Federal Direct Loans: Types, Rates, and Repayment Plans

Federal Direct Loans are the U.S. Department of Education’s fixed-rate student loans, made directly by the government to undergraduates, graduate and professional students, and parents of dependent undergraduates. They come in four forms — subsidized, unsubsidized, PLUS, and consolidation — with borrowing amounts capped by year and by lifetime, rates set each July, and a menu of repayment plans that includes income-based options and forgiveness for public service. Rules are shifting significantly on July 1, 2026: Grad PLUS ends, new caps apply to graduate and parent borrowing, and the income-driven repayment lineup is being rebuilt.

The Four Types of Direct Loans

Direct Subsidized Loans go only to undergraduates with demonstrated financial need. The government pays the interest while you’re enrolled at least half-time, during the six-month grace period after you leave school, and during any approved deferment. That interest benefit is the single biggest advantage of subsidized loans.

Direct Unsubsidized Loans are open to undergraduates and graduate or professional students without a need test. Interest accrues from the day the money is disbursed, and any interest you don’t pay while in school will capitalize — add to your principal — when you enter repayment.

Direct PLUS Loans are for parents of dependent undergraduates and, for enrollment periods before July 1, 2026, for graduate and professional students. PLUS Loans require a credit check and let you borrow up to the cost of attendance minus other aid received.¹

Direct Consolidation Loans combine multiple federal loans into one loan with a single monthly payment and a fixed rate equal to the weighted average of the loans being consolidated, rounded up to the nearest one-eighth of a percent.²

Grad PLUS Ends July 1, 2026

For enrollment periods on or after July 1, 2026, graduate and professional students can no longer receive new Grad PLUS Loans. The change was enacted through the Working Families Tax Cuts Act and implemented by final regulation.³ Graduate students who need to borrow beyond the Direct Unsubsidized limit will need to turn to private lenders. Parent PLUS remains available, but with new caps described below.

Current Interest Rates

Direct Loan rates are fixed for the life of each loan and set once a year based on the 10-year Treasury note auction held every May. Each loan locks in the rate in effect at its first disbursement, so a rate change next year won’t touch loans you already have. For loans first disbursed between July 1, 2025, and June 30, 2026:⁴

Direct Subsidized and Unsubsidized for undergraduates: 6.39%
Direct Unsubsidized for graduate and professional students: 7.94%
Direct PLUS for parents and graduate students: 8.94%

Rates for loans disbursed on or after July 1, 2026 will be announced after the spring Treasury auction.

How Much You Can Borrow

Federal law caps borrowing by year and over your academic career. The caps depend on whether you’re a dependent or independent undergraduate, a graduate or professional student, or a parent.

Undergraduate Annual Limits

Dependent undergraduates whose parents have not been denied a PLUS Loan can borrow combined subsidized and unsubsidized amounts of:⁵

First year: $5,500 (up to $3,500 subsidized)
Second year: $6,500 (up to $4,500 subsidized)
Third year and beyond: $7,500 (up to $5,500 subsidized)

Independent undergraduates, and dependent students whose parents were denied a PLUS Loan, can borrow more because they have access to additional unsubsidized funds:

First year: $9,500 (up to $3,500 subsidized)
Second year: $10,500 (up to $4,500 subsidized)
Third year and beyond: $12,500 (up to $5,500 subsidized)

Graduate, Professional, and Parent Caps Starting July 2026

New annual and aggregate caps take effect for loans made on or after July 1, 2026:³

Graduate programs: up to $20,500 per year in Direct Unsubsidized Loans, with a $100,000 aggregate cap for the degree.
Professional programs: up to $50,000 per year in Direct Unsubsidized Loans, with a $200,000 aggregate cap for the degree.
Parent PLUS: $20,000 per year per student, with a $65,000 aggregate limit per dependent student.

A new lifetime maximum of $257,500 applies to all federal student loans a borrower receives, excluding amounts borrowed as a parent. That figure covers undergraduate, graduate, and professional borrowing combined, and it applies to students starting a new program on or after July 1, 2026. Amounts returned by the school or borrower don’t count against the cap.

Who Qualifies

To receive a Direct Loan you must be a U.S. citizen or eligible noncitizen, have a valid Social Security number, and be enrolled at least half-time in a degree or certificate program at a participating school. You also have to maintain satisfactory academic progress as defined by your school.⁶

Your federal aid history matters. Defaulting on a prior federal student loan or owing a refund on a federal grant will block you from new loans until you fix it — typically through loan rehabilitation or by consolidating the defaulted loan.

