The Federal Family Education Loan Program (FFEL) is the largest of the U.S. higher education loan programs. FFEL was initiated by the Higher Education Act of 1965 and is funded through a public/private partnership administered at the state and local level. In 2007-08, FFEL served 6.5 million students and parents, lending a total of $54.7 billion in new loans (or 80 percent of all new federal student loans). Since 1965, 60 million Americans have used FFEL loans to pay for education expenses.
In April 2009, President Barack Obama called for an end to the Program, and said he hoped to replace it with the Direct Loan program and an expanded Pell Grant. The President deemed FFEL a wasteful program that "costs the American people billions of dollars each year."[1]
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Overview of FFEL and DL
In the FFEL Program, private lenders make federally-guaranteed student loans to parents and students. A major difference between FFEL and the other major federal loan program (the Direct Loan program) is FFEL's use of government funds. Private lenders who make loans to students under FFEL receive subsidies from the federal government. The government also guarantees a large portion of the loan, insuring private lenders against default. If a parent or student defaults, the private lender is reimbursed by the government for its losses. Under the Direct Loan program, the government lends directly to students.
About 75 percent of postsecondary institutions participate in FFEL, or approximately 4,000 institutions nationwide.
Stafford & PLUS Loans
Both federal student loan programs offer the Federal Stafford Loan and the Federal PLUS Loan for graduate students and for parents of dependent undergraduate students. However, the main federal student loan is the Stafford Loan. There are the following two types of Stafford loans:
- Subsidized. For students who meet a financial needs test, the government pays all interest costs on behalf of borrowers while they are in school, and during grace and deferment periods. Repayment begins six months after graduation.
- Unsubsidized. Students who do not meet a financial needs test or who need to supplement their subsidized loans may receive unsubsidized Stafford loans. Borrowers may defer payment of interest during school, grace, and deferment periods, but they are responsible for all interest that accrues. Repayment begins six months after graduation.
Interest Rates are set by law, as follows:
- For most Stafford loans made before July 1, 2006: Variable rate applies (changing annually with an 8.25 percent cap).
- Stafford loans made beginning July 1, 2006: 6.8 percent.
- New subsidized Stafford loans to undergraduates beginning July 1, 2008 (per recent budget reconciliation law):
-6.0 percent for a loan first disbursed between July 1, 2008, and June 30, 2009 -5.6 percent for a loan first disbursed between July 1, 2009, and June 30, 2010 -4.5 percent for a loan first disbursed between July 1, 2010, and June 30, 2011 -3.4 percent for a loan first disbursed between July 1, 2011, and June 30, 2012
Interest rate under the new law does not extend to loans disbursed after June 30, 2012. The rate for these new loans will revert to 6.8 percent. The law did not affect new unsubsidized Stafford loans. The rate remains 6.8 percent.
-PLUS Loans made beginning July 1, 2006: 8.5 percent in FFEL Program; 7.9 percent in DL Program. -For PLUS Loans made before July 1, a variable rate applies (with a 9.00 percent cap).
Obama Calls for End to FFEL
On 24 April 2009, President Barack Obama called for an end to the FFEL program, calling it a wasteful and inefficient system of "taxpayers...paying banks a premium to act as middlemen -- a premium that costs the American people billions of dollars each year....a premium we cannot afford."[2]
Industry Response: studentloanfacts.org
America’s Student Loan Providers (ASLP) is an industry lobbying group representing private lenders. ASLP operates www.studentloanfacts.org. On 6 April 2009, Kevin Bruns, director of ASLP, argued against ending the FFEL program in a prepared statement posted on ASLP's website. According to Bruns, there is "a growing consensus" among legislators "that large scale changes in the financial aid delivery system should be carefully considered."[3]
American Student Assistance is a Student Loan Guarantor that has also responded to the proposed changes to the financial aid delivery system, and has responded with its own proposal for change.
References
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