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Direct Federal Student Loan?

The Direct Federal Student Loan is the only government student loan program now.

The Health Care and Education Reconciliation Act of 2010 has eliminated FFELP loans.

These loans were underwritten by the federal government, but offered by private lenders who added incentives and benefits to compete for students. In 2008, Congress started eliminating lender subsidies for these loans and lenders started leaving the program.

Students in 2009 were scrambling to find new sources for their loans. Many were not informed until the last moment that their chosen lenders were pulling out. After that experience, many schools started to switch to Direct loans.

With over 130 lenders pulling out of the FFELP and a financial hole to plug in the Pell grant program, Congress decided to eliminate it entirely and use the money saved (which had gone to lenders) for education spending.

The way it worked before, colleges and universities had to make a choice about which federal program they used. With the lenders leaving in 2009, over 300 schools switched from the FFELP to the Direct federal student loan program. At that point, the Direct loan program (which had never been as popular as the FFELP) became the preferred choice. At least students (and schools) were assured of getting their money on time.

Now, all federal loans for all schools are lent directly by the government. whether you get an unsubsidized Stafford loan or a subsidized one, it will be a Direct loan.

So the only choice of loan type you have left is...

Federal Loans for College or Private loans?

...or both. This may not be the most crucial factor when choosing a college, but it can make a difference. Some schools do not participate in federal Direct student loans and some schools do not approve private loans. Remember, a Direct loan is a U.S. Department of Education loan and a private loan is any loan that is not guaranteed by the U.S. government.

If you choose a college that costs more than the federal loan limits allow, you may need private student loans to close the gap. If you have tuition bills due and you still have a gap, now is the time to secure more funding. [COMPENSATED AFFILIATE LINK]

These are some of the benefits and drawbacks for Direct loans:

Direct Federal Student Loan
Benefits	Drawbacks
1. Instant Student Loan- half an hour at direct loans gov and then you sign for your money	1. No added Incentives- some FFELP lenders offered better benefits for borrowers in the past
2. Stability- U.S. Department of Education is not going out of business	2. No Switching Lenders- With private lenders you can look around each year for a better deal
3. No Profit Motive- so no worries about your loans being sold	3. Poor Customer Service- no phone pay if their site is down, for instance
4. Easy Record-keeping- all your loans on file and accessible with FAFSA PIN	4. No other type of loans- many private lenders do many different kinds

And for parents who are thinking about parent college loans and for graduate students: the federal direct plus loans have an interest rate of 7.9%.

If parents have an excellent credit score, they might be able to do better by cosigning a loan offered by a private loan lender.

If you have more than one Direct loan, they can be consolidated. Check the student loan consolidation calculator to see if this will give you a better interest rate.

What Do You Think about Direct Federal Student Loans as the Only Option?

Can you think of any other benefits or drawbacks? Will this be good for students? For schools? For taxpayers? Tell us what you think!

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Only Direct Student Loans...Other Opinions

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Direct Federal Loan Not rated yet
Changes made by the Health Care and Education Reconciliation Act of 2010 to federal loans came as a surprise to me. I didn't know that the Health Care ...

Direct Federal Student Loans are a Mess Not rated yet
Switching to Direct federal student loans has been a mess for my school. Students need to sign their new master promissory note by Aug 10 or they will ...

The Benefits of Direct Federal Student Loans Not rated yet
Creating direct federal student loans eliminates the middle man, and eliminates the greed from that middle man.

The whole purpose of education is to ...

A Direct Federal Student Loan Will Be Easier to Keep Track of Not rated yet
Getting a direct federal student loan will make it easier to keep track of which loan servicer is holding the loan. Many times, lenders sold federal loans ...

Direct Federal Student Loans Means More Choice Not rated yet
Having only Direct federal student loans for government school loans will actually lead to more choices for students and parents. While banks were making ...

Direct Federal Student Loans are Easier Not rated yet
I think federal Direct student loans are easier for students. They don't have to spend time looking at different lenders and thinking about which one ...

The Direct federal student loan program has one huge advantage over private loans- multiple payment plans to suit all income levels. Aside from including options for deferment and forbearance, you can also choose a monthly payment formula based on your income, rather than on the amount you owe. Private loans do not have this sort of arrangement available.