America’s student loan debt just continues to grow. If you’re wondering how we got here, you’ll probably hear pundits say that for-profit colleges are largely to blame, along with higher tuition costs in general and an increase in those seeking graduate degrees.
But the confusion students and their parents may experience–from the time they get that first financial aid letter to their ongoing efforts to pay back their loans—is certainly part of the problem.
The acronyms, the lenders, the loan types, the repayment rules — it can be more than a bit bewildering. For example, in the past, federal student loans could be either Direct or Indirect Loans, but that changed in 2010, when Congress voted to eliminate the latter. The big difference—and point of contention—was the source of the funding.
Indirect vs. Direct Student Loans
Indirect Student Loans
The government didn’t directly insure FFEL loans; it acted through a guarantor who 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
What is a direct student loan? 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. Lenders and agencies aren’t involved in the process. And students and parents have just one point of contact, because the loans are made, backed, and serviced by the Department of Education.
Prior to 2010, every school made its own decisions 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. Now, though, no new indirect loans are issued through the FFEL program.
Even though indirect student loans were eliminated in 2010, there are still 14.5 million borrowers who hold $301 billion in Federal Family Education Loan (FFEL) . And many are still struggling with this debt.
But FFEL loans aren’t eligible for the best income-driven repayment plans or programs like Public Service Loan Forgiveness (PSLF), which allows some members of the military, classroom teachers, social workers, and not-for-profit and government employees to have certain loans eliminated after 120 on-time payments. Borrowers must consolidate their FFEL loans into the Direct Loan Program before they can apply for these opportunities.
Consolidating with a Federal Direct Consolidation Loan can increase the amount of interest that accrues or that is paid over the life of the loan. If you decide to lengthen your payment period (for example, from 10 years to 20 years), while your monthly payment may lower, the total interest charges you 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 new interest rate on a Direct Consolidation Loan is calculated as the weighted average of the borrower’s current federal loans—rounded up to the nearest eighth of 1%. So the rate won’t go down, but it actually might rise slightly.
Finally, don’t forget that if you borrow federal funds, you’re at the mercy of any changes the government decides to make . President Trump already proposed eliminating Public Service Loan Forgiveness, ending federally subsidized student loans, and curtailing income-based repayment plans. He’s also suggested that people whose loans fall into delinquency should be subject to stricter enforcement.
These are not insignificant factors, so if you’re thinking about how to best address your student loan debt, it’s important to evaluate your unique situation.
That starts with determining what kind of loan or loans you have. You can do that online at the office of Federal Student Aid , which is part of the U.S. Department of Education. You can view your federal student loan history there with your FSA username and password. Once you know what you’re dealing with, you’ll be better prepared to make some decisions. If you don’t have any indirect loans, you still can consider consolidating your direct student loans into one Direct Consolidation Loan .
If you have indirect loans (like FFEL) you want to consolidate, you can apply to do so at the Federal Student Aid site . And if you want to consolidate some federal loans and not others, you can do that, too. (Note that only federal loans are eligible for consolidation into a Direct Consolidation Loan, not private student loans.)
Refinancing Your Student Loans
Another option is to apply to refinance your student loans—federal, private, or both—into one new student 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, such as unemployment. But you could gain other advantages. One of those is a shot 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 a federal forgiveness or income-based repayment programs—refinancing might help you 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.)
And going with a private lender might come with its own benefits and protections. With a SoFi refinanced loan, for instance, you may be eligible for unemployment protections and assistance in finding a new job. You can also get other member benefits with SoFi. (Think of it as the fun stuff. Or, at least, mixing business with pleasure.) SoFi regularly hosts community events across the country where members can meet each other as well as get some face-to-face financial advice.
As a SoFi Member, you’ll also be able to take advantage of career coaching and networking opportunities—so you can continue to grow in the career for which you’ve worked so hard.
Student loans can get complicated—SoFi is here to help. From helping you finance your education to helping you get out of your college debt, we’ve got you covered.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website on credit.
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.