Federal Student Loans

While included in the term Financial Aid higher education loans differ from scholarships and grants in that they must be paid back. They come in several varieties in the United States.

Federal student loans are made to students directly. There are no payments while enrolled in at least half time status. If a student drops below half time status, the account will go into its six-month grace period. If the student re-enrolls in at least half time status, the loans will be deferred, but when they drop below half time, again they will not longer have their grace period. Amounts are quite limited as well.

Federal student loans can also be made to parents. They can obtain a much higher limit, but payments start immediately.

Private student loans made to students or parents have a higher limit and no payments until after graduation, although interest will start to accrue immediately. Private loans may be used for any education related expenses such as tuition, room and board, books, computers, and past due balances. Private loans can also be used to supplement federal student loans, when federal loans, grants and other forms of financial aid are not sufficient to cover the full cost of higher education.

There are two distribution channels for federal student loans, the Federal Direct Student Loans and the Federal Family Education Loans.

Federal Direct Student Loans also known as Direct Loans or FDLP loans are funded from public capital originating with the US Treasury. FDLP loans are distributed through a channel that begins with the US Treasury Department and from there passes through the US Department of Education. Then it goes to the college or university and then to the student.

Federal Family Education Loan Program loans also know as FFEL loans or FFELP loans are funded with private capital provided by banking institutions such as banks, savings and loans and credit unions. Because the FFELP loans use private capital as their source, students who use FFELP loans are able to take advantage of payment options that are similar to those available to customers who take out a home loan or a consumer loan. Some institutions will allow a discount for automatic payments or a series of on-time payments. In 2005, approximately two-thirds of all federally subsidized student loans were FFELP.

According to the US Department of Education, more than 6,000 colleges, universities, and technical schools participate in FFELP. This is a representation of about 80% of all schools. FFELP lending represents 75% of all federal student loan volume.

The maximum amount that any student can borrow is adjusted from time to time as federal policies change. A study published in the winter of a 1996 edition of the “Journal of Student Financial Aid,” “How Much Student Loan Debt Is Too Much?” suggested that the monthly student debt payment for the average undergraduate should not exceed 8% of total monthly income after graduation. Some financial aid advisers have referred this as the 8% rule. Circumstances vary for individuals, so the 8% level is an indicator not a set rule.