Federal Loans
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Direct Loans and Federal Family Education Loans (FFEL) are the two largest government federal loan programs. FFELs are guaranteed loans made by private lenders. That means the government reimburses the lender when borrowers default, or otherwise fail to pay back the loan. Before getting reimbursed, lenders are required to make certain efforts to collect the loans.
Although the FFEL program is federal, it is mostly administered through state or private nonprofit agencies called guaranty agencies. Guaranty agencies pay off the lenders when borrowers default, and in turn, are reinsured by the Department of Education. The U.S. Department of Education provides a list of state guaranty agencies.
Federal Direct Loans are made directly by the federal government to students, with the assistance of the school or other entity that originates the loan. Lenders and guaranty agencies are not involved in the process.
Both federal student loan programs are highly regulated by Congress and the U.S. Department of Education. The maximum interest rates, and many of the important terms of federal loans are set by Congress, and are similar in both programs. There are, however, a few important differences in available repayment plans for FFEL and Direct borrowers.
Stafford loans are for undergraduate, graduate and professional students enrolled at least half-time. Federal Stafford Loans are made to students through the Direct Loan program and the FFEL program. FFEL and Direct Stafford loans have the same loan limits, deferment, and cancellation rights. There are some differences with respect to repayment plans.
Stafford loans may be subsidized or unsubsidized. A subsidized loan is awarded on the basis of financial need, and the government pays the interest before repayment begins or during authorized periods of deferment. Unsubsidized loans are not awarded on the basis of financial need, and borrowers are responsible for all interest. Interest payments are usually deferred while the borrower is in school, but is added to the principal of the loan (capitalized) when repayment begins. Borrowers can choose to pay interest while in school or during an authorized period of deferment to avoid capitalization.
Loan Terms, Fees and Limits
Interest Rates
For loans first disbursed on or after July 1, 2006, Stafford loans have a fixed 6.8% interest rate. This is the maximum interest rate. Lenders can set lower rates. Most Stafford loans taken out before July 2006 have variable rates that are capped at 8.25%.
Interest rates will gradually be reduced for Stafford subsidized loans over the next few years. These cuts will apply only to loans disbursed after 2007. You will not get the benefit of these reductions if you took out loans before 2007.
The new rates will be:
- 6% for loans first disbursed July 1, 2008 to July 1, 2009
- 5.6% for loans first disbursed July 1, 2009 to July 1, 2010
- 4.5% for loans first disbursed July 1, 2010 to July 1, 2011
- 3.4% for loans first disbursed July 1, 2011 to July 1, 2012.
Loan Limits
The Department of Education establishes annual and aggregate limits for the various federal loan programs. Stafford loan limits vary depending on whether you are financially dependent or independent.
Currently, the total debt a dependent, undergraduate borrower can accumulate from all Stafford loans combined is $23,000. The amount is $46,000 for independent undergraduates. The limits vary for each year of study, depending on the length of the program and the student’s year of study. These maximum borrowing limits are for the total of both subsidized and unsubsidized loans. For full information on Stafford loan limits, visit finaid.org or The Department of Education’s website.
A new law increases the borrowing limits for unsubsidized Stafford loans first disbursed on or after July 1, 2008. The annual limit for unsubsidized Stafford loans for undergraduate dependent students is increased by $2,000.
This same increase of $2,000 will apply to dependent students whose parents are unable to borrow PLUS loans. This increase is on top of the additional $4,000 or $5,000 (depending on how much school the student has completed) that dependent students can get under current rules if their parents are unable to borrow PLUS loans. The annual loan limits for independent undergraduate students seeking to borrow unsubsidized Stafford loans will also go up by $2,000.
Loan Fees
In 2005, Congress passed a law that will reduce and eventually eliminate Stafford loan origination fees. Prior to this law, the fee limits were usually 4%. The maximum fee for FFEL Stafford loan dropped to 1.5% on July 1, 2007 (for loans disbursed on or after that date) and will drop again to 1% on July 1, 2008. The fee will be eliminated as of July 1, 2010. Similar changes will be made to Direct Stafford loan fees.
Lenders are required to disclose the amount and method of calculating the origination fee. In addition, you should not be charged for any costs related to processing or handling applications or data required to determine your eligibility to borrow.
Both the Direct and FFEL loan programs offer PLUS loans. These loans are available for parents borrowing for the education of dependent undergraduate children enrolled in school at least half time.
In cases where parents are divorced or separated and more than one wants to borrow a PLUS loan, each parent should complete a separate application form. The total amount borrowed by both parents cannot exceed the PLUS loan limit, which is the cost of attendance minus any other aid received by the student.
“Grad PLUS loans” are also available for graduate and professional students. Unlike Stafford loans, PLUS borrowers are generally required to pass a credit check. Unless the lender determines that extenuating circumstances exist, you will not pass the credit check if you are:
- 90 or more days delinquent on the repayment of a debt; or if
- you have been the subject of a default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a federal government student loan debt, during the five years preceding the date of the credit report.
PLUS borrowers with poor credit may still get loans if they can find someone with a better credit history to co-sign.
As of July 1, 2008 a new law gives lenders additional discretion to find “extenuating circumstances.” Under this new law, a lender may find “extenuating circumstances” if during the period from January 1, 2007 through December 31, 2009, the parents seeking to take out a PLUS loan are or were delinquent for 180 days or less on a mortgage payment on their primary residence or on medical bill payments, as long as they are not and have not been more than 89 days delinquent on the repayment of any other debt during this period.
Loan Terms, Fees, and Limits
PLUS loans taken out after July 1, 2006 have fixed interest rates. There is a difference in the maximum fixed rates between the FFEL and Direct Loan programs. The fixed rate for Direct PLUS after July 1, 2006 is 7.9% while the fixed rate for FFEL PLUS is 8.5%. Interest rates for PLUS Loans taken out prior to July 1, 2006 are variable and capped at 9%. This is a maximum rate. Lenders can set lower rates.
There are also origination fees for PLUS loans, up to 4%.
There is no specific limit on the amount of PLUS loans a student or parent can borrow. The maximum amount is the cost of attendance minus any other financial aid received.
Perkins Loans (formerly called National Direct Student Loans, and before that National Defense Student Loans) are low-interest loans for both undergraduate and graduate students with exceptional financial need. Perkins Loans are originated and serviced by participating schools and repaid to the school. The government does not insure the loans, but instead provides money to eligible institutions to help fund the loans.
Loan Terms, Fees, and Limits
Perkins loan interest rates are fixed, currently at 5%. There are no origination or other fees or charges for Perkins loans.
Perkins loan amounts depend on when the borrower applies, the level of need, and the school’s funding level. Undergraduate students can borrow up to $4,000 for each year of undergraduate study up to a total of $20,000.
The amount you can borrow might be less than the maximum available. Each school participating in the Perkins loan program receives a certain amount of Perkins funds each year. When all available funds for that award year have been given out, no more awards can be made for that year.
From 1978 to 1998, the federal Health Education Assistance Loan Program (HEAL) provided insurance for loans made by participating lenders to eligible graduate students in medical and health-related fields. The program was discontinued in 1998. It was administered by the federal Department of Health and Human Services. For more information on the special terms and rules that apply to these loans, click here.