FDSLP – Federal Direct Student Loan Program

William D. Ford Federal Direct Loan Program

The William D. Ford Federal Direct Loan Program or FDSLP is one of the largest educational initiatives ever undertaken by the United States government. The program is designed to reduce government and private financial institute redundancies, dramatically reduce taxpayer expenses, and provide educational loans for students and parents at reduced rates of interest. Loans granted under the Federal Direct Loan Program are issued and managed by the United States Department of Education and are forecasted to save taxpayers and the federal government billions of dollars over the next decade and beyond.

The Federal Direct Loan Program, also referred to as the Federal Direct Student Loan Program, or FDSLP, is an effort that has been more than twenty years in the making. Originally circulated through congress in the late 1980’s, the measure was defeated during the first Bush administration, but was passed shortly after Clinton took office and officially signed the bill into law in 1993. However, the FDSLP struggled in its early years, resulting in a dramatic decrease in funding that persisted into the middle of the last decade. This is due in large part to the enormous subsidies paid to private lenders for educational loans under the Federal Family Education Loan program, or FFEL.

The FFEL was passed in 1965 as a measure to ensure that most Americans had access to educational loans. While this was enacted in order to provide opportunity to US citizens and increase the overall skill level of the workforce, it was also a government platform at the time to increase and retain the number of Americans with college degrees and therefore be competitive with other highly educated regions, such as Japan, Russia, and Western Europe. However, the program had serious design flaws that cost taxpayers billions of dollars over the last half century. Under the FFEL, private lenders issued loans that were subsidized and guaranteed by the United States government. These subsidies cost millions per day in US tax dollars.

Because of the difficulty in regulating the FFEL program, abuse of the system was widespread. Lenders, colleges, and universities often entered into unethical agreements where lenders literally paid colleges in order to be their primary source of educational loans. These agreements were typically paid for with subsidy funds. Furthermore, taxpayer dollars were not reinvested in the American educational system. As a result, less funding was available for students who truly needed it, resulting in hundreds of thousands of Americans being unable to attend college each year. This was counter-productive to the founding premises of the FFEL. Additionally, educational loans under this program were guaranteed by the US government, which meant that private lenders sought federal offsets in the event of loan defaults.

Further complications came about as a result of the declining market conditions since the collapse of the housing market in 2007 and 2008. Because private banks were suffering from the recession, fewer loans were issued, and those that were granted were often done so under less favorable terms and conditions than previously. This left many Americans without access to educational funds, further depleting the number of skilled Americans available in the workforce. While the Federal Direct Loan Program was already in place during this time, many students were still being issued loans under the FFEL, as both programs were available. As a result, funding for the FDSLP decreased to a critical point.

In addition to the abuses and mismanagement of the FFEL, many students and parents also experienced confusion and difficulties brought about as a result of the complexities of the FFEL lending process. Often, borrowers would need to procure multiple loans that were serviced by a variety of lenders. Because each lender had their own lending process and eligibility requirements, students often found themselves experiencing extreme difficulties in managing their loans. Lenders would sometimes sell loans to other financial institutions, further complicating the process. Legislation passed prior to the current recession also eliminated a great number of benefits that were available with the loans; this meant that new loans had less features and benefits for prospective or returning students, and borrowers with older loans were sometimes stripped of benefits that they had enjoyed for years. Legislation to pass the Federal Direct Loan Program sought to restore these benefits and simplify the lending process, but the FDSLP experienced a great deal of resistance from typically republican members of congress.

After a great deal of investigation and research on behalf of the United States Department of Education and other entities of the US government, a measure was introduced to congress to remedy these abuses and waste caused by mismanagement of the FFEL. Aptly named, the Student Aid and Fiscal Responsibility Act was written and championed through congress by Representative George Miller of California. Miller sat as Chairman of the House Education and Labor Committee, and his measure sought to regulate the issuance of federal educational loans, lower interest rates, simplify the lending process, and make loans available to students and parents regardless of market conditions. Miller’s bill passed congress and the senate, and is now enacted as the Federal Direct Loan Program.

Under the Federal Direct Loan Program, subsidies are completely eliminated, and educational loans have been placed almost entirely in the hands of the federal government. As a result, savings have been projected at nearly $80 billion over the next ten years. The FDSLP will direct these funds to bettering the US educational and workforce system by investing in early childhood development programs, work force training, community colleges, educational-related construction, and investments in traditionally African-American colleges and universities. One major source of funding for college students, the Pell Grant, will also be significantly bolstered by the Federal Direct Loan Program.

