Direct Lending

"Direct Lending" submitted by SchoolGrantsfor Editorial Team and last updated on Sunday 8th January 2012

The main federal loan for students is called the Stafford Loan and has two variations:

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.

What are the differences between Direct lending and the FFEL Program related to default prevention?

Direct Loan Program Is More Than Twice as Expensive as FFELP

If you want more grist to the mill in arguing that the FFEL program is cheaper than the direct loan alternative, then some new numbers (from the U.S. Department of Education) will help.

As reported by Inside Higher Ed, a comparison can be made using new data published by the Department following the enactment of the College Cost Reduction and Access Act (CCRAA) and a mid-session review of the President's 2008 budget.

Taking into consideration the cuts in subsidies for lenders by more than $20 billion, Inside Higher Ed made a rough estimate of the effect of the subsidy costs on the two programs.

Programs Volume Estimated Subsidy Cost Subsidy Cost per Dollar Lent
Direct Loan $17,940 Million $765.731 Million 4.26 Percent
FFELP $89,281 Million $1,536.181 Million 1.72 Percent

According to Inside Higher Ed this computation leads to the following conclusion: The direct lending program is about two and half times more costly to operate than the FFEL program. (Source: edfund.org) Check also - Difference between Federal Family Education Loans (FFEL) and Direct Loans (FDSL)

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