[Author's note: since passage of the the Health Education Reconciliation Act of 2010 on March 26, 2010, PLUS loans and Stafford loans are no longer offered through the now defunct FFEL program. This article is meant as a consumer resource showing what lending was like before student loan reform took effect.]
Correctly choosing the federal student loan that best fits one's financial needs requires understanding the different kinds which exist in the marketplace. This article will explain the two large federal student loan programs—the Federal Family Education Loan Program (FFEL) and the William D. Ford Federal Direct Loan Program (FDLP, or Direct)—as well as the difference between subsidized and unsubsidized student loans.
Federal Student Loans – FFEL Loans
FFEL loans are federal student loans offered by private financial institutions, such as Citi and Chase, and backed by the federal government, thus minimizing the risk for private lenders. Of the two student loan programs, FFEL loans account for nearly 80% of federal student loans, making it by far the largest lending program for students.
FFEL loans can be offered to both parents and students who qualify, and can be either subsidized or unsubsidized. Stafford loans and PLUS loans (which will be explained in a later section) can be offered through the FFEL loan program. Additionally, FFEL loans can be consolidated.
FFEL loans have been criticized for being wasteful because private lenders essentially act as intermediate players in the lending process; they receive subsidies from the federal government which then go toward the loans themselves. Some politicians, including President Obama, have called for the FFEL loan program to cease, thus broadening the Direct loan program. While a bill seeking to shift FFEL loans to direct lending passed the House of Representatives on September 17, 2009, it is unclear when the Senate will take up such legislation and what the result will be, as such a move will require a massive shift in the way loans are administered and disbursed.
Federal Student Loans – Direct Loans (FDLP)
Direct loans, as the name suggests, are offered directly by the federal government through the Department of Education. As the sole lender, the government releases funds for eligible students and parents to participating schools, who then apply the funds to pay for students' tuition and associated costs.
Direct loans, as with FFEL loans, can either be offered as subsidized or unsubsidized loans, and the program also offers both Stafford and PLUS loans. Additionally, Direct loans can be consolidated.
Subsidized and Unsubsidized Federal Student Loans
Subsidized federal student loans are available based upon a student's demonstrated financial need. These loans, which are subsidized by the Department of Education, direct the government to essentially cover the loan's interest while a student is still in school, during a grace period, and during loan deferments. As such, students with subsidized loans save money by keeping the accruing interest to a minimum.
With unsubsidized loans, students are responsible for all of the interest which builds up during a student's college career. However, in some instances, borrowers can defer the interest while a student is still in school (which is often capitalized, or added to the principal of the loan).
Federal Student Loans – Stafford and PLUS Loans
A Stafford Loan is guaranteed by the federal government, and is available either as a Direct loan or an FFEL loan. Whether subsidized or unsubsidized, the payment of Stafford Loans is deferred until a student has been out of school for six months. Until recently, Stafford Loans could have either variable or fixed interest rates. However, as of 2006, Stafford loans are only offered with fixed rates.
A PLUS Loan, sometimes called a PLUS Parent Loan, is available for parents of eligible students at post-secondary schools. Additionally, PLUS Loans are available for graduate and non-traditional, professional students as well. They can be either Direct or FFEL loans.
PLUS Loans, unlike Stafford Loans, are often taken out by parents, and as such the parents are financially responsible for its repayment.
Federal Student Loan Consolidation
For those who have more than one of the above mentioned loans, federal student loans can be consolidated into one, manageable monthly payment. Consolidated federal student loans, while convenient for both parents and students, can also sometimes save money due to their flexible repayment options.
For more information on this and further details on the information contained in this article, visit Federal Student Aid's website, from which much of the information for this article was gleaned.
David Harris-Gershon - David Harris-Gershon – a blogger for Tikkun magazine and a freelance writer on Israel, the Middle East and America’s role in ...
