Direct Loans and Federal Family Education Loans – FFEL
Direct Loans and Federal Family Education Loans (FFEL) are the two largest government federal loan programs. As of July 1, 2010, the FFEL program was eliminated. Most federal loans are now made through the Direct Loan program.
Federal Direct Loans are made directly by the federal government to students. Lenders and guaranty agencies are not involved in the process. FFELs are guaranteed loans made by private lenders. 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.
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. For example, you must be in the Direct Loan program to qualify for public service forgiveness.
Stafford loans are for undergraduate, graduate and professional students enrolled at least half-time. As of July 1, 2010, Federal Stafford Loans are made to students only through the Direct Loan program. 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. This grace period “interest subsidy” was eliminated for Direct subsidized loans made on or after July 1, 2012 and before July 1, 2014.
Unsubsidized loans are not awarded on the basis of financial need, and borrowers are responsible for all interest. Interest payments for unsubsidized loans may be 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. For loans made for periods of enrollment begining on or after July 1, 2012, graduate and professional students will no longer be eligible to receive subsidized loans. Loans made prior to this date are not affected by this change.
Loan Terms, Fees and Limits
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 new Stafford subsidized loans disbursed after 2007.
The rates are:
- 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, 2013.
The Department of Education web site has more information about interest rates and terms.
The total amount of Stafford loans, including both subsidized and unsubsidized, that undergraduates can borrow is $31,000 for dependent students and $57,500 for independent students. Subsidized loans can be no more than $23,000 of this aggregate amount. The higher independent student limits also apply to dependent students whose parents are unable to borrow PLUS loans. The limits vary for each year of study, depending on the length of the program and the student’s year of study. There is more information on Stafford loan limits on the Department of Education’s web site and in the Department’s publication, Funding Education Beyond High School (2012-2013). This includes information about the higher limits for graduate students.
In 2005, Congress passed a law that reduced Stafford loan origination fees over time. 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 dropped again to 1% on July 1, 2008. The fee was eliminated as of July 1, 2010 for FFEL Stafford loans, but so was the FFEL program. For all Direct Subsidized and Unsubsidized Loans for which the disbursement date is on or after July 1, 2010, the origination fee dropped to 1%. There will be slight increases in these fee under the sequester.
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. As of July 1, 2010, the FFEL program has been eliminated, so all PLUS loans will be through the Direct Loan program. These loans are available for parents borrowing for the education of dependent undergraduate children enrolled in school at least half time. “Grad PLUS” loans are also available for graduate and professional students.
In some cases, parents are divorced or separated and more than one parent wants to borrow a PLUS loan. In this situation, 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.
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. Lenders may have additional discretion to find “extenuating circumstances.” You will get a letter that looks like this if your initial credit check is approved. This letter informs you of a denial due to adverse credit history.
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. With all new PLUS loans coming through the Direct Loan program, the rate for the loans will be 7.9%.
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. As of 2008, undergraduate students can borrow up to $5,500 for each year of undergraduate study up to a total of $27,500 for students who have completed two years of education leading to a bachelor’s degree.
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. There is more information in the Department’s publication, Funding Education Beyond High School (2012-2013). This includes information about the higher limits for graduate students.
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 HEAL default issues, click here.