Not every student is financially sound enough to get a college education on their own funds.
Higher education is one of the biggest expenses in any person’s life. Not many parents can fund them either.
In order to promote higher education and ensure the students received the education of their choice, education loans were introduced.
Education loans can be either direct or indirect. While direct loans are funded by the federal government, private loans are funded by private lenders like financial institutions and banks. Today they are categorised as Federal Loans and Private education loans.
A federal loan is offered at a low rate of interest and the borrower has many repayment options under a federal loan. There are loan forgiveness, Pay As You Earn, Income Based Repayment Plan and Income Sensitive Repayment Plans. These are in place to help a student repay the loan and reduce defaults.
On the other hand, private education loans are offered at a higher interest rate and these rates tend to vary from lender to lender. Though private loans are more easily available than the federal loans due to the large number of participating lenders, the repayment options are limited.
One can either change the repayment date or consolidate their loan. This will not reduce the financial burden on the borrower and the loans will accumulate interests.
An indirect loan is a federal loan offered by the government indirectly. There were many private lenders such as private financial institutions and banks that funded federal loans offered by the government.
These private institutions would offer the loans to the students and in place of the government. However, this was discontinued and if you have taken a federal loan after June 30, 2010, it is a direct loan.
The Federal Family Education Loan Program (FFELP) is a US higher education loan program introduced by the Higher Education Act 1965. Also known as the guaranteed loan program, the FFELP is the second biggest loan program after the direct loans.
The FFELP is government sponsored to help student s and parents pay for higher education. The FFELP was offered by many banks and private financial institutions. These institutions were funded by the government and were reimbursed by the government in case of a default by a borrower.
If the borrower faces difficulty in repaying the loan amount, they will be allowed to change the repayment date at least once a year. This was a legal requirement for the FFELP lenders.
The loan offered under FFELP was known as the FFEL Plus loan. Though this was a federal loan, the parents of the student had to approach private lenders. The parents would apply for the loan through one their banks or any institution of their choice. The banker would have to decide if the parent qualifies for the loan.
However, not all banks and financial institutions participated in this program. So, the parents had to choose one of the participating institutions and apply for the loan. Qualifying for a FFEL Plus loan was always known to be harder than qualifying for a direct federal loan.
Also, not every school offered indirect federal loans. Most of the schools offered only one of the federal loans (direct or indirect). Hence, a parent can apply for this loan only if the student’s school was part of the program.
Once the loan was approved, the lender would pay the school and defaults were taken care of by the government.
Guaranteed agencies were the non- profit groups that had contracts with the federal government. When a student defaulted payment on the FFELP, the government would take over the loan and pay off the lender. For this purpose, the federal government used a guarantee agency to service the loan.
The role of the guarantee agency was to pay the private lender in place of the federal government, in case of a default. The federal government will then reimburse the agency, after which it attempts to collect the loan from the student.
This ensured the private lenders did not suffer for funding the federal loans. They were reimbursed immediately and did not have to worry about the loan collection. The guarantee agency in place of the federal government would take up that responsibility.
Direct loans are also provided by the government to aid struggling students. The government has many loan options to suit the varying needs of parents and children to get a good education.
Unlike FFELP, direct loans are directly held by the US Department of Education. If a borrower is facing difficulty in repaying the student loan, they can convert their FEELP to a direct loan to enjoy the benefits offered for direct loans.
Direct loans are not controlled by any private party. The interest rates on these loans are fixed by the government. Any student who has taken a direct loan is eligible for the Public Service Loan Forgiveness. However, to qualify for this plan, the student should have made a minimum of 120 on time payments while working at a qualified public service organisation, full time.
