Federal Direct Student Loan Program


The William D. Ford Federal Direct Loan Program provides "low-interest loans for students and parents to help pay for the cost of a student's education after high school. The lender is the U.S. Department of Education... rather than a bank or other financial institution." It is the largest single source of federal financial aid for students and their parents pursuing post-secondary education and for many it is the first financial obligation they incur, leaving them with debt to be paid over a period of time that can be a decade or more as the average student takes 19.4 years. The program is named after William D. Ford, a former member of the U.S. House of Representatives from Michigan.
Following the passage of the Health Care and Education Reconciliation Act of 2010, the Federal Direct Loan Program is the sole government-backed loan program in the United States. The program replaced the earlier Federal Family Education Loan program which issued "guaranteed loans" — loans originated and funded by private lenders but guaranteed by the government. The FFEL program was eliminated because of a perception that it benefited private student loan companies at the expense of taxpayers, but did not help reduce costs for students.
The Federal Direct Loan Program has accumulated a very large outstanding loan portfolio of about $1.5 trillion and this number will continue to rise along with the percentage of defaults. A common concern associated with the program is the effect on the economy and repercussions for students that must repay these loans.

History

authorized a pilot version of the Direct Loan program, by signing into law the 1992 Reauthorization of the Higher Education Act of 1965. The Higher Education Act was passed to give greater college access to women and minorities.
President Bill Clinton set a phase-in of direct lending, by signing into law the Omnibus Budget Reconciliation Act of 1993, although in 1994 the 104th Congress passed legislation to prevent the switch to 100% direct lending.
Funding for new direct loans in the Federal Direct Student Loan Program increased from $12.6 billion in 2005 to $17.8 billion in 2008.
President Barack Obama organized all new loans under the Direct Loan program by July 2010. The switch to 100% Direct Lending effective July 1, 2010 was enacted by the Health Care and Education Reconciliation Act of 2010.
In 1940, only about 500,000 Americans attended college, but by 1970 that number was near 7.5 million and now in 2018 that number is estimated to be around 14 million. Since 1970, family incomes for 80% of Americans have failed to make inflation-adjusted gains. With college costs skyrocketing, the lack of wage increases forced most students to rely on student aid and student loans.
In comparison, other countries have also experimented with government-sponsored loan programs. New Zealand, for instance, now offers 0% interest loans to students who live in New Zealand for 183 or more consecutive days, who can repay their loans based on their income after they graduate. This program was a Labour Party promise in the 2005 general election.

Types of loans

There are four types of direct loans:
  • Direct PLUS Loan: The direct PLUS loan is a federal loan that graduate or professional students and parents of undergraduate students can use to pay for their education. These loans can be used to help pay for education expenses not covered by financial aid. The Direct PLUS loan is not based on financial need, but credit is necessary. Eligibility is determined by the school and once the student has signed, he or she has entered into a legally binding agreement to repay all the loans. In a parent PLUS loan, the parent can authorize the school to use the loan for other educationally related charges after tuition and room and board.
  • Direct Subsidized: A direct subsidized federal loan is for eligible students to cover costs at a four-year institution, community college, or vocational school. Only students with demonstrated financial need are eligible and the amount is determined by the school. The US Department of Education pays the interest on the loan while the student is in school and he or she gets a grace period of six months after graduating.
  • Direct Unsubsidized: Unlike Subsidized loans, these federal loans do not require students to demonstrate financial need and they are responsible for paying interest on the loan during all periods. If the student chooses not to pay the interest while in school, the interest will accumulate and be added to the principal.
  • Direct Consolidation: These loans enable the student to consolidate multiple federal loans into one loan at no added cost. If a student has multiple loans, he or she can consolidate multiple monthly payments into one monthly payment at the average rate of the loans being consolidated. One disadvantage is that students cannot lower their interest rates. The interest rate is equal to a weighted average of the interest rates on their current federal student loans, rounded up to the nearest 1/8%.

