Types of Federal Student Loans

NOTICE: Federal legislation will very likely eliminate the FFEL version of federal student loans, effective July 1, 2010. See the Direct Loan Program information on this website, as Direct Loans will continue.

FFEL Program Loans

FFELP Loans: FFELP Loans are relatively low-interest, long-term loans generally made by banks, savings associations and credit unions to help you finance the cost of your post-secondary education. Banks, savings associations and credit unions are generally referred to as a lender. FFELP Loans are guaranteed by the US government and, except for the PLUS Loan, do not require a credit check. There are three (3) types of FFELP Loans:

  • Stafford Loans (the interest on which may or may not be paid by the federal government while you are in school);
  • PLUS Loans (which includes loans to the parent of a student and to graduate and professional students); and
  • Consolidation Loans.

In all cases, loan payments are made to the holder of your loan.

What is a Stafford Loan? A Stafford Loan is the most common form of federal student loan and one of the three (3) types of FFELP Loans made by a lender to a student/borrower. A Stafford Loan and a Direct Loan are essentially the same type of loan; the principal difference is the lender. In the case of a Stafford Loan a bank or savings and loan or credit union is the lender whereas the federal government is the lender of a Direct Loan. The repayment of a Stafford Loan is guaranteed by the federal government. Undergraduates, graduates and professional degree students may obtain a Stafford Loan. These loans are not credit-based.

What is a PLUS Loan? PLUS Loans are available only to parents, graduates and professional students. Parents, like graduates and professional students, must use the loan proceeds to help defray the cost of post-secondary education for their children. These loans are credit-based which means the applicant must have a satisfactory credit record.

What is a Consolidation Loan? A Consolidation Loan allows FFELP borrowers to refinance multiple FFELP (and Direct Loans) into one loan with one monthly payment.

Direct Loan Program

Direct Loans: Direct Loans are administered by participating schools under the William D. Ford Federal Direct Student Loan Program. The US government is the lender. Direct Loans may be made to undergraduates, their parents and graduates. There are essentially three (3) types of Direct Loans and they are the same as the FFELP loan types: Direct Loans (including Direct Subsidized Loans and Direct Unsubsidized Loans), Direct PLUS Loans and Direct Consolidation Loans. Almost all of the terms and conditions of each type of loan made under the Direct Loan program are the same as those in the FFEL Program. For example, only the PLUS Loan under either program is credit-based; the maximum award amounts are the same across loan types and the interest rates across loan types are also generally the same in both programs. However, under the Direct Loan program, loan payments are made directly to the federal government not to a bank, savings and loan or credit union or similar financial institution.

Perkins Loan Program

Perkins Loans: Perkins Loans are low-interest (currently 5%) long-term loans made by a school according to the rules of the Federal Perkins Loan Program. The school acts as the lender using a limited pool of funds provided by the federal government. The school must also make a matching contribution to this pool of funds. Perkins Loans may be made to undergraduate, graduate and professional degree students. Different maximum loan amounts vary based on grade level. For the 2007-2008 school year, the maximum loan amount for undergraduates is $4,000 a year and $20,000 cumulatively. The maximum loan amount for graduate and professional degree students is $6,000 a year and $40,000 cumulatively including undergraduate loans. These loans may be made only to students who have a demonstrated financial need according to the FAFSA. The interest on these loans is paid by federal government during the in-school and nine (9) month grace period. The repayment period or term of the loan is ten (10) years. Loan payments are made to the school or its loan servicing agent.

Subsidized vs. Unsubsidized Loans

Subsidized vs. Unsubsidized Loans: Only FFELP or Direct Stafford Loans may be "subsidized." A "subsidized" FFELP or Direct Stafford Loan means the federal government pays the lender the interest that accrues on the loan while the student is in school at least half-time and during grace and deferment periods. An "unsubsidized" FFELP or Direct Stafford Loan means you pay all the interest that accrues during the life of the loan; the federal government doesn't pay any of it. The interest rate is the same whether the loan is subsidized or unsubsidized.

Subsidized FFELP or Direct Stafford Loans are only available to students who have a financial need based on the information provided on the FAFSA. Your school determines your financial need by subtracting your Expected Family Contribution or "EFC" from the cost of attendance. Your EFC can vary from year to year and depends on you and your family's financial situation. As discussed under the FAFSA section, your EFC is calculated according to a formula established by federal law. Financial need is not necessary to receive an unsubsidized FFELP or Direct Stafford Loan.

If you received a subsidized Direct or Stafford Loan, the federal government pays the interest on the loan while you are in school at least half-time and for the first six (6) months after you leave school.

If you receive an unsubsidized Direct or Stafford Loan, while you are responsible for paying all the interest, you can pay the interest while you are in school or during a period of deferment or forbearance. You may also allow the interest to accrue (accumulate) and have the interest added to the principal amount of your loan. This is called capitalization. If you choose not to pay the interest as it accrues and allow it to be capitalized, the total amount you have to pay will be increased.