MONEYSCHOOL'S Simplified Guide
to FAFSA and Federal Student Aid

Section 5: Student Loan Overview

If you are approved for a federally-guaranteed student loan, the loan may be funded in one of two ways:

  1. By the Department of Education under the Federal Direct Loan program
  2. By a private lender under the Federal Family Education Loan (FFEL) program 

Educational institutions can choose to participate in either the Direct Loan program or the FFEL program, so whether you get a Direct loan or an FFEL loan depends on where you attend school.  The interest rates and repayment terms for undergraduates are the same for direct loans as for FFEL loans. 

At present, the majority of federal student loans are made through the FFEL program, but that could be changing.  Reductions in federal subsidies and the credit crunch of 2008 caused some lenders to drop out of the program. 

Also, in 2009, President Obama has proposed that the FFEL program be eliminated, and that all federally-sponsored student loans be issued through the direct loan program.  The money saved by that change would be used to increase the availability of Pell grants.  Congress would have to act on that proposal before it takes effect and the lenders are lobbying hard to retain it.  Stay tuned.

Below, is a summary of the various types of federally-sponsored student loan programs and key differences among them.  Once again, the type of financial aid you are offered will depend on your financial need, i.e., the difference between your cost of attendance and your expected family contribution. 

Your cost of attendance is the cost for one academic year at a particular school, and includes the cost of tuition, books and supplies, room and board, and other reasonable expenses.  Obviously, the cost of attendance will vary depending on which school you attend.  Most colleges and universities post their estimated cost of attendance on their web sites.

The amount available to a student annually from each program is limited, so if your EFC is low (meaning your financial need is great), you might be offered a combination of grants, subsidized loans, and unsubsidized loans to cover your entire cost of attendance.   If your EFC is relatively high, you might be offered only an unsubsidized loan.  Subsidized and unsubsidized loans are discussed in the next section.

Important Tip: It is critical for borrowers to distinguish between federal student loan programs  and private student loans.  Private student loans are available from a number of lenders, including some that also participate in the FFEL program.  Private student loans are negotiated directly between the borrower and the lender much like any other consumer loan, and are not guaranteed or regulated by the Department of Education.  Private loans may require credit approval and/or a co-signer.  For more information, see the section on private student loans, near the end of this guide.