Things have been pretty quiet on the student loan front with the exception of Congress approving the increase in Unsubsidized loan for undergraduate students. Still, I expect things to pick up this fall as enrollment begins for the more traditional schools.
I figure this might be the time to compare the two types of student loans available, depending on which your school uses: Federal Family Education Loan Program (FFELP) or Federal Direct Lending. It is possible that a school can participate in both programs, but I'm not aware of any that do. So, what's the difference?
First, let me point out the similarities:
Annual loan limits effective July 1, 2008. Both are:
- $9,500 with no more than $3,500 Subsidized for freshman
- $10,500 with no more than $4,500 Subsidized for sophomores
- $12,500 with no more than $5,500 Subsidized for juniors and seniors
- $20,500 with no more than $8,500 Subsidized for graduate students
Interest rates, effective July 1, 2008, for both are:
- 6.0% undergraduate level
- 6.8% graduate level
Grace period for both loans is 6 months after the student graduates or ceases to be a student. The standard repayment term for both is 10 years, but can be adjusted.
Sound just alike, right?
Direct Lending
- Uses the Department of Education/U.S. government as the lender. You will repay your loan to the Department. There is no bank involved.
- You sign your Master Promissory Note at your school, or the online designation
- A processing fee of 4% is taken out of each disbursement
- The school initiates all disbursements
- Consistency in using the Department of Education from year to year. Your contact for loan questions is always the Department.
Stafford Loan through FFELP
- uses an actual bank as the lender. You will repay your loan to this lender or the loan servicer it uses.
- You sign the Master Promissory Note with the lender, usually online
- A processing fee of up to 4% may be taken out of each disbursement. Some lenders are still paying this fee, so you don't have to. Others are either charging the full 4% or a reduced amount, such as only 1%. For those charging less than 4%, you will get more money from your loan.
- The lender initiates all disbursements based on the school's provided disbursement dates
- The lender industry has been on very shaky ground, meaning some students have had to change lenders numerous times, making it harder to track loans borrowed overall. Your contact for questions may involve several lenders unless you consolidate after graduation.
There has been great debate over which student loan is better, and Congress sometimes pushes for schools to leave the FFELP program and enter into Direct Lending in order for our government to make more money. Both have their advantages and disadvantages, as you can see. Direct Lending makes it much easier to track loans in repayment, while Stafford Loan through FFELP may not charge as high a processing fee.
Unfortunately, it's highly unlikely you will have any decision in which type loan you can take. The school will make the determination in which program they choose to be involved. Either way, the FAFSA must still be filed for a federal loan.