This post is a continuation of the last two that summarized Modules 1 and 2 of the Student Loan Entrance Counseling (SLEC). Module 3, “Federal Student Loans”, is summarized in this post. When a student is approved for a Federal loan for the first time, they’re required to complete the SLEC, which is an online tutorial at SLEC ensures that a student understands their rights and responsibilities with Federal loans prior to entering into a loan agreement. When a student completes the SLEC, a record is sent to designated colleges. They may then execute loan agreements.

How Federal Student Loans Work

As authorized under the Higher Education Act of 1965, the ED makes several types of Federal student loans available to help students pay for their post-secondary education. Below are key features of these loans:

a. A student’s college determines eligibility for a Federal student loan based on the information submitted on the FAFSA form.

b. Student loan amounts are awarded by a student’s college, but the ED is the lender. The ED uses service providers to manage loans after disbursement. The service providers are the student’s point of contact for billing matters, making payments, or changing repayment plans.

c. Federal student loans must be paid back with interest. The interest rates are determined annually and are fixed for the life of the loan.  Although loans initially disbursed during different 12-month periods may have different interest rates, the rate will never exceed the statutory maximum rate. The maximum interest rates are 8.25% for Direct Subsidized Loans and Direct Unsubsidized Loans made to undergraduate students, 9.50% for Direct Unsubsidized Loans made to graduate and professional students, and 10.50% for Direct PLUS Loans made to parents of dependent undergraduate students or to graduate or professional students.

d. Students must sign a Master Promissory Note before funds can be disbursed.

e. Loan origination fees are deducted from the amount of a loan payment before a student receives money.

The Master Promissory Note (MPN)

An MPN is a binding legal document that a student must sign before receiving money from a Federal student loan. There is one version of the MPN for Direct Subsidized or Unsubsidized Loans and another version of the MPN for Direct PLUS Loans. MPN’s are valid for one or more loans and one or more academic years up to 10 years. The MPN includes a Borrower’s Rights and Responsibilities Statement that explains the terms and conditions of loans and the rights and responsibilities of borrowers.

It’s important that students read and save a copy of their MPN and Borrower’s Rights and Responsibilities Statement since they may need to refer to them when information is needed about loan terms. Students can also find their MPN in the My Documents folder in their account. If a student doesn’t want to receive more than one Federal student loan under the same MPN, they must notify their college’s financial aid office in writing each academic year.

Types of Federal Student Loans

Direct Subsidized Loans are available to undergraduate students with financial need as demonstrated on their FAFSA data. Direct Unsubsidized Loans are available to undergraduate students without demonstrated need.

a. Direct Subsidized Loans

These are Federal student loans for which the undergraduate borrower doesn’t accrue interest while in college or in a grace or deferment period. If the student is a first-time borrower on or after July 1, 2013, and before July 1, 2021, there is a limit on the period of time for which they can receive Direct Subsidized Loans, and under certain conditions they may become liable for accrued interest.

b. Direct Unsubsidized Loans

These are a Federal student loan available for undergraduate, graduate, and professional students that offer a low fixed interest rate and flexible repayment terms. Interest is accrued on Direct Unsubsidized Loans while the student is in school, but the government pays the interest on them during certain periods of repayment under the Revised Pay As You Earn Repayment Plan (REPAYE), and during deferments for cancer treatment.

Differences Between the Two Federal Loan Types

Direct Subsidized Loans:

Eligibility: Must have financial need.

When Interest Begins Accruing: 6 months after graduation or leaving school

The government pays interest during the following circumstances: While enrolled at least half-time, during the grace period, during deferment periods, and during certain periods of repayment under IBR, PAYE, and REPAYE plans.

Direct Unsubsidized Loans:

Eligibility: Available regardless of financial need.

When Interest Begins Accruing: Immediately after the initial loan disbursement.

The government suspends the accrual of interest: During certain periods of repayment under the REPAYE plan, during deferment for cancer treatment, and during the grace period.

Loan Rates, Fees, and Payment Information for Direct Subsidized and Direct Unsubsidized Loans:

Interest Rate: 4.99% is the current interest rate for Direct Subsidized Loans with disbursement date after 6/30/2023.

Loan Origination Fee: 1.057% is the origination fee for Direct Subsidized Loans with a disbursement date after 6/30/23.

When Payments Are Required: 6 months graduation or when below half-time enrollment.

(Note: There has been a loan repayment pause in effect since March 2020 due to the COVID-19 pandemic. Interest does not accrue on outstanding balances during the pause).

Maximum Amounts of Loans

The annual and aggregate loan limits for dependent undergraduate students are:

First Year Total = $5,500

Second Year Total = $6,500

Third Year and Beyond = $7,500

Aggregate Limit = $31,000

The annual and aggregate loan limits for independent undergraduate students are:

First Year Total = $9,500

Second Year Total = $10,500

Third Year and Beyond = $12,500

Aggregate Limit = $57,500

How Students Receive Money from Loans

Generally, the college will disburse loan money in more than one installment, usually at the beginning of an academic term. For example, disbursements may be at the beginning of each semester or quarter.

If the college does not use academic terms or does not have academic terms that meet certain requirements, it will disburse a loan in at least two installments, one at the beginning of the period of study for which the student is receiving the loan, and one at the midpoint of that period of study. The college determines the schedule.

The college may disburse some or all of the loan by crediting it to the student’s account at the college or may give it to the student by check. The loan service provider will notify the student in writing each time the college disburses part of the loan.

The ED charges a loan origination fee that is a percentage of the principal amount of each loan. This fee will be subtracted proportionally from each disbursement of the loan and will be shown on the disclosure statement that is sent to the student. Federal Direct Subsidized and Unsubsidized Loans have an origination fee of 1.057%, while Parent PLUS loans carry a higher origination fee of 4.228%.