Federal student loans could be either Direct Loans or “indirect loans” until 2010, when Congress voted to eliminate the latter. Yet many borrowers of indirect loans, also known as Federal Family Education Loans (FFELs), continue to struggle with repayment today.
Here’s what student borrowers should know about the two different loan types.
Key Points
• Indirect loans, also known as Federal Family Education Loans (FFEL), were discontinued in 2010.
• Direct Loans, funded by the Department of Education, are the current student loan standard.
• Borrowers can identify the types of loans they have through their account on StudentAid.gov.
• There are approximately 7.29 million FFEL borrowers who are still repaying these loans as of 2024.
• FFEL borrowers must consolidate their loans to access income-driven repayment plans and Public Service Loan Forgiveness.
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 program ended in 2010, and loans are now made through the Federal Direct Loan Program.
The government didn’t directly insure FFEL Program loans. Instead, 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, the guarantor, the 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, 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 of these types of student loans.
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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, including whether they are Direct Loans or FFELs.
To figure out your loan types, log into your account on StudentAid.gov and click on “My Aid” in the dropdown section. In the “Loan Breakdown” section, you’ll see each loan you have and your loan balances. You can also find information there on who your loan servicers are, including their contact information, and your loan amounts. On each loan servicer’s website, you’ll find information about your monthly payments and payment history, and your loan interest rates and terms.
Repaying FFEL Program Loans
Even though indirect student loans ended on June 30, 2010, there are still 7.29 million borrowers who hold $165.4 billion in FFEL loans as of 2024.
Borrowers must consolidate their FFEL loans before they can apply for one of the income-driven repayment plans, which base monthly loan payments on your discretionary income and family size over a period of 20 or 25 years, typically resulting in lower payments.
FFEL loan holders also must consolidate loans to apply for Public Service Loan Forgiveness (PSLF), which allows those who work in qualifying public service jobs for the government or nonprofit organizations to have certain loan balances forgiven after 120 on-time payments.
Here are more on repayment options.
Income-Sensitive Repayment Plan
Only low-income FFEL borrowers may qualify for this FFEL repayment plan. The lender determines the monthly payment based on a fixed percentage of the borrower’s gross monthly income. Payments are made for a maximum period of 10 years.
Consolidating Your Loans
Consolidating loans with a federal Direct Consolidation Loan combines your loans into one loan with one payment. The interest rate on a Direct Consolidation Loan is the weighted average of the borrower’s current federal loans, rounded up to the nearest one-eighth of a percentage point.
This loan does not lower your interest rate, and may even 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.
A Direct Consolidation Loan may be an option for borrowers who want to streamline their payments rather than those who are looking to save money.
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. Ideally, the new loan will have a lower interest rate or better loan terms.
Before deciding to refinance federal loans, it’s important to note that when you refinance, you lose access to federal benefits. This includes income-driven repayment plans and Public Service Loan Forgiveness.
If you have a lower debt-to-income ratio after graduation and have built your credit over time since you first took out your student loans — and you don’t foresee a need for federal benefits — refinancing may be an option to consider, especially if you can qualify for a lower interest rate.
You can see how much you could save with our student loan refinancing calculator.
The Takeaway
Approximately 7.29 million borrowers are repaying FFEL Program loans as of 2024. The last of these “indirect loans” were issued in 2010, when federal Direct Loans largely took over.
Whether you’re repaying a FFEL loan, Direct Loan, or private loan, it’s a good idea to learn your options and figure out which makes the most sense for your situation.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
What is an indirect student loan?
Indirect student loans are also known as Federal Family Education Loans (FFEL). These loans were discontinued in 2010. Before that time, the Department of Education worked with private lenders through the Federal Family Education Program to provide these student loans, which were backed by the federal government. Student loans are now made through the Federal Direct Loan Program. However, about 7.29 million borrowers in the U.S. are still repaying FFEL loans.
How do I know if my loan is direct or indirect?
To determine if your loan is direct or indirect, log into your account on StudentAid.gov and click on “My Aid” in the dropdown section. In the “Loan Breakdown” section, you’ll see each loan you have. Direct loans start with the word “direct,” while indirect loans start with “FFEL.”
What is better, a subsidized or unsubsidized loan?
A subsidized Direct loan is generally preferable to an unsubsidized loan. The main difference between them is the way the interest is handled. With a Direct Subsidized Loan, you won’t be charged interest on the loan while you’re in school or during the six-month grace period after graduation. With a Direct Unsubsidized Loan, interest starts accumulating from the time the loan is disbursed and you are responsible for paying that interest.
SoFi Student Loan Refinance SoFi Loan Products
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