FFELP Loans vs Direct Loans – Explanation of the FFEL Program and the Benefits

If you have attended an undergraduate, graduate, or doctorate program within the past 25 years, then there is a good chance that you’ve taken out a student loan. Two common student loan options are FFEL loans and Direct loans.

FFEL loans are available through the Federal Family Education Loan Program. It is sometimes referred to as the federally-guaranteed student loan program or called an FFELP loan.

Direct loans are available through the William D. Ford Federal Direct Loan Program.

The choice of loan programs that were available to each student borrower depend upon the college they have chosen to attend.

No new loans are being offered by the FFEL program as of July 2010. All new loans are being made under the Direct loan program today.

If you are still paying off your student loans, however, understanding the FFEL program and its benefits is still important.

What Are the Differences Between FFEL Loans vs Direct Loans

In the FFEL program, the funds for the student loans came from banks, credit unions, and other financial institutions.

In the Direct loans program, the funds come directly from the U.S. Department of Education. Those funds were secured by the department from the U.S. Treasury. Financial instituions are not involved with the lending process under this program.

In FY 2008, at the height of the Great Recession, many financial institutions which were part of the FFEL program sought assistance from the Department of Education to issue new loans anyway. About two-thirds of the loans issued since 2008 were provide with funds that came from the government anyway.

There are 4 types of FFEL loans that were issued under the program’s existence.

Stafford Loans: This type of loan offered interest that was paid by the government when the student borrower was enrolled in school, during grace periods, and during times of deferrement.

Unsubsidized Stafford Loans: This loan had the same structure as the traditional Stafford loan, except that the government would not pay the interest while the student was enrolled or not required to pay.

PLUS Loans: This type of student loan allowed parents to borrow money to pay for the costs of a college education for their children or dependents. It applied to undergraduate and graduate students.

Consolidation Loans: These loans would combine several federal student loans into a single loan, often reducing the monthly payment obligations of the student borrower.

These are the same types of loans that are offered under the Direct loans program as well. The only difference between the loans is that one was issued by a financial institution and the other was issued by the government itself.
FFEL loans were also insured by guaranty agencies.

Some lenders were not banks or credit unions. Some non-profit agencies, finance companies, and state agencies also got involved with this student loan program.

What Are the Advantages of FFEL Loans?

Most of the benefits that are found in the FFEL loan program are also found in the Direct loans program.

The one disadvantage is that FFEL loans do not qualify for any type of loan forgiveness. Even if you have Direct loans which do qualify, and you work in a qualifying job, any payments you’ve made toward your 5-year or 10-year requirements will not be reflected with an active loan of this type.

You may be asked to consolidate all your loans into a new Direct loan program to qualify for loan forgiveness if you have FFEL and Direct loans. In this situation, you may have your 5-year or 10-year clock reset.

It was actually more difficult to qualify for FFEL loans when this program was active compared to the Direct loan counterparts. In one of the final surveys of the program, provided by the National Postsecondary Student Aid Sutdy, 42% of applicants for an FFEL PLUS student loan were denied.

In comparison, only 21% were denied under the Direct PLUS program.

The reason for the difference in denials was that the law allowed private lenders to apply restrictive standards to their loan products in ways that are similar to traditional lending products, like a loan or a credit card.

Some schools only participated in one program, which was an advantage for some FFEL loan recipients. In March 2008, only 25% of schools were using the Direct loans program. By March 2010, 46% of colleges were part of the Direct program with 39% more transitioning to the program.

For students who went to college between 1998-2006, qualifying for the FFEL loan meant your credit was reasonably good, there was confidence in your studies, and you could pay for your tuition and education-related expenses.

What Are the Advantages of the Direct Loan Program?

The primary advantage of being involved with the Direct Loan program is that student borrowers are eligible for public service loan forgiveness.

To qualify for loan forgiveness, the student borrower must work in a public service job for a minimum of 10 years. They must also repay their loans during this time through an eligible repayment plan.

After 10 years of being employed and making successful payments, the remaining balance on their student loans would be canceled. This program only benefits borrowers who would still owe money on their loans after 10 years of employment, which means individuals with low income relative to their debt and qualifying income-driven repayment plan individuals are the most likely to use it.

This forgiveness plan covers all types of Direct loans, including consolidation loans. Student borrowers are even permitted to consolidate their FFEL loans into Direct loans to qualify for this benefit.

You must not be in default and make 120 monthly payments on your loans after October 2007. Your job must be full-time employment, defined as working an annual average of 30 hours per week, or the number of hours your employer considers full-time employment.

There are other forms of forgiveness that are permitted with the Direct loans program as well.

Teachers who received a student loan after October 1, 1998 and teach full-time for 5 consecutive years at a qualifying school may be eligible to have a portion of their loans canceled. This benefit applies to FFEL loans as well. Up to $5,000 may be canceled under this benefit, while Perkins loans may be fully canceled.

For those serving with AmeriCorps of the Peace Corp, their student loan interest is eligible to be paid during their time of service. This benefit is only received if your service is completed. Student borrowers are permitted to receive a forbearance on their loans during their time of service as well.

The interest rates for Direct loans is also better than the interest rates for FFEL loans. As of the time of writing, the interest rate of a Direct loan was 7.9%, while the interest rate of a FFEL loan was 8.5%.

How Can I Consolidate My FFEL Loans?

To consolidate FFEL loans into Direct loans to qualify for certain forgiveness programs, you must apply for a federal direct consolidation. There is no other way to turn it into a qualifying loan that is eligible for forgiveness.

For some borrowers who have already been making payments toward their Direct loans forgiveness, the consolidation would place every student loan into that one loan. That means you’d be forced to start over, even if you were on payment 119 when you made the transition.

If you are several years into your debt forgiveness process, it may be wise to continue paying your FFEL and Direct loans separately. Then consolidate the FFEL loans after your Direct loans have been forgiven.

Otherwise, if you have FFEL loans, you will want to get them consolidated as soon as possible to begin qualifying.

If you’re unsure of your loan status, attempt to have your student loan payments qualified for public service loan forgiveness. FFEL loans will not be certified.

What Can I Do About My FFEL Loans and Direct Loans?

To find out what type of student loans you have, you must log into your Student Aid account. You can do so by visiting studentaid.gov/login. Once there, you’ll need to have your FSA ID. In the past, you could use your student aid PIN, but this feature has been removed.

Once you are logged into your profile, you can scroll directly to your loan summary. Anything marked “Direct” is part of the Direct loans program and eligible for its benefits. FFEL loans are also marked, including any supplemental loans you may have received.

Perkins loans are a third type of loan offered and not associated with either program. Some Perkins loans are labeled as being a “National Direct Student Loan (Perkins).” These are not part of the Direct loans program. Any Direct loan you received will begin with “Direct” in its title, such as a “Direct Stafford Unsubsidized Loan.”

By understanding the types of student loan you have, you’ll know which ones to consolidate if you qualify for forgiveness programs through your employment. Log into your account today to see which loans you have, then speak with your administrator about any potential program benefits which may apply to you.