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The William D. Ford Federal Direct Loan Program (also called FDLP, FDSLP, and 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 pursuing post-secondary education and their parents, for many it is the first financial obligation they incur, debt can be paid over a period that can be a decade or more.

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. Guaranteed loans—loans originated and funded by private lenders but guaranteed by the government—were eliminated because of a perception that they benefited private student loan companies at the expense of taxpayers, but did not help reduce costs for students.

Contents

• 1Political history
• 2Types of Loans
• 2Current program size
• 3Possible problems in the future
• 4References
• 5External links

Types of Loans

There are four types of direct loans:

• Direct PLUS Loan: A federal loan that graduate or professional students and parents of undergraduate students can use to pay for college. 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. The school determines your eligibility for Direct plus loans when you complete the Master Promissory Note.Once, you have signed the Note you have entered into a legally binding agreement to repay all the loans you receive. 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. The application takes about 20 minutes to complete and needs to be completed in a single session.
• Direct Subsidized: A federal loan for eligible students to cover the cost 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 Dept. of Education pays the interest on the loan while you're in school and you get a grace period of six months after graduating.
• Direct Unsubsidized: Unlike Subsidized loans, these federal loans do not require students to demonstrate financial aid and you are responsible for paying interest on the loan during all periods. If you choose to not pay the interest while you are in school, the interest will accumulate and be added to the principal.
• Direct Consolidation: These loans enable you to consolidate multiple federal loans into one loan at no added cost. If a student has multiple loans, they can consolidate their monthly payments into one monthly payment at the average rate of the loans being consolidated.

Political history[edit] - Program Characteristics

President George H. W. Bush authorized a pilot version of the Direct Loan program, by signing into law the 1992 Reauthorization of the Higher Education Act of 1965.

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 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 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 (retroactive for all former students who had government loans), who can repay their loans based on their income after they graduate. This program was a Labour Party promise in the 2005 general election.^{[citation needed]}

Current program size[edit]

Currently, there are 1.2 trillion dollars in principal and interest on direct loans remained outstanding (borrowed by 34.5 million individuals). At the end of 2019, there were 657 billion in outstanding Direct Loan program loans for 32.1 million recipients.The Federal Student Aid (FSA), which is responsible for managing the outstanding loan portfolio, reported that at the end of 2009 there were 1,510.3 billion dollars of loans outstanding which is spread out of 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. Student loan forgiveness come in several forms, the two most popular being Public Service Loan Forgiveness and Teacher Student Loan Forgiveness. For example, there are 890,516 Public Service Loan Forgiveness 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. California, Florida, Texas, and New York represent more than 20% of all student debt ($340 million).

The FSA managed $473 billion under the Federal Direct Student Loan Program at the end of 2012. New loans originated under the program during 2012 totaled $106.7 billion. 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 originate under the FDSL program. Most of the growth in FDSL loan portfolio balances can be attributed to new loan originations, while being 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

Total number of dollars (in billions) entering default, 2009-2018

This graph portrays the changes in the interest rate for direct subsidized loans, 2004-2019

Default and interest rates: Default is extremely common and a large risk the government takes on when giving out low-interest rate loans. 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. 250,000 students default on their loans each quarter while currently there is 1.5 trillion dollars currently lent out. On average it takes around 19 years to pay off these loans. 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 consequences are that the principal and interest are due in full a well as collection costs. Defaulting makes a student ineligible for any addition 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 interuptions. 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 be understated even because of the large number of students still in school or within the grace period. The consequences of default are severe for the borrower and can result in damaged credit, ineligibility for future student loans, garnishment of wages, high collection fees, loss of federal income tax refunds or Social Security and the prohibition from other federal assistance programs. Additonally, 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 establishes 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. Students failing to repay would be a huge cost to the government, which we now know is true. The estimate was that in the 1990s the defaulted student loans would cost the government at least two to three billion dollars each year. From the graphic above, it is apparent that the the number of students entering default has surmounted that estimate.

Possible problems in the future[edit]

Some believe that the growth of student loan debt is reaching problematic levels. Economists point to a drag on the economy as a whole because of high levels of student debt. One way that has been suggested to help students with loan repayment is to lower interest on balances. U.S. Senator Richard Blumenthal urged, "We must reduce the student loan interest rate back to 3.4 percent immediately, and then even lower, and develop ways for past students to reduce and erase the $1 trillion in existing debt. The failure of Congress to act now threatens our all too slow and fragile economic recovery and job creation." Another way to deal with debt to income levels is to require higher learning accountability. "Only recently have government regulators demanded accountability for the educational benefits universities produce and the efficiency with which they produce them: What does college cost? How many students are admitted? How many graduate? How long does it take them to graduate? How many get good jobs? At the same time, accrediting bodies have changed their measurement emphasis from inputs and activities to outcomes...Students want not just high-paying jobs, but an acceptable ratio of starting salary to student debt. Governments likewise care not just about the number of graduates but the total cost of producing each graduate.” These questions warrant consideration in the future conversations about the Federal Student Loan Program.

The Stafford Student Loan Program is a subsidized loan that has some problems. There have been calls to reform it but the structure has not changed much since its creation in 1965. The problems are that it is too costly, a wasteful subsidy for middle-income students, acts as disincentive for students to save, and providing an incentive for colleges to raise tuition.

Another problem is that federal financial aids provides less support for students going to community college. They are low cost institutions to begin with but are disadvantaged by both state and federal aid. Data was collected by the National Postsecondary Student Aid Study (NPSAS) and the results of the study revealed that the percentage of lower-income students receiving federal aid awards significantly favored private proprietary and non-pro􏰜fit 2-year students and institutions. The average federal grant allocation to students attending public community colleges was 49% lower than federal awards granted to private baccalaureate institution students. Also, only one in three public community college students from the lowest income group received federal grant aid while three out of every four students at private baccalaureate institutions received this aid.