PLUS borrowers face a credit check. You don’t need excellent credit, but an adverse credit history (bankruptcy, foreclosure, wage garnishment, or defaulted debts over a certain threshold in the past five years) will trigger a denial. If you’re denied, you can still qualify with an endorser or by documenting extenuating circumstances.¹

Applying and Getting the Money

Applying happens mostly at studentaid.gov and involves three steps. Skip one and your funds stall.

First, file the Free Application for Federal Student Aid (FAFSA). It uses your federal tax information to calculate your Student Aid Index, which drives your eligibility for subsidized loans and other need-based aid. The federal deadline for the 2026–2027 FAFSA is June 30, 2027, but many schools and states set earlier deadlines, so filing early matters.⁷ Your school uses the results to build a financial aid offer showing which loans you can take and in what amounts.

Second, complete entrance counseling if you’ve never borrowed a Direct Subsidized, Unsubsidized, or student PLUS Loan. The online session at studentaid.gov takes about 20 to 30 minutes and covers how interest works, your repayment obligations, and what happens if you can’t pay.⁸

Third, sign the Master Promissory Note (MPN), the legal contract in which you promise to repay. You sign it electronically with your FSA ID.⁹ A single MPN can cover multiple loans over up to ten years at the same school, so most undergraduates sign it just once.

After you accept the loan through your school’s aid portal, the school will send you a disclosure statement showing the loan amount, anticipated disbursement dates, and the origination fee that will be deducted from each disbursement.¹⁰ Because of that fee, you receive slightly less than you’ll owe. Funds are usually disbursed in at least two payments per academic year, sent to your school to cover tuition and fees, with any surplus paid to you.

When Repayment Starts

Direct Subsidized and Unsubsidized Loans come with a six-month grace period after you graduate, drop below half-time enrollment, or leave school. No payments are due during those six months. On subsidized loans the government keeps covering the interest; on unsubsidized loans, interest keeps accruing and will capitalize at the start of repayment unless you pay it during the grace period. Your first bill arrives the month after the grace period ends.

PLUS Loans work differently. Parent PLUS enters repayment once the loan is fully disbursed, though parents can request a deferment while the student is enrolled and for six months after. Grad PLUS Loans originated before July 1, 2026 receive an automatic six-month post-enrollment deferment similar to other Direct Loans.

Before you leave school, your school is required to provide exit counseling covering your total debt, estimated monthly payments under different plans, and the consequences of missing payments. If you withdraw without the school’s knowledge, they must send you those materials within 30 days.¹¹

Choosing a Repayment Plan

You can switch plans at any time without penalty, so the initial choice isn’t permanent.

Fixed-Payment Plans

Standard Repayment sets fixed monthly payments over ten years. It’s the default and results in the least total interest paid. Graduated Repayment starts lower and steps up every two years, still inside a ten-year window, with more total interest than the standard plan. Extended Repayment stretches payments over up to 25 years, either fixed or graduated, but you need more than $30,000 in outstanding Direct Loans to qualify; monthly payments are lower and total interest is substantially higher.¹²

Income-Driven Plans

Income-driven repayment (IDR) ties your monthly payment to your earnings instead of your balance and forgives any remaining amount after 20 or 25 years of qualifying payments:¹³

Income-Based Repayment (IBR): 10% of discretionary income for new borrowers, 15% for borrowers who took out loans before July 1, 2014. Forgiveness after 20 years (new borrowers) or 25 years.
Pay As You Earn (PAYE): 10% of discretionary income, forgiveness after 20 years, available only to borrowers whose first disbursement was on or after October 1, 2007.
Income-Contingent Repayment (ICR): the lesser of 20% of discretionary income or a fixed payment over 12 years, forgiveness after 25 years.

The Saving on a Valuable Education (SAVE) plan is currently blocked by a federal court order issued in March 2026. Borrowers who were enrolled or had applications pending were placed in an administrative forbearance and must select a different plan and begin making payments.¹⁴

Repayment Assistance Plan Coming in 2028

A new Repayment Assistance Plan (RAP) is scheduled to replace SAVE, PAYE, and ICR by July 1, 2028. After that date, borrowers who take out new loans or consolidate existing ones on or after July 1, 2026 will have to use either the RAP or the Tiered Standard Plan. IBR stays available for existing borrowers who don’t borrow or consolidate after July 1, 2026.¹⁵ The RAP’s payment formula and forgiveness timeline are still being finalized.

