Federal Student Loan Programs
Direct Student Loans and Federal Family Education Loans (FFEL) are the two biggest government federal student loan programs. FFELs are guaranteed student loans made by private lenders. That means the government will reimburse the lender when a borrower defaults, or otherwise fails to pay back the student loan. Before being reimbursed the lenders are required to make certain efforts to collect the student loans.
Although the FFEL program is federally funded, it is mostly administered through state and private nonprofit agencies called guaranty agencies. Guaranty agencies pay off the lenders when a borrower defaults, and in turn, they are reinsured by the Department of Education.
Federal Direct Student Loans are made directly by the federal government to the student, with the assistance of the school or other entity that originates the student loan. Lenders and guaranty agencies are not involved in this type of student loan.
These federal student loan programs are strictly regulated by Congress and the U.S. Department of Education. The maximum interest rates, and many of the important terms of federal student loans are set by Congress, and are similar programs. There are, however, a few important differences in available repayment plans for FFEL and Direct Student Loan borrowers.
Stafford Student loans are for undergraduate, graduate and professional students enrolled in at least half time. Federal Stafford Student Loans are made to students through the Direct Student Loan program and the FFEL program. FFEL and Direct Stafford Student loans have the same loan limits, deferment, and cancellation rights. There are a few differences with the repayment plans.
Stafford Student loans may be subsidized or unsubsidized. A subsidized student loan is awarded based on financial need and the government will pay the interest before repayment begins or even during authorized periods of deferment. Unsubsidized student loans are not awarded based on financial need, and the borrower is responsible for all interest. However the interest payments are usually deferred while the borrower is in school, but is added to the principal of the student loan when repayment begins.
For student loans first disbursed on or after July 1, 2006, Stafford student loans have a fixed 6.8% interest rate. This is the maximum interest rate allowed. Lenders can set lower rates though. Most Stafford student loans taken out before July 2006 have variable rates that have been capped at 8.25%.
Interest rates will gradually be reduced for Stafford subsidized student loans over the next few years. These cuts will apply only to student loans disbursed after 2007. You will not get the benefit of these reductions if you took out loans before 2007.
The new interest rates will be:
• 6% for student loans first disbursed July 1, 2008 to July 1, 2009
• 5.6% for student loans first disbursed July 1, 2009 to July 1, 2010
• 4.5% for student loans first disbursed July 1, 2010 to July 1, 2011
• 3.4% for student loans first disbursed July 1, 2011 to July 1, 2012.
The Department of Education has established annual and aggregate limits for the various federal student loan programs. Stafford student loan limits vary depending on whether you are financially dependent on a parent or not.
Currently, the total debt a dependent, undergraduate borrower can accumulate from all Stafford student loans combined is $23,000. The amount is $46,000 if you are an independent undergraduates. The limits will 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 student loans. For full information on Stafford student loan limits, you can visit The Department of Education’s website.
A new law increases the borrowing limits for unsubsidized Stafford student loans first disbursed on or after July 1, 2008. The annual limit for unsubsidized Stafford student loans for undergraduate dependent students has been increased by $2,000.
