Student Loans

Federal Student Loan Programs: Summary for 2011

The U.S. federal government offers three types of federal student loan programs to students enrolled in post-secondary institutions: Stafford Loans, Perkins Loans, and Consolidation Loans.  All of these loans are direct loans, through which the Department of Education lends money directly to students.  Before 2010, the U.S. Department of Education had run another lending program called Federal Family Education Loan (FFEL).  Through FFEL, private lenders such as Sallie Mae could offer parents and students loans guaranteed by the Department of Education.  The FFEL program was eliminated with the passage of the Health Care and Education Reconciliation Act in March 2010.

The Department of Education administers federal student loan programs through the Federal Direct Loan Program (FDLP).  The two most popular types of loans are Stafford Loans, also known as Direct Subsidized and Direct Unsubsidized Loans.  Direct Subsidized Loans are partially subsidized by the U.S. Department of Education.  The third most popular type of loan is the PLUS Loan.  PLUS Loans are provided to graduate and professional students and parents of undergraduate students.  The rates of interest for direct loans vary according to the date of disbursement and the student’s status as graduate/professional or undergraduate.

Currently, Direct Subsidized Loans for undergraduates have the lowest interest rate.  For loans disbursed between July 1, 2011 and June 30, 2012, the interest rates are as follows: Direct Subsidized Loans for undergraduates, 3.4%;  Direct Subsidized Loans for graduate students and Direct Unsubsidized Loans for all students, 6.8%; and Direct PLUS Loans for all students, 7.9%.

Among federal student loan programs, the Perkins and Consolidated Loans have a more limited scope than Stafford and PLUS Loans.  The Perkins Loan is available to students who demonstrate a greater financial need than students who are only eligible for Stafford or PLUS Loans. Perkins Loans are subsidized by the U.S. Department of Education.  As of October 2011, Perkins Loans have a fixed interest rate of 5% for a 10-year repayment period.

Direct Consolidation Loans have a specialized purpose: they allow a borrower to minimize their number of payments.  With a Direct Consolidation Loan, a borrower combines multiple loans into one loan.  This provides them with the opportunity to make a single monthly payment.  Direct Consolidation Loans typically provide a borrower with more time to pay back a loan, but may significantly increase the cost of interest.  Once a borrower has combined their loans into a Direct Consolidation Loan, they cannot remove any of the individual loans.

Although the Department of Education lends money directly to students or parents, it often employs private businesses as loan servicers, even for federal student loan programs.  Loan servicers may disburse monies to students.  They may also provide avenues such as electronic funds transfers (EFTs) to facilitate repayment.  Loan servicers can charge fees of up to 4% of the amount of the loan for their servicers.

Direct loans are usually one part of a larger federal aid package that a student may receive.  Other components of an aid package may include grants and scholarships.  If students are not eligible for a federal loan, they can apply for a private loan.