Though both the loans are federal loans, they are different. Here are some of the main differences:
|Funds provided by the US Department of Education||Funds provided by banks and financial institutions|
|Loan consolidation is available||Very few lenders offer loan consolidation. Borrower can consolidate their FFELP loans into direct loans|
|Direct loans’ interest rate under PLUS loans and Higher Education Reconciliation Act 2005 is 7.9%||Rate of interest increased to 8.5% under Higher Education Reconciliation Act 2005 and PLUS loan.|
|Income contingent repayment plan is available||Income sensitive repayment plan is available|
|Public Service Loans Forgiveness is available||Public Service Loan Forgiveness can be obtained by consolidating the FFELP loan into a direct loan.|
|Very good front-end and back-end discounts are provided by the US Department of Education||Though lenders offer good front-end discounts, none can offer better back-end discounts than the UD Department of Education|
|Direct Loans are held only by the US Department of Education and cannot be sold.||The FFELP loans can be sold to another lender.|
|No other products apart from Direct loans are offered||Other products such as private student loans programs and college savings programs are offered to help students.|
|Still Exists||Discontinues after the Health Care and Education Reconciliation Act 2010|
Since the FFELP did not have many options for students who had difficulty in repaying the loans, the default rate was higher when compared to the Direct Loans. In case of a default, the government would reimburse the lender. On an aggregate level, the FFELP seemed to be more expensive, than the Direct Loans.
This being the case, President Obama realised, FFELP was costing the government more than the Direct Loans. Hence, he signed a bill on March 30, 2010 to eliminate FFELP. The FFELP was completely stopped by June 30, 2010 by the Health Care And Education Reconciliation Act 2010. Since then, the government directly funded all the federal loans.
Majority of the students have more than one education loan. Sometimes they have multiple loans to fund just one course or it could be a combination of education loans for multiple courses. When you have too many loans at varying interest rates, it gets complicated to keep track of each payment.
When you consolidate your education loan, you are combining all of multiple education loans into one. Once consolidated, the average interest rate of the loans consolidated is your new rate of interest. Thus you will get the new loan at a lower interest rate, thereby saving you some interest payments.
Borrowers consolidate education loans when they are not in a position to repay the loans on time. Consolidating your loans will get you more time to pay the loan, at a lower rate of interest and prevents you from defaulting.
There are three major types of federal loans. They are:
This is the most common type of direct loan. This loan can either be subsidized or unsubsidized.
Subsidized Stafford Loans are need based and do not accrue any interest while you are still studying. The interest rates kick in only after your course is completed. Hence, you pay interest on the loan only after you complete your education and are in a position to repay it.
In an unsubsidized Stafford Loan, your loan will accrue interest right from the beginning. Thus, you will have to pay 2-5 years’ interest (depending on the term of your course, even when you are not actively earning.
These loans are taken by students when the Stafford loan is not sufficient to meet their educational requirements. Though this is also a federal loan, it required a good credit score. If the student does not have the required credit rating, they can get a co-signer. The co-signer’s credit worthiness will also be checked before the loan is sanctioned.
Though Plus loans are a better alternative to private loans, it disqualifies the borrower from the income based repayment option.
These are loans given out directly by the school. The amount given is small and the loan is funded by the government. In case of a default, the school will be reimbursed by the government.
Earlier when there were both direct and indirect federal loans, you could consolidate them into a private loan. After the ban of indirect federal loans since June 30, 2010, all federal loans were made direct and direct consolidation loans are the only way to consolidate your federal loans.
Under direct loan consolidation, you can consolidate:
This is a provision by the government to help the struggling students to pay off their educational debts. The borrower can consolidate one of the above or a combination of the above loans into a Direct Consolidation loan. However, the borrower must have at least one outstanding FFELP or a Direct Loan in order to qualify for a Direct Loan consolidation. You cannot consolidate a sole Perkins Loan into a direct loan. It can be consolidated only in addition to some other Direct Loan.
Initially students were given the option to consolidate their Direct Loans even when they were just studying. Since July 1, 2006, joint consolidation for spouses was also eliminated.
You can consolidate your Direct Loan during:
When you consolidate your loan that is still in the grace periods, you stand to lose the grace period. In order to make full use of your grace period, keep the lender informed when you sign up for a consolidation. The lender will then process your application towards the end of your grace period, so that it doesn’t go waste.
The direct loan consolidations are offered directly by the government. The government encourages borrowers to apply online.
Every borrower is eligible for only one Direct Loan Consolidation. However, there are some exemptions such as:
Direct Loans are the best options for struggling students as the rates of interest is low and there are a number of repayment options. You can not only consolidate your direct loans. But can even get it forgiven. The aim of the government is to provide good education to everyone who wants it.