Jeffrey Wade
Federally insured student loans are loans for students looking to finance their college education. They are distinct from personal, private, or alternative loans in that they are backed by government funds. Up until 2010, guaranteed loans were available through private lending institutions under the Federal Family Education Loan Program (FFELP). These loans were funded by the Federal government and administered by approved private lending organizations. In 2010, the FFELP was discontinued, and all new loans were administered under the Direct Student Loan Program.
| Characteristics | Values |
|---|---|
| Availability | Until June 30, 2010 |
| Lenders | Private lenders like Sallie Mae and commercial banks |
| Loan Types | Federal Family Education Loans (FFELs), including Stafford, PLUS, and Consolidation loans |
| Guarantee Mechanism | If a borrower defaults, the federal government pays the lender and takes over the loan |
| Repayment Programs | More generous repayment options for direct loans compared to FFELs |
| Interest Rates | Federal loans often have more attractive interest rates than private loans |
| Collateral | Federal loans do not require collateral for approval |
| Repayment Assistance | Federal agencies may offer student loan repayment benefits as a recruitment or retention incentive |
| Loan Forgiveness | Borrowers may have their federal student loan debt removed if they can prove their school misled them |
| Risk | Private lenders assumed no risk of default under the Federal Family Education Loan Program |
| Current Status | Discontinued as of 2010, replaced by the Direct Student Loan Program |
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What You'll Learn
Federal Family Education Loans (FFELs)
Federally guaranteed student loans are different from private student loans and direct loans from the federal government. The guaranteed student loan program was ended on June 30, 2010, by Congress. However, many people still have federally guaranteed student loans issued before this date. Under this program, private lenders like Sallie Mae and commercial banks issued student loans that were guaranteed by the federal government. These guaranteed loans are also called Federal Family Education Loans (FFELs).
FFELs were issued by private lenders but were guaranteed by the federal government. This meant that if a borrower defaulted on an FFEL, the federal government would pay the lender and take over the loan. The government would pay approximately 97% of the principal balance to the lender. At this point, the government owned the loan and the right to collect payments.
The Federal Family Education Loan Program included the Federal Stafford Loan, Federal PLUS, Federal Supplemental Loans for Students (Federal SLS), and Federal Consolidation Loan programs. Lenders used their own funds to make loans to enable students or their parents to pay for the students' attendance at eligible institutions. The program offered both subsidized and unsubsidized loans. In the case of subsidized loans, the government paid the interest on the loan while the student was in school, during the 6-month grace period, and during periods of authorized deferment. For unsubsidized loans, the student was responsible for paying the accrued interest during these periods.
The FFEL program ended on July 1, 2010. However, many borrowers still have outstanding FFELs. While some FFEL Program loans are held by ED, most are held by a guaranty agency or a commercial lender. FFELs are eligible for income-driven repayment (IDR) plans, but the options are more limited compared to direct loans. Borrowers can get more IDR options by consolidating their FFEL Program loan into a Direct Consolidation Loan.
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FFELs vs. Direct Loans
Federally insured student loans are of two types: Federal Direct Loans and Federal Family Education Loans (FFELs). FFELs are also called "indirect loans."
FFELs
Federal Family Education Loans were insured by the Department of Education. These loans were privately issued by a bank, credit union, or other lenders that participated in the Federal Family Education Loan Programs. FFELs were guaranteed by the federal government until 30 June 2010. The federal government would pay the bank and take over the loan in case of a default. The federal government would then own the loan and the right to collect payments.
Direct Loans
Direct Loans are issued by the US Department of Education. These loans are made directly from the federal government to students. The federal government contracts with loan servicers to handle day-to-day loan management. Direct Loans are eligible for more forgiveness and loan repayment options than FFELs. Direct Loans are also eligible for federal repayment plans and federal forgiveness programs.
FFELs vs Direct Loans
The availability of repayment programs is the most important difference between the two types of federally insured student loans. The federal government offers several repayment plans for low-income borrowers for Direct Loans. Some of these plans are available to certain FFEL borrowers. Generally, the repayment plan options are more generous for Direct Loans than for FFELs. Direct Consolidation Loans and FFEL Consolidation Loans can have a repayment term of up to 30 years. The Income-Sensitive Repayment (ISR) plan is available only for FFEL loans.
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Loan Forgiveness
A guaranteed federally insured student loan is a type of loan that was issued by private lenders, such as Sallie Mae and commercial banks, but guaranteed by the federal government. This means that if a borrower defaults on a guaranteed loan, the federal government pays the bank and takes over the loan. This type of loan was previously known as a Federal Family Education Loan (FFEL).
