Federal Student Loans: Terms and Conditions for Borrowers

Publication Date: June 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Education

Type:

Abstract:

The federal government operates two major student loan programs: the Federal Family Education Loan (FFEL) program, authorized by Part B of Title IV of the Higher Education Act (HEA), and the William D. Ford Direct Loan (DL) program, authorized by Part D of Title IV of the HEA. These programs provide loans to undergraduate and graduate students and the parents of undergraduate students to help them meet the costs of postsecondary education.

Together, these federal student loan programs provide more direct aid to support students' postsecondary educational pursuits than any other single source. In FY2003, these programs provided $45.8 billion in new loans to students and their parents.

Under the FFEL program, loan capital is provided by private lenders, and the federal government guarantees lenders against loss through borrower default, death, permanent disability, or, in limited instances, bankruptcy. Under the DL program, the federal government provides the loans to students and their families, using federal capital (i.e., funds from the U.S. Treasury). The two programs rely on different sources of capital and different administrative structures, but essentially disburse the same set of loans: subsidized and unsubsidized Stafford loans for undergraduate and graduate students; PLUS loans for parents of undergraduate students; and Consolidation loans that offer borrowers refinancing options.

Loans made through these programs support students pursuing postsecondary studies on at least a half-time basis at eligible postsecondary institutions. Student borrowers receiving loans through these programs are allowed to postpone loan repayment until they complete their academic programs. Students are also able to defer repaying their loans in order to pursue additional postsecondary studies.

The loans made through the FFEL and DL programs are low-interest variable rate loans with interest caps that limit the cost to borrowers. Interest rates are determined by statutorily set market-indexed interest rate formulas. Some of the programs' loans are "subsidized" (a reference to the need-based interest subsidies the government provides for borrowers) and others are "unsubsidized," but the same aggregate borrowing limits are extended to borrowers regardless of financial need.