The Administration of the Federal Family Education Loan and William D. Ford Direct Loan Programs: Background and Provisions

Publication Date: September 2006

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 source. In FY2005, these programs provided $56.2 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. FFEL program loans are originated by private lenders. That is, private lenders work directly with students and families to initiate the loan. Private lenders also are responsible for billing borrowers and collecting loan payments. State and nonprofit guaranty agencies receive federal funds to play the lead role in administering many aspects of the FFEL program. In particular, the guaranty agencies provide many of the administrative services related to the loan guarantee, including providing technical assistance and training to schools on loan certification and to lenders on loan procedures, providing credit and loan rehabilitation counseling to borrowers, reimbursing lenders when loans are placed in default, and initiating collections work.

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), and owns the loans. Under the DL program, schools may serve as loan originators, or the loans may be originated by contractors working for the U.S. Department of Education (ED). ED hires contractors to service the loans: i.e., to monitor student enrollment and loan repayment status, process loan payments, and initiate collections work for delinquent and defaulted loans.

The DL program was initially introduced to gradually expand and replace the FFEL program. However, the 1998 amendments of the HEA removed the provisions of the law that referred to a "phase-in" of the DL program. Currently, both programs are authorized. They draw on different sources of capital and utilize 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 for graduate students; and Consolidation loans that offer borrowers refinancing options. This report will be updated as program changes occur.