FFELs were ended on June 30, 2010, due to concerns about their cost to the government. Since then, federal student loans have only been available under the direct loan program, in which the loan is made directly from the federal government to students.
Student loan forgiveness refers to the release of borrowers from their obligation to repay part or all of their federal student loan debt. Only federal direct loans are eligible for loan forgiveness, which means private loans are not covered. Forgiveness is available for some types of loans, but eligibility is typically limited to borrowers in certain public service, educational, or military professions, as well as income-driven repayment (IDR) plans.
The Public Service Loan Forgiveness (PSLF) program, for example, is designed for people who work in public service jobs for the government or a not-for-profit organization. Additionally, an employer at a federal agency may repay a portion of an employee's loans through the federal student loan repayment program. Employees can also agree to a specified period of service in exchange for student loan repayment benefits.
President Biden's Saving on a Valuable Education (SAVE) plan, announced on June 30, 2023, aimed to offer enhanced financial benefits to student loan borrowers. However, this plan was blocked by federal courts in June 2024, and current enrollees are awaiting a final rule determination.
It is important to note that student loan forgiveness does not apply to private loans and that eligibility requirements often depend on specific circumstances and the type of loan.
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Loan Repayment Plans
Federally guaranteed student loans are different from private student loans that the government does not guarantee and from direct loans issued directly to the student by the federal government. Under the guaranteed student loan program, private lenders like Sallie Mae and commercial banks issued student loans that the federal government guaranteed. If a borrower defaults on a guaranteed loan, the federal government pays the bank and takes over the loan.
There are several loan repayment plans available for federally guaranteed student loans. Federal agencies are authorized to implement a program to repay certain types of student loans as a recruitment or retention incentive for highly qualified personnel. The Student Loan Repayment Program is intended to facilitate the recruitment and retention of highly qualified employees by allowing agencies to repay part or all of their federally insured student loans. Agencies may make payments of up to a maximum of $10,000 for an employee in a calendar year and a total of not more than $60,000 for any one employee.
The federal government also offers several repayment plans for low-income borrowers, such as the Pay As You Earn (PAYE) plan. Some of these plans are available to certain Federal Family Education Loan (FFEL) borrowers. Generally, the repayment plan options are more generous for direct loans than for FFELs.
The U.S. Department of Education also offers Federal Direct Student Loans, where they act as the lender. Direct loans include Federal Direct PLUS loans and Federal Direct Stafford loans. The U.S. government pays the interest on subsidized loans while the student is in school, during the 6-month grace period, and during periods of authorized deferment. For unsubsidized loans, the student is responsible for paying the interest accrued during these periods.
The Department of Education has also announced that it will resume collections of its defaulted federal student loan portfolio. They will be providing borrowers with information and resources to assist them in selecting the best repayment plan, like the new Loan Simulator and AI Assistant (Aiden).
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Loan Discharge
Federally guaranteed student loans are different from private student loans that are not backed by the government, and from direct loans issued directly to the student by the federal government. Under the guaranteed student loan program, private lenders like Sallie Mae and commercial banks issued loans that the federal government guaranteed. If a borrower defaults on a guaranteed loan, the federal government pays the bank and takes over the loan. The federal government then owns the loan and the right to collect payments.
The guaranteed student loan program was ended for new loans as of June 30, 2010. However, many people are still paying off their federally guaranteed student loans issued before this date. The program was ended due to the argument that it was more costly to the government than direct loans.
Federal student loans come from the Department of Education and include:
- Direct Subsidized Loans – made to eligible students who demonstrate a financial need to help cover the costs of school. The federal government pays the interest on these loans while the student is in school.
- Direct Unsubsidized Loans – made to eligible students regardless of their financial need. The student is responsible for paying the interest accrued while they are in school.
- Direct PLUS Loans – made to graduate and professional students as well as parents of dependent undergraduate students to assist with paying for costs not covered by other financial aid.
- Direct Consolidation Loans – allow students to combine all of their eligible federal student loans into one loan with one loan servicer.
To qualify for federal student loans, you must complete the Free Application for Federal Student Aid (FAFSA). It is important to calculate how much you need to borrow and keep track of the total amount borrowed. Federal loans allow you to make payments based on your income and may be forgiven after 10 years if you pursue a career in public service.
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Frequently asked questions
A guaranteed federally insured student loan is a loan backed by the government. If a borrower defaults on a guaranteed loan, the federal government pays the bank and takes over the loan.
Direct loans are issued directly by the federal government, whereas guaranteed student loans are issued by private lenders like Sallie Mae and commercial banks, but guaranteed by the federal government. Direct loans also tend to have more generous repayment plans.
No, the Federal Family Education Loan Program (FFELP) was discontinued in 2010, and all new loans are now administered under the Direct Student Loan Program.
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