Federal Student Loan Consolidation: Direct vs. FFELP

I have mentioned that there are two different types of Federal Student Consolidation Loan programs available for affording college, but I haven’t really gone into details on the differences between each of them.

The names of these programs are the William D. Ford Direct Loan Program (referred to as FDSLP, “Direct Loan”, and “Direct Loan Consolidation”) and the Federal Family Education Loan Program (known as FFELP). Although they both issue regular student loans and offer student loan consolidation, the ways in which the programs work are different, and you do not get to choose which to use while you are in college (although you get to once you have graduated and are consolidating your loans).

The William D. Ford Federal Direct Loan Program issues both regular student loans and consolidates student loans. Through this program, the Department of Education acts as the lender, and provides the same amount of money for loans (such as the Stafford and PLUS loans) as does the Federal Family Education Loan Program.

The Federal Family Education Loan Program is different from FDSLP (or direct loan) in that through this program, the loan is actually funded through approved financial institutions (i.e. banks, credit unions, etc.) and backed by the government. Since the government guarantees to repay these loans to the lender, they are able to offer it to you at a decent fixed rate (you will know what rate you will be paying when you sign up).

During college, you do not need to worry about which program to choose for student loans, as your school decides for you. However, once you graduate and choose to consolidate your student loans, you have the option of choosing to use FDSLP or FFELP and should figure out which one is best for you.

Here are some things to consider in making your decision on which program to use for consolidation:

-Each program will offer incentives that the other one doesn’t. For example, each program has certain repayment plans that the other one doesn’t.

-Defaulted loans can be consolidated in a direct loan consolidation, but cannot be through FFELP

-You should have at least one direct student loan if you are applying for direct student loan consolidation. However, if you don’t, but have at least one FFELP loan and have been unable to obtain a student consolidation loan with an FFELP lender, you may still be eligible.

-Remember that with FFELP, you are consolidating through a private lender. Because of this, there is a chance they that will require you to have a minimum balance in outstanding federal student loans, which would probably not happen through the direct loan program.

These are the only big differences that I have come across so far. Overall, the two programs are pretty similar, and one probably won’t put you TOO much further ahead than the other will. If I find any more significant information on differences between the programs, I will post it right away.

Federal Student Loan Consolidation: Repayment Plans

If you decide to use federal student loan consolidation as a way to help you in affording college, there are numerous payment plans available; in fact, probably more than you will find with any other student consolidation loan, or perhaps any other student loan altogether. Some of the payment plans are available for only one type of federal student loan consolidation, but there are six in total. Here they are:

Standard Repayment: With this plan, you will pay a fixed monthly payment on your student consolidation loan for up to 10 years, with a $50 minimum monthly payment. Depending on the amount that you borrow with the student loan, the repayment term may be less than 10 years. Available for both FFELP and Direct Loan borrowers.

Extended Repayment: This repayment plan is similar to standard repayment, except for that it allows for a loan term of 12 to 30 years, depending on how much you have borrowed. By stretching out your payments over a longer time period, you can reduce the amount of the monthly payment, however, this will increase the total amount of money you repay over the lifetime of the student loan (due to more accumulation of interest). Available for both FFELP and Direct Loan borrowers.

Graduated Repayment: This plan is different from the first two, in that it starts off with lower payments, which gradually increase every two years. Depending on the total amount you borrow in student loans, the loan term can be between 12 and 30 years. The monthly payment can be no less than 50% and no more than 150% of the monthly payment that you would have under the standard repayment plan. When you start out repaying the student loan, the monthly payment must be at least the interest that is accruing and also at least $25 (half the amount of the standard repayment). And of course, this amount will increase after the first two years. Available for both FFELP and Direct Loan borrowers.

Income-Contingent Repayment: Payments under this plan are based on the income of the borrower and the total amount that they owe. Monthly payments on the student consolidation loan will be adjusted each year in accordance with changes in the borrower’s income. The monthly payment must be greater than $5. The loan term can be up to 25 years, and at the end of the 25 years, any remaining balance on the loan will be discharged. Note that the write-off of the remaining balance after those 25 years is taxable based on current laws. This repayment program is only available for Direct Loan Borrowers.

Income-Sensitive Repayment: If you consolidated your federal student loans through FFELP, this is your alternative to income-contingent repayment. With this repayment plan your monthly payments will be a percentage of your gross monthly income, and the loan term will be 10 years. As I said, this is only available to FFELP borrowers.

Income-Based Repayment: This plan was introduced in 2007 as a better alternative to income-sensitive and income-contingent repayment, and will start on July 1, 2009. This repayment plan is available in both the Direct Loan and FFELP programs. It is similar to income-contingent repayment, but caps your monthly payments at a lower percentage of a smaller part of your income.

You are probably wondering what the difference is between the FFELP and Direct Student Loan Consolidation Programs, and what determines which you will use. I will describe that in my next post.

Federal Student Loan Consolidation: Pros/Cons

Federal Student Loan Consolidation exists for student loans that you have borrowed from the government for paying for college. You may combine all of your government student loans into one big student loan with a longer payment term (and hence, lower monthly payments). Make sure to first read my blog on the general benefits of student loan consolidation and how to do it, before reading the specifics here.

The following student loans are some that are eligible for federal consolidation:

-Federal Nursing Student Loans
-Federal PLUS and Federal Direct PLUS parental loans
-Stafford Loans
-Perkins Loans
-Federal Consolidation and Federal Direct Consolidation Loans (if reconsolidating)
-Any other loans from the government you may have

As with most student consolidation loan programs, you will have the following general financial aid benefits (see other post for more details on them):

-Single, lower monthly payments
-Alternate repayment plans
-extended repayment period
- Ability to choose any lender (if receiving loan through FFELP and not Federal Direct)
-No pre-payment penalties
-Chance to improve credit score

In addition to these, here are other details and financial incentives on federal student loan consolidation:

-Fixed interest rate – You will not have to worry about paying more in monthly payments than what you originally signed up for. Interest rate will be the weighted average of the current interest rates of your federal loans. This is not the case for private student consolidation loans, where the interest rate can vary.

No minimum balance required – If you only have $1,000 in federal student loans, you are still eligible to consolidate. Note this will only work for Federal Direct Consolidation Loans; through FFELP, where a lender provides the money which your government insures, you may be required to have a certain balance accrued in federal loans

-Extend repayment up to 30 years

-Credit is not a factor – you are still eligible for this financial aid even if you have bad credit!

As far as drawbacks, federal student loan consolidation has the following general drawbacks:

-More interest (unless are using improved credit thing) accumulated in the end

-Have a longer time before loan is fully paid off

-Might lose repayment incentives from original lending companies

-Loss of deferment or grace period w/original loans

In addition to this, here are drawbacks specific to federal student loan consolidation:

-Cannot include consumer debt loans, personal loans, or bank or credit union loans. I don’t see why you would anyways, but this is one of the rules that I’m at least a few people out there don’t like this.

-If you do choose to do a Federal Direct Consolidation Loan, you will not have the option to choose your lender.

Other than this, Federal Student Consolidation Loans share most of the characteristics that I described in my posts on general student consolidation loan information. If you haven’t read those yet, definitely read them for more information.

Overall, if you plan to consolidate, Federal Student Loan Consolidation is your best option and you should do this before private loan consolidation.In my next posts, I’ll describe the repayment options available, some other things to consider for student loan consolidation, the difference between the two types of federal student loan consolidation, and answer some frequently asked questions =)