Pausing Payments: Deferment and Forbearance

Deferment and forbearance let you stop making payments temporarily, but they treat interest differently.

During a deferment, the government keeps paying interest on subsidized loans, so those balances don’t grow. Qualifying situations include returning to school at least half-time, active-duty military service, unemployment (up to three years), and documented economic hardship. Forbearance pauses payments too, but interest accrues on every loan type, including subsidized. Your servicer can grant forbearance for up to a year at a time if you’re struggling; certain situations, like a medical or dental residency, or monthly student loan payments that equal at least 20% of your gross monthly income, trigger a mandatory forbearance the servicer must grant when you ask.

Unpaid interest during forbearance capitalizes when the forbearance ends, growing your principal. Paying at least the interest during forbearance leaves you ahead.

Forgiveness and Discharge

Several federal programs can wipe out part or all of your Direct Loan balance if you meet strict conditions over long timeframes.

Public Service Loan Forgiveness

PSLF forgives your remaining Direct Loan balance after 120 qualifying monthly payments (ten years’ worth, not necessarily consecutive) while working full-time for a qualifying public service employer. Qualifying employers include federal, state, local, and tribal government agencies, 501(c)(3) nonprofits, and organizations like AmeriCorps and the Peace Corps. For-profit companies and labor unions don’t qualify, even doing government contract work.¹⁶

Only payments made on the standard ten-year plan or an income-driven plan count toward the 120. Graduated and extended plan payments generally don’t. Starting July 1, 2026, the Department of Education can also disqualify employers it determines have a “substantial illegal purpose,” though this won’t retroactively strip credit for months already counted.

Teacher Loan Forgiveness

Teachers who work full-time for five complete and consecutive academic years at a qualifying low-income school can receive up to $17,500 of forgiveness on their Direct Subsidized and Unsubsidized Loans. The $17,500 maximum is for highly qualified secondary math and science teachers and special education teachers; other eligible teachers qualify for up to $5,000. Direct PLUS Loans aren’t eligible, and you can’t count the same teaching period toward both this program and PSLF.¹⁷

Total and Permanent Disability Discharge

If a physical or mental condition severely limits your ability to work now and in the future, you can apply for a total and permanent disability (TPD) discharge with documentation from the Department of Veterans Affairs (a 100% disability rating or an individual unemployability determination), the Social Security Administration (SSDI or SSI eligibility meeting certain criteria), or a licensed physician, nurse practitioner, physician’s assistant, or psychologist certifying your condition.¹⁸

IDR Forgiveness

Balances remaining after 20 or 25 years of qualifying IDR payments are forgiven, depending on the plan and whether the loans financed undergraduate or graduate study. Under current federal tax law, forgiveness through an IDR plan is excluded from gross income when the discharge occurs through the repayment provisions of the Higher Education Act.¹⁹ State tax treatment varies, and some states may treat the forgiven amount as taxable income.

If You Fall Behind

A Direct Loan enters default after 270 days without a payment. Once that happens, the whole unpaid balance becomes due immediately, you lose access to deferment, forbearance, and new federal aid, and the default is reported to credit bureaus.

Federal collection tools go beyond what private lenders have. The government can garnish up to 15% of your disposable wages without a court order through administrative wage garnishment and intercept your federal tax refunds and Social Security benefits through the Treasury Offset Program.²⁰ Collection fees of up to 25% can be added to your balance, and there is no statute of limitations on federal student loan debt.

Two main paths lead out of default. Loan rehabilitation takes nine agreed-upon payments over ten consecutive months, after which the default is removed from your credit report. Consolidation through a Direct Consolidation Loan can resolve the default immediately, though the default notation stays on your credit history. Either path restores your eligibility for new federal aid and repayment plans.⁶

1
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2
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4
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13
eCFR. 34 CFR 685.209 – Income-Driven Repayment Plans
14
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20
U.S. Department of Education. U.S. Department of Education Delays Involuntary Collections Amid Ongoing Student Loan Repayment Improvements