How to describe the federal student loan program? Well, it’s complicated. Here are some key terms and players you need to know if you plan to use federal financial aid to pay for college.
Key Student Loan Terms and Resources
William D. Ford Federal Direct Loan Program. As of July 1, 2010, all federal student loans are originated through this program. These loans are made by the federal government to qualifying undergraduate and graduate students and parents of undergraduate students. Interest rates on direct loans are set by Congress.
When you borrow federal student loans, the U.S. Department of Education sends the money directly to your school, which credits it to your account and then issues to you any excess. More than 90% of student loans made each year are federal loans.
Before July 1, 2010, students could borrow federal student loans through the now-defunct Federal Family Education Loan Program, or FFELP. Many federal student loan benefits, including some income-driven repayment plans, are restricted to direct loan borrowers only. However, FFELP borrowers may consolidate their loans into direct loans to become eligible for these options.
Subsidized loan or unsubsidized loan. There are two types of federal student loans available to undergraduates: subsidized loans and unsubsidized loans. Students with high financial need are eligible for federal subsidized student loans, which come with more benefits than unsubsidized loans.
Note that all parent and graduate student loans are unsubsidized.
One major perk of subsidized loans is that the federal government covers interest payments while you’re enrolled as a student at least half time. This means that your loan doesn’t accumulate interest and your loan balance doesn’t grow while you’re in school.
The government also provides interest subsidies for subsidized loans in other instances, such as while borrowers are enrolled in certain repayment plans.
Student loan servicer. Student loan servicers are companies that contract with the federal government to manage the federal student loan repayment system. Servicers communicate directly with borrowers, manage borrower accounts and collect payments. If you have questions about your bill or repayment options, contact your servicer.
Note that some servicing contracts are currently undergoing significant upheaval. Some services have announced that they will not be renewing their contracts. To protect yourself during transitions, be sure to keep your account information up to date and keep track of your payment records.
Income-driven repayment. A number of repayment plans are available to federal student loan borrowers. These plans generally fall into two categories: monthly payments based on how much you owe or how much you earn.
The four income-driven repayment plans cap your monthly payment amounts at a percentage of your income, and any remaining debt is forgiven after 20 or 25 years, depending on when the particular repayment plan ends. These plans can help keep monthly payments manageable and help avoid default. However, depending on the plan and how your income changes over time, you may end up paying more in total than you would under other repayment plans, such as the standard 10-year plan.
Private student loan. For private student loans, a nonfederal financial institution such as a private bank, credit union or state agency acts as your lender. They will disburse your loan and set the terms and conditions for it. Your school will not directly facilitate this process, but will certify that the loan amount won’t be higher than your cost of attendance. Your school may also act as a lender if it offers any type of institutional loan program.
Pell Grants: Pell Grants are relevant because they are “free money” that doesn’t need to be repaid and can help reduce reliance on student loans. The grants are a form of need-based financial aid from the federal government available only to undergraduate students who demonstrate a certain level of financial need. They can be used to cover tuition, fees and other qualifying college costs such as books, housing and transportation.
FAFSA: The Free Application for Federal Student Aid, commonly known as the FAFSA, determines eligibility for all types of federal student aid, including Pell Grants and student loans. It’s free to file and must be submitted annually. Once you’ve submitted the FAFSA, your college will send you information on what financial aid is available to you, which could include grants, scholarships and loans.
National Student Loan Data System. The NSLDS website is the Department of Education’s central database for student aid information. You can find information there about all of your federal student loans, such as your loan balances and who holds them. If your loan was a part of FFELP, your guarantor will be listed. If you have a Department of Education servicer listed, your loan is part of the direct loan program.
Significant Federal Agencies
Office of Federal Student Aid. The Office of Federal Student Aid, or FSA, is a part of the Department of Education. FSA oversees the federal student financial aid programs, including the student loan program, and maintains an informative website launched in December 2019, StudentAid.gov.
Consumer Financial Protection Bureau. The bureau serves as a financial services industry watchdog. If you need help resolving an issue with your student loan servicer or lender and haven’t been able to resolve it directly, you can file a complaint through the CFPB website.
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