Direct Federal Student Loan or FFELP loan?

The Direct Federal Student Loan is your preferred choice, now.

Everyone always wants to know:

"Does it make a difference which kind of unsubsidized Stafford loan you get?"

The answer is supposed to be "No", not to the borrower. But, not now- not with over 130 lenders pulling out of the FFELP and a bill in Congress to eliminate it entirely.

Students last year were scrambling to find new sources for their loans. Many were not informed until the last moment that their chosen lenders were pulling out. While most found replacements, students do not feel secure about next year's prospects for lenders.

And neither do the schools.

The way it works is that colleges and universities have to make a choice about which federal program they go with. This year, over 300 schools have switched from the FFELP to the direct federal student loan program. (The most publicized ones have been Penn State, Michigan State and Northeastern and the latest big defector is the University of Connecticut.)

As soon as you enroll in a college, your choice of which federal loan program to go with is made. Whichever program your school decides to pick is the one you are stuck with.

So...

Consider Which Federal Loans for College You Prefer

No one is saying that it should be the most crucial factor when choosing a college, but it is an added one. Remember, a Direct Federal Student Loan is a U.S. Department of Education loan and an FFELP loan is issued through a private lender, but guaranteed by the U.S. government.

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

Direct Federal Student Loan
Benefits	Drawbacks
1. Instant Student Loan- just sign online after you receive your award letter	1. No added Incentives- some FFELP lenders paid the federal fees for borrowers in the past
2. Stability- U.S. Department of Education is not going out of business	2. No Switching Lenders- With FFELP 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 Alternative loans- many private lenders do both

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%. (FFELP plus loans are 8.5%.)

I don't think that the FFELP will survive,. If it does, it won't be for long. The influx of $40 billion worth of new loans into the Direct Loan program will require the Department of Education to hire former FFELP institutions like Sallie Mae to service them (at least at first). If you have a choice between the Department of Education or a loan institution to service your Direct Loan- the loan institution is your better choice.

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