Student Loans and the Federal Family Education Loan Program

Established by an Act of Congress in 1965 and begun in 1966, the Federal Family Education Loan Program (FFELP) is a partnership program between the federal government and private lenders and an umbrella program which includes Stafford loans, student PLUS loans and Perkins loans. Since it started more than half a trillion dollars have been disbursed through this program.

Funds for the program are provided by a network of independent banks, credit unions and other financial institutions and lenders are generally happy to make money available in what would normally be considered a high risk area of lending because loans are to a large degree (although not totally) underwritten by the federal government. In about five percent of cases private guarantors do become involved with defaulted loans and are able to make application to the federal government for at least partial reimbursement.

The vast majority of funds are used for subsidized and unsubsidized Stafford loans. In the case of subsidized loans the federal government pays the interest on loans while students are attending full-time courses (and for up to six months after graduation), while in the case of unsubsidized loans students are responsible for paying the interest due on their loans. Interest is not however normally paid on unsubsidized loans while a student is attending full-time education (and again for up to six months after graduation) but is added to the loan.

The other program with attracts major funding is the student PLUS loans program which is designed to allow parents to take out loans on behalf of their children. This program was extended in 2006 and is now also available to professional and graduate students. The student PLUS loans program is becoming an increasingly important part of college funding these days.

Applications to the Federal Family Education Loan Program are normally made using a Free Application for Student Aid (FAFSA) application form which is submitted to the loans officer at the college for which the student has been accepted. Applications are then examined and loans granted on the basis of the information provided and the availability of funds for disbursement.

Loans are normally disbursed at least twice each year (depending upon the academic timetable followed by the college) and it is common for the bulk of each loan to be paid directly to the college to cover tuition and other fees, with the balance then being paid over to the student or parent, less fees.

In most, but certainly not all cases, a fee of about 4% is payable which is made up of a 3% administration, or 'originating', fee and a 1% insurance fee. It is not uncommon however for higher fees to be charged and so it is important to ask about the fee structure and, if necessary, to shop around when applying for student loans.

The William D Ford Direct Student Loan Program

The Direct student loan program started approximately 15 years ago and was intended to cut out the middle man so that, instead of involving banks, credit unions and other private lenders, the Federal government loans the money directly to students and parents.

Direct loan programs overlap the alternative which is called the FFELP, or Federal Family Education Loan Program, which is a program designed to work through a network of private lenders. Since direct loan programs duplicate in many ways the FFEL programs, it is important to decide which program you want. Both programs offer both Stafford and PLUS loans.

The criteria for eligibility on both programs is the same and they follow identical need based guidelines, or have identical credit check requirements as those for non need based programs. Since both programs essentially provide the same loan funding this raises the natural question of how to choose between them.

To some degree the decision involves choosing which of two providers you will have to deal with. For example, although both will provide customer service personnel to answer any questions, in some cases you may find that private lenders will be more helpful and flexible while the government will be indifferent or more bureaucratic. This will not always be the case of course and sometimes you will find that just the opposite is true.

One of the best ways to get a feel for the service you are likely to receive from different lenders is to read some of the Internet forums dealing with the subject of student loans. Also with the tremendous growth of social networks in recent years it has become much easier to find a diverse set of opinions. Of course you do have to be careful as many of the views expressed are based more on personal taste than objective criteria, but reading the posts will quickly show you which side the poster favors.

There are however some more concrete differences between the two types of loan. For example, because FFELP loans are both funded and serviced by private financial institutions the organization with which you sign a promissory note might not be the organization to which you make repayments. It is a common practice these days for lenders to 'sell' loans on to other companies in much the same as most mortgage companies do.

This is an important consideration because you might have gone to the trouble of finding a lender you like, choosing beyond simply the interest rate on the loan and repayment terms and preferring their customer service, only to find that your loan is sold on and you are dealing with a company which you had previously rejected. In the case of direct loans however, because loans are not sold on by the Federal government, this problem does not arise.

Perhaps the most important difference for the majority of lenders however will be the difference in rates, repayment terms and fees between the two. Here you need to remember that while the interest rates on Stafford and PLUS loans are officially fixed private lenders do enjoy some flexibility in other areas.

They might or might not for example charge both origination and insurance fees, which are currently assessed at 3% and 1%, according to Federal rules. Though these charges will still be applied to your loan, a private lender might agree to absorb these in order to get your business. They might as an example choose to alter the dates on which interest charges are calculated or to either extend a grace period or increase your repayment period.

At the end of the day the only way to discover just what is available is to shop around in much the same way as you would if you were looking for any other kind of loan.