Federal Family Education Loan Program

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The Federal Family Education Loan (FFEL) Program was the second largest of the U.S. higher education loan programs (Direct Loans being the first). The FFEL was initiated by the Higher Education Act of 1965 and was funded through a public/private partnership administered at the state and local level. In 2007-08, FFEL served 6.5 million students and parents, lending a total of $54.7 billion in new loans (or 80% of all new federal student loans). Since 1965, 60 million Americans have used FFEL loans to pay for education expenses.

Following the passage of the Health Care and Education Reconciliation Act of 2010 on January 05, 2010 the program was terminated, and no subsequent loans were permitted to be made under the program after June 30, 2010.

Overview of FFEL and DL

In the FFEL Program, private lenders made federally guaranteed student loans to parents and students. Commercial lenders (e.g. Sallie Mae) would use their private capital to finance loans under the FFELP but received subsidies from the federal government.[1] These subsidies were used to maintain interest rates at the federally mandated levels, pay down fees associated with the loans and cover expenses associated with collection and defaults.[2] The government also guaranteed a large portion of the loans, insuring private lenders against default. If a parent or student defaults, the private lender was reimbursed by the government for its losses. In contrast, under the Direct Loan program, the government lends directly to students using federal funds provided to it by the US Treasury.

Stafford and PLUS loans

Both federal student loan programs offer the Federal Stafford Loan and the Federal PLUS Loan for graduate students and for parents of dependent undergraduate students.

The main federal student loan is the Stafford Loan. There are two types of Stafford loans:

Interest rates

Interest rates are set by law, as follows:

President Obama and FFEL

On 24 April 2009, President Barack Obama called for an end to the FFEL program, calling it a wasteful and inefficient system of "taxpayers...paying banks a premium to act as middlemen—a premium that costs the American people billions of dollars each year....a premium we cannot afford."[4]

A Congressional Budget Office review in July 2009 showed that if the government did the direct lending itself, rather than use private sector lenders via FFEL, it would save $80 billion over ten years.[5] That estimate was later downgraded to $61 billion after the Congressional Budget Office revised its estimates for 2010.[6]

Industry response

America's Student Loan Providers, an industry lobbying group representing private lenders, issued a prepared statement on April 6, 2009 stating "a growing consensus" among legislators "that large scale changes in the financial aid delivery system should be carefully considered."[7]

Student Loan Fairness Act

The Student Loan Fairness Act proposed, if enacted would cap interest rates of student loans to 3.4%. This version of the bill, HR1330, was sponsored by Rep. Karen Bass (D-CA37) on May 21, 2013.[8]

A proposal from Senator Elizabeth Warren, a Democrat from Massachusetts, would have used the Federal Reserve’s discount window lending for the student loans while Congress searches for a more permanent solution. As of December 2013, these proposals have been put on hold until the Obama administration can negotiate a compromise with the Senate on financial aid reform.[9]

References

  1. http://www.csmonitor.com/Money/2010/0330/Student-loan-reform-What-will-it-mean-for-students
  2. http://petri.house.gov/federal_stud_loans.pdf
  3. Swagel, Philip. "Support for College Students and Banks: Not So Different" NY Times. July 23, 2013. Print.
  4. http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-on-Higher-Education/
  5. http://www.cbo.gov/ftpdocs/104xx/doc10479/hr3221.pdf
  6. http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendreconprop.pdf
  7. http://studentloanfacts.org/NR/rdonlyres/81D7AFB7-FAC8-4F0F-8675-0F71DA0F478F/10746/HouseSenateBudgetVotes04.pdf
  8. “H.R. 1330--113th Congress: Student Loan Fairness Act.” www.GovTrack.us. 2013. December 3, 2013 <http://www.govtrack.us/congress/bills/113/hr1330
  9. Sofastaii, Mallory. "Time's Up: Student Loan Interest Rates Set to Double". PBS.org. July 1st 2013. Web
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