As of July, 2010, all new educational loans are included under the Federal Direct Loan Program. This is the most significant investment ever made in student aid, and it is the only government-backed loan program in the United States. Students seeking funding from the program only need to fill out the Free Application for Federal Student Aid (FAFSA) as they normally would. In fact, the Federal Direct Student Loan Program has streamlined the FAFSA application by eliminating redundant or unnecessary questions and improving the federal databases used to administer the application and disbursement process. Eligibility and loan amounts are managed by the educational institute to which the student is applying, enabling communication during the process to be much more effective than previously. There are a number of loans available through the Federal Direct Student Loan Program:

Subsidized Direct Loans: Subsidized loans are those that do not require borrowers to pay interest until after their studies are completed, in most cases. Interest is also not charged during grace periods, deferment, and in some cases, while the loan is in forbearance. In the past, interest on subsidized loans was paid to lenders by the federal government, but this is not necessary under the FDLP. This type of loan is considered a “need-based” loan, and therefore borrowers must prove that their financial situation warrants the granting of this type of loan. Subsidized loans may require documented proof of the borrower’s assets and income information.

Subsidized loans granted to undergraduate students under the Federal Direct Loan Program feature fixed interest rates of 4.5% for loans disbursed from July, 2010 to June, 2011. Loans disbursed prior to this time typically range between 5.6% and 6.8% interest. Subsidized loans granted to graduate or professional students are fixed at 6.8% interest regardless of when the funds were disbursed.

Unsubsidized Direct Loans: Unsubsidized loans granted under the Federal Direct Student Loan Program begin earning interest at a rate of 6.8% from the time they are disbursed. Borrowers may opt to pay the interest while they are pursuing their education, or they may wait until their studies are completed. However, caution is advised because the loans are capitalized- meaning that the interest is compounded at regular intervals, thereby increasing the total amount owed substantially over the life of the loan.

Direct Plus Loans: These loans are generally available for parents who wish to fund their children’s education, and for graduate and professional students. The application process is the same as the above listed loan types. Direct Plus Loans under the Federal Direct Loan Program feature a fixed interest rate of 7.9%.

Direct Consolidation Loans: The Federal Direct Student Loan Program offers a method of combining previous educational loans into one US Department of Education loan. Rates and terms vary depending upon loan types and conditions to be consolidated.

All loans granted under the Federal Direct Loan Program have annual and aggregate maximum amounts that must be adhered to. First year dependent undergraduate students may receive a total of $3,500 in subsidized loans, and an additional $2,000 in unsubsidized loans. First year independent undergraduate students may also be granted a maximum of $3,500 in subsidized loans, but may receive an additional $6,000 in unsubsidized loans. Whether dependent or independent, these loans are conditional upon the inability of the student’s parents to obtain a Direct Plus Loan. First year graduate and professional degree students may receive a total of $20,500, but only $8,500 of this can be in subsidized loans.

Successive years of education allow for an increase in total maximum yearly amount, but the aggregate amount is set for each type: Dependent undergraduate students may not receive more than $31,000 by the time they graduate, independent undergraduate students may not be granted more than $57,500, and graduate and professional students may not receive more than $138,500. All decisions regarding loan amounts disbursed under the Federal Direct Loan Program are determined by the educational institute being attended.

Regardless of the type of loan, the terms, or the amounts, all borrowers must complete a Master Promissory note, or MPN. This document is a legally binding instrument that certifies that borrowers will repay their loans except under the most extreme circumstances. The MPN will serve for numerous loans over a period of several years, and is valid should the student study at different educational institutes. Loans granted by the Federal Direct Student Loan Program are legal agreements that must be paid, and the Master Promissory Note contains all relative information to enforce this agreement. In the event of default, the MPN will be used in a legal setting to recover funds distributed. For this reason, it is important that students and borrowers understand the terms and conditions of their FDSLP loans.

The Federal Direct Loan Program dictates that students enter repayment when they attend school less than half time, graduate, or otherwise leave school for more than six months. Payments are typically made on a monthly basis, and borrowers generally have up to 25 years to repay these debts. In the event of financial difficulty, FDSLP loans can go into forbearance, which is a temporary reprieve from payments based upon financial need. Distinctly different from forbearance, loans may also sometimes be cancelled or discharged, but only under very specific circumstances, which usually do not include bankruptcy. Federal Direct Loans that were granted fraudulently may be discharged, and loans granted by educational institutes that close may also be discharged in some cases. Teachers and public service employees may also be forgiven of their educational debts if they meet certain criteria. In order to learn more about repayment, forbearance, and cancellation policies and procedures, the National Student Loan Data System, managed by the US Department of Education, is an excellent resource, and may be found here: www.nslds.ed.gov.

The Federal Direct Loan Program appears to have a long future ahead of it. Because of the massive savings realized by removing educational lending from private firms, the future of the American education system will be strengthened greatly by the responsible investment of billions of taxpayer dollars that were once wasted on private subsidies. In fact, other countries around the world are following suit, which is a strong indicator that placing education in the hands of the federal government is a wise decision for the future of U.S. students and their parents.