Federal Student Loan Programs - Overview
The federal government provides various types of student loans to help promote access to higher education. The common goal among the different loans is that they allow students to obtain financing for higher education at better terms than those available in the private market. In this regard, the federal government subsidizes the cost of loan for the borrower. Students usually have little or no credit or employment history and no collateral with which to secure a loan to finance a higher education. In response, the federal student loan programs entitle virtually all students to loans with below-market interest rates and flexible repayment options. Furthermore, loans are available to borrowers without respect to income, choice of institution, field of study, or academic performance (except in limited cases). Loans are available for two- and four-year undergraduate study, and graduate study.
Program Structure: Guaranteed vs. Direct Lending
All of the federal student loan types listed below - except Perkins Loans - are provided through one of two different administrative structures. Loans are provided: (1) by banks, guaranteed and subsidized by the federal government, under the Federal Family Education Loan (FFEL) program, and (2) by the federal government itself lending directly to students through the direct loan program. Colleges decide which program will administer the federal loans that their students borrow. More information on the two loan program structures is available here.
Types of Federal Student Loans
Stafford Loan
Stafford loans are available to all undergraduate and graduate students. Interest rates on loans taken out after July 2007 are fixed at 6.8 percent. Loans originated earlier carry variable interest rates. Students can borrow up to the cost of attendance, but no more than $5,500 in their first year, $6,500 in the second year, and $7,500 each year thereafter. (Borrowers with parents who are ineligible for a PLUS loan may borrow more. The limit is raised to $6,000 for first and second year students, and to $7,000 each year thereafter.) Graduate students may borrow no more than $20,500 each year. Borrowers do not need to make payments (principal or interest) on the loans while in school. Loans generally must be paid back over 10 years once a borrower leaves school.
Stafford Loan - Subsidized
Subsidized Stafford loans are the same as unsubsidized Stafford Loans, except (a) interest rates are lower for undergraduate borrowers, and (b) interest does not accrue for both undergraduates and graduate students while the borrower is in school. A dependent undergraduate student qualifies if his or her parents meet financial eligibility requirements. Independent undergraduate and graduate students qualify if they themselves meet financial eligibility requirements. Beginning in academic year 2008-2009, interest rates on Subsidized Stafford loans will be reduced each year until rates reach 3.4 percent in 2011-2012. The lower interest rates will apply only to new loans originated each year and not to previously issued loans. The table below illustrates the scheduled interest rate reductions. Subsidized Stafford loans originated in academic year 2012-2013 and thereafter will carry an interest rate of 6.8 percent. This policy was adopted in the College Cost Reduction and Access Act of 2007, a budget reconciliation bill.
| Subsidized Stafford Loan Interest Rates | ||
| Academic Year Disbursed | Interest Rate | |
| 2007-08 | 6.8% | |
| 2008-09 | 6.0% | |
| 2009-10 | 5.6% | |
| 2010-11 | 4.5% | |
| 2011-12 | 3.4% | |
| 2012-13 and thereafter | 6.8% | |
| Loans originated in each year carry the interest rate for entire repayment period. | ||
| Federal Student Loan Statistics 2008 | ||||
| Program | New Loans (millions) | New Loan Volume ($ billions) | Average Loan Size ($) | |
| Stafford Subsidized | 7.9 | 30.4 | 3,945 | |
| Stafford Unsubsidized | 7.5 | 32.7 | 4,544 | |
| PLUS Loans | 1.1 | 11.4 | 11,114 | |
| Consolidation Loans | 5.0 | 14.8 | 30,206 | |
| Perkins Loans | 0.7 | 1.1 | 2,231 | |
| Figures include both Direct Loans and Federal Family Education Loans. | ||||
| Source: President's 2010 Budget Request Appendix; New America Foundation | ||||