The Federal Direct Student Loan Program

The William D. Ford Federal Direct Student Loan Program was originally designed to bypass third party lenders like banks and credit unions. The federal government lends the money directly to students and parents.

The Federal Family Education Loan Program (FFELP) works through private lenders and somewhat overlaps the Direct loan program. Both offer Stafford and PLUS loans, follow the same guidelines to determine need in the need based programs, and have similar requirements for credit checks in the non-need based programs. So, it is important, for families and students to decide which program they want. But how do you do that?

One of the criteria you can use to make a decision is to ask yourself if you would prefer to deal with the government or a private lender in servicing your student loan? Each has customer service people to answer your questions. See who is more flexible and helpful. There are also online forums that discuss experiences with each type of loan servicer and would be a good place to begin. One of the largest is: College Confidential.com . Reading these posts or other online forums can help you decide which option would work best for you.

There are other differences between the federal direct student loan program and FFELP as well. When you get a loan directly from the federal government, it is the federal government that you pay back. With private lenders, however, you may not be making your payments to the organization that originally lent you the money. It is quite common for private lenders to "sell" loans to each other, so the company that lends you money may not be the company you repay.

It may not make a lot of difference to some people, but is a point to consider. If you choose a private lender it may be because you prefer their customer service. The company you end up repaying could actually be a company you rejected previously.

Probably the most important points to consider are the differences in interest rates, repayment terms and fees. The interest rates of federal loan programs like Stafford and PLUS are officially fixed, but that may not be the case for private lenders, who often have more flexibility in the rates they charge.

Private lenders like banks and credit unions may or may not charge insurance or loan setup fees. (Insurance fees are officially assessed at 1% and origination fees at 3% according to federal rules, but these are changing in the next few years). The private lender must charge the same fees, but may choose to absorb them in order to gain your business. They are also able to lengthen the loan repayment term, extend a grace period or alter interest calculation dates.

There is only one way to find out exactly what's available to you in terms of both federal direct student loans and private student loan funding ... shop around. Make sure you review the fees, interest rates and repayment terms of each institution and calculate the total cost of each loan you check out.

If you are interested in the Federal Direct Student Program, here are a few important resources:

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