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Direct vs. Indirect Student Loans: What’s the Difference?

By Jody McMaster · August 24, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Direct vs. Indirect Student Loans: What’s the Difference?

Federal student loans could be either Direct Loans or “indirect loans” until 2010, when Congress voted to eliminate the latter. Yet many borrowers of Federal Family Education Loan (FFEL) Program loans continue to struggle with repayment.

The big difference between the loan types—and point of contention—was the source of the funding.

Indirect vs. Direct Student Loans

Indirect Student Loans

The Federal Family Education Loan Program was funded by private lenders (banks, credit unions, etc.), but guaranteed by the federal government.

The government didn’t directly insure FFEL Program loans; it acted through a guarantor, which paid the lender if the borrower defaulted. Then the government reimbursed the guarantor.

When it came to questions about payment, borrowers dealt with the lender, guarantor, servicer, or a collection agency—not the government.

Direct Student Loans

With a Direct Loan, made through the William D. Ford Federal Direct Loan Program, the funds come directly from the U.S. Department of Education, which gets the money from the U.S. Treasury. The loans are made by the Department of Education and backed by the federal government.

Direct Loans consist of Direct Subsidized and Direct Unsubsidized loans (also called Stafford Loans), Direct PLUS Loans, and Direct Consolidation Loans.

Before 2010, every school made its own decision about whether to participate in a Direct or indirect loan program, or possibly both. But there were some differences in interest rates, fees, and repayment options.

What Kind of Loans Do You Have?

If you’re thinking about how to best address your student loan debt, it’s important to know what kind of loan or loans you have. You can view your federal student loan history at Federal Student Aid with your FSA username and password.

Determining a federal repayment plan depends on several factors. First, you may want to check which plans you qualify for .

Repaying FFEL Program Loans

Even though indirect student loans ended on June 30, 2010, there are still 10.6 million borrowers who hold $239 billion in FFEL loans.

Many are still struggling with this debt, though 1.14 million borrowers who defaulted on a privately held FFEL loan caught several COVID-era breaks .

Borrowers must consolidate their FFEL loans before they can apply for one of the four common income-driven repayment plans, which forgive any loan balance after 20 or 25 years of payments.

They also must consolidate loans to apply for Public Service Loan Forgiveness (PSLF), which allows some members of the military, classroom teachers, social workers, and nonprofit and government employees to have certain loan balances eliminated after 120 on-time payments.

Here’s more on repayment options, including the only income-driven repayment plan tailored to FFEL borrowers.

Income-Sensitive Repayment Plan

Only borrowers with a high debt-to-income ratio will qualify for this FFEL repayment plan. The lender determines the monthly payment, based on your total gross income, not adjusted gross.

No loan balance is forgiven after a certain period of time.

Consolidating Your Loans

Consolidating loans with a federal Direct Consolidation Loan can increase the amount of interest that is paid over the life of the loan. If you decide to lengthen your payment period (for example, from 10 to 20 or even 30 years), your monthly payment may be lower, but the total interest you’ll pay over the life of the loan will most likely be higher.

So, consolidation isn’t necessarily a money-saving option over an extended time period. And the interest rate on a Direct Consolidation Loan is the weighted average of the borrower’s current federal loans, rounded up to the nearest eighth of one percentage point. So the rate actually might rise slightly.

If you don’t have any indirect loans, you still can consider consolidating your Direct Student Loans. (Note that only federal student loans, not private student loans, are eligible for consolidation into a Direct Consolidation Loan.)

Refinancing Your Loans

Another option is to apply to refinance your student loans—federal, private, or both—into one new loan through a private lender.

You could lose some of the repayment perks you have with your federal student loans if you refinance with a private lender, including the ability to delay payments if you run into certain hardships. But you could gain a chance at a lower interest rate.

If you got a good job after graduation and improved your credit profile since you first took out your student loans—and you don’t foresee a need for PSLF or an income-based repayment program—refinancing might help lower your payment without extending the length of your loan via a lower interest rate. (If you tried to lower your interest rate before and didn’t qualify because of your credit history, it might be worth your time to check again. Credit scores can change over time.)

It might be interesting to calculate how much refinancing could save you.

The Takeaway

More than 10 million borrowers are repaying FFEL Program loans. The last of these “indirect loans” were issued in 2010, when federal Direct Loans largely took over. Whether you’re repaying an FFEL loan, Direct Loan, or private loan, it’s a good idea to strategize rather than stress out.

SoFi blazed the trail on student loan refinancing. A refi of one or more loans might put a spring in your step.

Check out what kind of rates and terms you can get in just a few minutes.


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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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