower’s period of military service. Interest Subsidy on All Loan Types During Cancer Treatment Deferment A Cancer Treatment Deferment is provided during periods while a borrower is receiving treatment for cancer and for the six months thereafter. During periods while a borrower receives this deferment, no interest accrues on their qualifying loans. The Cancer Treatment Deferment is available on all types of Direct Loan program loans that are either made on or after September 28, 2018, or that had entered repayment status on or before September 28, 2018.100 This benefit does not appear to be available for loans that were made prior to September 28, 2018, but had not yet entered repayment prior to that date. Deferred Payment of Accrued Interest In certain instances, the obligation of a borrower to pay the interest that accrues on the outstanding principal balance of loans made through the Direct Loan program may be deferred. For instance, during in-school, grace, deferment, and forbearance periods, borrowers are not required to make payments of either principal or the interest that accrues on the OPB. Also, for a borrower whose loans are in repayment status and who i [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR45931. Public record. Not legal advice.