Difference Between Federal Family Education Loans (FFEL) and Direct Loans (FDSL)

"Difference Between Federal Family Education Loans (FFEL) and Direct Loans (FDSL)" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012

The main federal loan for students is called the Stafford Loan and has two variations:
Federal Family Education Loan Program (FFELP) loans are provided by private lenders, such as banks, credit unions and savings & loan associations. These loans are guaranteed against default by the federal government.

Federal Direct Student Loan Program (FDSLP) loans or "Direct Loans", administered by "Direct Lending Schools", are provided by the US government directly to students and their parents.

The Difference Between Federal Family Education Loans and Direct Loans Each higher education institution decides whether to participate in the Direct Loan program, the FFEL program, or both. Borrowers must use the program their school designates. Eligibility requirements and loan limits are identical for both programs.

The Direct loan contractor is obligated to perform the due diligence required by law, just as FFEL lenders must do. The real difference lies in the many additional preventive and remedial actions taken or supported by FFEL guarantors, which vary considerably from guarantor to guarantor. There are fewer private loan providers, and most have tightened their credit/underwriting standards. Increased federal loan limits will help some. But one thing is clear; this problem is facing students who need private loans—regardless of whether they are attending FFEL or Direct lending schools.

The basic difference between the Direct Loan and FFEL programs is who originates and holds the loans. In the FFEL program, a private lender (usually a bank or credit union) receives a subsidy from the federal government to make the loan. The college or university certifies the borrower’s eligibility and helps disburse the loan. The student repays the holder of the loan and, if the student becomes delinquent, the holder of the loan initiates collection efforts. In the Direct Loan program, by contrast, the federal government makes the loans directly to the students. Upon graduation, the borrower repays the government. The federal government, through a federal contractor, manages the portfolio of loans. If the student does not repay the loan, the federal government initiates loan collection efforts.

The most important difference between Direct Lending and the FFELP program is the source of loan funding. Direct loans are funded through the U.S. Department of Education using funds obtained from the U.S. Treasury. This program offers students and parents one point of contact because the loans are made, backed, and serviced by the U.S. Department of Education.

In the FFEL program, funds come from banks and lenders creating multiple points of contact for students. There are also some differences in interest rate, fees and repayment options which make the Direct Loan Program more beneficial for borrowers. However, annual loan limits and eligibility criteria remain the same. They are guaranteed against default by the federal government and offer students flexible repayment options.

Direct lending is when eligible students and parents borrow directly from the federal government. Direct loans include Direct Subsidized and Unsubsidized loans, Direct PLUS loans and Direct Grad PLUS loans. Borrowers will repay these loans directly to the U.S. Department of Education.

More than 4,000 private lenders, guaranty agencies, loan servicers, secondary markets, and collection agencies participate in the FFEL program. Included in this total is Sallie Mae, the largest holder of student loans in the country, which currently holds 45 percent of all federal student loans. In addition to making, holding, and servicing student loans, Sallie Mae operates a secondary market that buys federal student loans from private lenders, thus releasing the original lenders from the complex loan collection requirements and freeing their capital to make new loans. Besides Sallie Mae, some 25 private nonprofit and state secondary markets purchase loans from the original lenders.

Roughly three dozen state and private nonprofit guaranty agencies administer federal insurance on FFEL student loans and work to minimize student loan defaults. If an FFEL borrower defaults on repayment, the guaranty agency pays the holder 98 percent of the face value of the loan and attempts to collect from the borrower. At the same time, the federal government reimburses the guaranty agency up to 98 percent of the value of the loan. If the agency is unable to collect, it assigns the loan to the Department of Education and the federal government initiates collection efforts.

Default rate among four-year universities is the same as, or lower than, the national average for such institutions. But overall rate will continue to be higher because we do not exclusively focus on four-year universities. The Direct lending CDR will increase over time as its portfolio composition shifts from one of primarily low risk borrowers to more of a mixed portfolio.

The university has been using the bank-based Federal Family Education Loan Program (FFELP) for more than a decade, but on March 15, 2010, the President Obama signed into law the College Lending Bill prohibiting banks and private lenders from issuing federal loans. Effective July 1, 2010, all federal student loans are required to go through a federal direct loan program.

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