Student Loans - The William D Ford Direct Loan Program

The Direct loan program began about 15 years ago and, in true American fashion, was designed to cut out the middle man. Instead of having banks, credit unions and other private businesses lend money to students and parents, the Federal government loans the money directly.

Direct programs overlap the alternative, called FFELP (Federal Family Education Loan Program). The latter is the acronym for programs that work through private lenders. Since they duplicate in some ways the FFEL programs, it's important for lenders to target which they want. Both offer Stafford and PLUS loans.

Direct loans have the same criteria for eligibility. They follow the same need-based guidelines, or have the same credit check requirements for non-need-based programs. Providing the same programs according to the same standards raises a natural question: how to decide between them?

In part, the decision involves choosing which of two servicers to deal with. Both provide customer service personnel to answer questions. In some cases, the private lender will be more flexible and helpful and the government more bureaucratic or indifferent. In others, the situation is reversed.

Reading some of the forums may be the best way to get more information about which would suit an individual best. One large and popular such site is: http://talk.collegeconfidential.com/forumdisplay.php?f=7 With the growth of social networks it has become easier to get a diverse set of opinions. Many of those views are based less on objective criteria than personal taste. Reading the posts will quickly allow a person to decide which side they favor.

More concrete differences between the two broad types do exist, though. Since FFELP loans are funded and serviced by private financial institutions who you sign a promissory note to may not be who you repay. It's common practice for lenders to 'sell' loans to other companies. Mortgage companies do that all the time.

You may have gone to the trouble to find a lender you like. You might choose beyond the rate and repayment terms preferring their customer service, for example. But if the loan is sold to another company, you may be repaying a company you rejected. In the case of Direct loans, since the Federal government is the lender, the loans are not sold to another party.

The most important difference to most people, however, will be the possibility that rates, fees and repayment terms may differ between the two. Officially the interest rates of Stafford and PLUS loans are fixed. But private lenders have some flexibility in other areas.

They may or may not charge origination and insurance fees (officially assessed at 3% and 1%, according to Federal rules, which themselves are changing the next few years). Though the fees are still there, the lender may agree to absorb them in order to gain your business. They may alter the dates on which interest charges are calculated, or extend grace periods or lengthen the repayment period.

The only way to find out what is available is to shop around as you would for any other kind of loan. Calculate the total cost of the loan the way you would any other. To obtain information from the official government site see: http://www.ed.gov/offices/OSFAP/DirectLoan/index.html.

To apply online by electronically completing an MPN, or Master Promissory Note, application see: https://dlenote.ed.gov/empn/index.jsp

Like the other programs a FAFSA (Free Application for Student Aid) is still required. Forms available at: http://www.fafsa.ed.gov/