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The William D. Ford Direct Loan
Program
The Direct loan program began about 15 years ago and, in true
American fashion, was designed to cut out the middle man.
Instead of having banks, credit unions and other private
businesses lend money to students and parents, the Federal
government loans the money directly.
Direct programs overlap the alternative, called FFELP (Federal
Family Education Loan Program). The latter is the acronym for
programs that work through private lenders. Since they
duplicate in some ways the FFEL programs, it's important for
lenders to target which they want. Both offer Stafford and PLUS
loans.
Direct loans have the same criteria for eligibility. They
follow the same need-based guidelines, or have the same credit
check requirements for non-need-based programs. Providing the
same programs according to the same standards raises a natural
question: how to decide between them?
In part, the decision involves choosing which of two servicers
to deal with. Both provide customer service personnel to answer
questions. In some cases, the private lender will be more
flexible and helpful and the government more bureaucratic or
indifferent. In others, the situation is reversed.
Reading some of the forums may be the best way to get more
information about which would suit an individual best. One
large and popular such site is:
http://talk.collegeconfidential.com/forumdisplay.php?f=7
With the growth of social networks it has become easier to get
a diverse set of opinions. Many of those views are based less
on objective criteria than personal taste. Reading the posts
will quickly allow a person to decide which side they
favor.
More concrete differences between the two broad types do exist,
though. Since FFELP loans are funded and serviced by private
financial institutions who you sign a promissory note to may
not be who you repay. It's common practice for lenders to
'sell' loans to other companies. Mortgage companies do that all
the time.
You may have gone to the trouble to find a lender you like. You
might choose beyond the rate and repayment terms preferring
their customer service, for example. But if the loan is sold to
another company, you may be repaying a company you rejected. In
the case of Direct loans, since the Federal government is the
lender, the loans are not sold to another party.
The most important difference to most people, however, will be
the possibility that rates, fees and repayment terms may differ
between the two. Officially the interest rates of Stafford and
PLUS loans are fixed. But private lenders have some flexibility
in other areas.
They may or may not charge origination and insurance fees
(officially assessed at 3% and 1%, according to Federal rules,
which themselves are changing the next few years). Though the
fees are still there, the lender may agree to absorb them in
order to gain your business. They may alter the dates on which
interest charges are calculated, or extend grace periods or
lengthen the repayment period.
The only way to find out what is available is to shop around as
you would for any other kind of loan. Calculate the total cost
of the loan the way you would any other. To obtain information
from the official government site see:
http://www.ed.gov/offices/OSFAP/DirectLoan/index.html
To apply online by electronically completing an MPN, or Master
Promissory Note, application see: https://dlenote.ed.gov/empn/index.jsp
Like the other programs a FAFSA (Free Application for Student
Aid) is still required. Forms available at: http://www.fafsa.ed.gov/
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