Federal Family Education Loan Program
The Federal Family Education Loan (FFEL) Program was the second largest of the U.S. higher education loan programs (Direct Loans being the first). The FFEL was initiated by the Higher Education Act of 1965 and was 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% of all new federal student loans). Since 1965, 60 million Americans have used FFEL loans to pay for education expenses.
Following the passage of the Health Care and Education Reconciliation Act of 2010 on March 26, 2010 the program was eliminated, and no subsequent loans were permitted to be made under the program after June 30, 2010.
Overview of FFEL and DL
In the FFEL Program, private lenders made federally guaranteed student loans to parents and students. Commercial lenders (e.g. Sallie Mae) would use their private capital to finance loans under the FFELP but received subsidies from the federal government. These subsidies were used to maintain interest rates at the federally mandated levels, pay down fees associated with the loans and cover expenses associated with collection and defaults. The government also guaranteed a large portion of the loans, insuring private lenders against default. If a parent or student defaults, the private lender was reimbursed by the government for its losses. In contrast, under the Direct Loan program, the government lends directly to students using federal funds provided to it by the US Treasury.
Stafford and PLUS loans
The main federal student loan is the Stafford Loan. There are 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 or the student withdraws to a less than half time status.
- 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 or the student withdraws to a less than half time status.
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% cap).
- Stafford loans made beginning July 1, 2006: 6.8%.
- New subsidized Stafford loans to undergraduates beginning July 1, 2008 (per recent budget reconciliation law):
- 6.0% for a loan first disbursed between July 1, 2008, and June 30, 2009
- 5.6% for a loan first disbursed between July 1, 2009, and June 30, 2010
- 4.5% for a loan first disbursed between July 1, 2010, and June 30, 2011
- 3.4% 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%. The law did not affect new unsubsidized Stafford loans. The rate remains 6.8%
- PLUS loans made beginning July 1, 2006: 8.5% in FFEL Program; 7.9% in DL Program. For PLUS loans made before July 1, a variable rate applies (with a 9.00% cap).
President Obama and 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."
A Congressional Budget Office review in July 2009 showed that if the government did the direct lending itself, rather than use private sector lenders via FFEL, it would save $80 billion over ten years.
America's Student Loan Providers, an industry lobbying group representing private lenders, issued a prepared statement on April 6, 2009 stating "a growing consensus" among legislators "that large scale changes in the financial aid delivery system should be carefully considered."