Federal Direct Loan Program

Student loans usually make up the majority of a college student's financial aid package, and many students take advantage of federal loan programs that offer reasonable terms and rates. The Federal Direct Loan Program (established in 1994) allows students to borrow directly from the federal government with a variety of repayment options, which are also open to students wishing to consolidate loans from other sources.

The Direct Loan Program offers the following repayment options:

• Standard Repayment
  The standard arrangement is to repay loans in 120 monthly payments over 10 years, although small loan amounts may be repaid faster. A variable interest rate is applied to the outstanding balance, but instead of varying the monthly payment amount, the payment remains constant and the number of payments is adjusted to account for a higher or lower interest rate. Under some circumstances, the student can request that payments be adjusted instead.
• Income-Contingent Repayment
  This plan limits payments to 20% of the borrower's monthly discretionary income. This means that payments will rise as income rises. However, if the calculated payment does not cover all of the interest due, the unpaid interest is added to the principal, increasing total costs. Any debt remaining after 25 years is forgiven, but forgiven debt is considered taxable income, which may create tax problems for low-income borrowers. Income-contingent repayment plans make the most sense for borrowers who expect their income to rise as they move up in their careers.
• Graduated Repayment
  Under this plan, payments start low and rise over time, with repayment taking up to 30 years. Graduated repayments increase automatically, independent of the borrower's income level.
• Extended Repayment Extended repayment stretches out the loan repayment period. Depending on the size of the loan, it can go from 12 years to as much as 30 years.

The Direct Loan program does not lock borrowers into one of these repayment plans; borrowers can switch from one option to another and there is no penalty for prepayment.

The government offers a variety of incentives to save for post-secondary education and education financing programs. For more information, call the Federal Student Aid Information Center at (800) 433-3243 or see the websites below:

• The Office of Post-Secondary Education: http://www.ed.gov/about/offices/list/ope/index.html
• The College Board: http://www.collegeboard.org