If college seems more expensive than ever, that’s because it is. Tuition more than doubled between 1978 and 2015 and is now at an all-time high. Not surprisingly, most families can’t afford to pay these costs out of pocket.
The numbers show that students and their families end up borrowing from the federal government to pay for education. As of late 2018, federal loans represented more than 92% of all outstanding student debt; as of late 2019, borrowers owed the government more than $1.6 trillion.
One federal loan program you may have heard of is called the Federal Family Education Loan Program (FFEL). The program was launched by the Higher Education Act of 1965 and was the main source of federal student loans for decades.
It included several types of loans for undergraduate and graduate students: Subsidized and Unsubsidized Stafford Loans, PLUS Loans, and FFEL Consolidation Loans.
FFEL loans had a unique structure: They were issued by private financial institutions and state-level lenders. The federal government guaranteed the loans against losses if the borrower defaulted, became disabled, or in certain other situations.
The government also sometimes paid an interest subsidy to ensure a certain rate of return for lenders. However, the government did not directly originate these loans or provide the capital for them.
Does the Federal Family Education Program Still Exist?
No. Congress discontinued FFEL loans in 2010 as part of the Health Care and Education Reconciliation Act , and no new loans have been issued under the program since that July 1, 2010.
The reform took place after the Congressional Budget Office found that, if the government eliminated “middlemen” private lenders and just loaned the money directly, it could save up to $68 billion over 10 academic years.
At that point, FFEL was replaced by the William D. Ford Federal Direct Loan Program. Loans offered under this program are similar to the earlier ones, including Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.
However, there are big differences in how the program is administered. The federal government itself now draws on its own capital to directly lend to students, while several federal contractors take care of originating and servicing the loans.
Even though no new FFEL loans are being issued, they are far from paid off. As of late 2019, nearly $271.6 billion of FFEL Loans remained outstanding. Borrowers of these loans are still responsible for making these payments, lenders are required to service them, and the federal government still insures them.
In 2015, the Department of Education banned debt loan holders from charging FFEL borrowers exorbitant interest rates on overdue student loans, as long as borrowers entered the government’s loan-rehabilitation program within 60 days of defaulting. However, the government rolled back those protections in 2017 . Here’s more info on what FFEL loans look like today.
Understanding Your FFEL Loan
If you have a FFEL loan, the biggest difference from a Direct Loan is the source of the money—you received it from a private lender instead of the federal government. Within the FFEL, you have one of four types of loans:
• Stafford: A loan for undergraduate students where interest is covered by the federal government while the student is in school at least half-time, and during grace or deferment periods.
• Unsubsidized Stafford Loan: A loan for undergraduate, graduate, and professional degree students where interest is charged during the entire life of the loan.
• Federal PLUS Loan: This loan is available for either parents of dependent undergraduate students, or for graduate or professional students. Interest is charged for the entire loan period.
• Federal Consolidation Loan: Designed for borrowers to combine multiple federal student loans into a single loan with a single payment. Interest is still covered by the government on subsidized parts of the loan if it’s in deferment.
If you’re not sure what type of loan you have, one place to look is the National Student Loan Data System . This database houses everything you need to know about your federal student loans, including your interest rate, balances, and payment plans.
Are FFEL Loans Eligible for Forgiveness?
With certain types of federal loans, eligible borrowers can opt for an income-driven repayment plan (IDR). As long as borrowers make on-time payments, which are tied to a share of their discretionary income, the balance is forgiven after 20 or 25 years.
Borrowers who are employed by a qualifying employer may be eligible under the Public Service Loan Forgiveness Program to have their loans forgiven after 10 years of payments, and those who qualify for the Teacher Loan Forgiveness Program could have up to a maximum of $17,500 in certain federal loans wiped away.
FFEL loans are generally not eligible for forgiveness through any of the above programs. At least not on their own. However, FFEL loans that are consolidated into a Direct Consolidation Loan may be eligible for forgiveness. Here are some details around that:
• Subsidized and Unsubsidized Federal Stafford Loans, as well as FFEL PLUS Loans made to students and FFEL Consolidation Loans that did not repay any PLUS Loans made to parents, are eligible for the Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR) plans.
• FFEL PLUS Loans to parents, or consolidation loans that include these, are eligible for the ICR Plan only.
Can I Still Consolidate or Refinance My FFEL Loans?
Federal student loan interest rates are set by Congress annually and are fixed for the term of the loan. If you’re still paying on your original FFEL loan, it will have the same interest rate as it did on the date you took the loan out.
For borrowers looking to streamline their payments or potentially lower their interest on FFEL loans, or on Direct or private loans, consolidation or refinancing are options to consider.
Consolidation is a government program that combines multiple federal loans into one Direct Consolidation Loan. The new interest rate is the weighted average of all the interest rates rounded to the nearest 1/8th of a percent. As mentioned above, FFEL loans are no longer available and don’t qualify for federal loan forgiveness programs.
But if you consolidate your FFEL loans into a Direct Consolidation Loan, that loan may be eligible for the federal repayment programs described above.
However, consolidation has some drawbacks . Because the interest rate for a consolidated loan is the weighted average of all the loans you choose to consolidate—rounded up to the nearest one-eighth of a percent—there is a chance your interest rate may actually go up a bit.
And if your payments are lower under any repayment program, it is likely because your loan term has been extended, which means you may pay more interest over the life of the loan. Finally, private loans aren’t eligible for federal consolidation.
As an alternative, whether you hold FFEL loans, Direct Loans, or a combination of private and federal student loans, refinancing may be one option to consider. When you refinance your student loans, you take out a single new loan from a private lender and use it to pay off your existing loans.
Refinancing can allow some borrowers, especially those with a strong credit and employment history (among other factors that vary by lender), to get more favorable loan terms, such as a lower interest rate or a lower monthly payment.
Even though the FFEL program doesn’t exist anymore, borrowers with these loans still very much have to pay them off. If you decide refinancing is an option you want to pursue, you can apply to refinance these loans.
Quick note if you do: refinancing any federal loans with a private lender automatically makes them ineligible for the repayment programs mentioned above, Direct Consolidation Loans, and other federal protections and benefits.
If you qualify for a lower interest rate than you received on your initial student loan, refinancing may allow you to reduce the total amount you pay over the life of the loan.
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