"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:
- Federal Family Education Loan Program (FFELP) 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 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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