    Current program size

Currently, there are $1.2 trillion in principal and interest on direct loans remained outstanding. At the end of 2019, there were $657 billion in outstanding Direct Loan program loans for 32.1 million recipients. The Federal Student Aid office, which is responsible for managing the outstanding loan portfolio, reported that at the end of 2009 there were $1.5 trillion of loans outstanding which is spread out over 42.9 million unduplicated recipients. In 10 years, the loan program experienced 230% growth in the loan portfolio and 130% growth in the loan recipients. Student loan debt in 2019 is the highest it has ever been. According to the latest loan debt statistics, student loan debt has become the second highest consumer debt category behind mortgage debt. The government combats this large outstanding balance with student loan forgiveness which come in several forms, the two most popular being Public Service Loan Forgiveness and Teacher Loan Forgiveness. Looking at Public Service Loan Forgiveness, there are 890,516 borrowers and 41,221 submitted applications, only 423 of these applications were approved. This translated into about $12.3 million of forgiven loans, leaving the rest of the hundreds of millions left to be paid. Unsurprisingly, the states with the largest populations have the largest proportions of debt. California, Florida, Texas, and New York represent more than 20% of all student debt.
Loan portfolio balances managed by the FSA for the Federal Family Education Loan Program are slowly and steadily shrinking as new loans offered to students by the U.S. Department of Education now originate under the FDSLP. Most of the growth in FDSLP loan portfolio balances can be attributed to the number of new loans, as it is now the sole government program for student loans. Another contributor to the rapid escalation in loan balances is due to the cost of higher education increasing rapidly, faster than inflation. Students are spending and borrowing more to finance their higher-priced higher education.

Default

Default and delinquency are increasingly common and are a large risk the government bears when giving out low-interest rate loans. Delinquency, or late or missing payments, will result in those payments being reported to the credit bureaus and credit scores being adjusted accordingly. When a student loan borrower moves to default, the next step in the process, the consequences are much more severe. A borrower is considered to have defaulted when he or she fails to make required payments for 270 days. When a loan is in default, the principal and interest are due in full as well as collection costs. The current default rate for the 1.56 trillion total outstanding dollars of debt among 44.7 million borrowers is 11.4%. According to estimates made in 2018 from the Department of Education reports, 40% of borrowers are expected to default on their loans by 2023. Over the average length of repayment which is 19 years, 250,000 students default on their loans each quarter while 1.5 trillion outstanding dollars are still supposed to be paid. Defaulting can disqualify a student for any additional Title IV federal student aid in the future. In many instances, the payment of federal student loans will cover any interest accruing between payments. However, if interest accrues between payments of the loan then the lender can capitalize the accrued interest by increasing the principal balance of the loan. The growing principal balance results in higher interest payments and a greater overall cost of the loan.
Pew Charitable Trusts research highlights the increasing number of student loan borrowers who encounter repayment problems or interruptions. As of October 2018, the number of student loan borrowers in default in the United States was more than 8 million, which equates to about 1 in 5 federal student loan borrowers. The numbers may even be understated because of the large number of students still in school or within the grace period. As previously mentioned, default consequences are severe and can include damaged credit, ineligibility for future student loans, garnishment of wages, high collection fees, loss of federal income tax refunds or Social Security and prohibition from other federal assistance programs. Additionally, the increasing number of defaults has an impact on the taxpayer. The federal government spent more than $600 million in 2016 and projects costs to exceed more than $1 billion in the near future.
For comparison, a study published in 1997 that draws back from the 1980s established that one-fifth of undergraduates borrow in the Stafford Loan previously known as the Guaranteed Student Loan Program. Freshmen could only borrow $2625, $3500 for sophomores, and $5500 for each year thereafter without collateral or credit. Now Freshmen can borrow $5500, Sophomores $6500, and juniors $7500. The study predicted that students failing to repay those loans would be a huge cost to the government,