If you have a student loan that was provided by or guaranteed by the federal government, your loan likely falls into one of two categories: direct loans or indirect loans. Indirect loans are also called Federal Family Education Loans (FFEL). Things can get confusing, however, because many types of loans (such as Stafford, Perkins, or PLUS loans) can be either a direct loan or an indirect loan.
Read on to find out the difference between a direct loan and an indirect loan/FFEL loan.
Direct vs. Indirect Federal Loans
Most federal student loans are either direct loans or indirect loans. These are separate from private student loans, which have nothing to do with the government, and are provided by private lenders, much like any other kind of loan you might obtain for a house or a car or for retail purchases. (Learn more about private student loans.)
Direct loans are loans provided to you directly by the U.S. Department of Education.
Indirect Loans/FFEL Loans
Indirect loans are loans provided by private institutions, but guaranteed by the federal government. These loans are often called Federal Family Education Loans, or FFEL loans. The government does not directly insure FFEL loans, but rather acts through a guarantor. If you default on your loan, the guarantor will pay the lender for your loan. The government in turn reimburses the guarantor. If you have an indirect/FFEL loan, you will almost always deal directly with the lender, guarantor, servicer or collection agency—not the federal government. (Learn more in What Is a Federally Guaranteed Student Loan?)
In 2010, the government eliminated the guarantors and other middlemen by passing legislation ending the FFEL program. After June 30, 2010, borrowers can only get direct loans.
Direct and Indirect Loan Types
There are many different loan types, most of which can be either a direct loan or an indirect loan. If you took out your loan after June 30, 2010, however, your loan will be a direct loan.
This is the most common type of student loan. Stafford loans can be subsidized or unsubsidized. Subsidized loans are need-based, whereas unsubsidized Stafford loans are not.
Subsidized loans do not accrue interest during times you are deferring payment, for example, while you are still in school. Unsubsidized loans will accrue interest during determent. The difference between what you'll pay for a subsidized and an unsubsidized loan can be significant if the loan is deferred during a four to five year college program.
Plus loans are usually used if a student’s Stafford loan is not large enough to pay for the student’s education.
These are the only kinds of federal loans that require a credit check. You can use a co-signor with good credit to help you qualify. Often, parents will obtain a Parent PLUS loan on behalf of their child. Parents should be very careful because if the student defaults, they will be responsible for repayment and will be the target of collection just as the student is.
While having a PLUS loan can also be a drawback in that it can disqualify a borrower from income based repayment in the event of a default, PLUS loans are still the preferred option over private loans, which are what many students end up with when their Stafford loans don’t cover the cost of education.
Perkins Loans are need based loans, and generally are smaller in amount than the other types. Perkins loans are given out by your school, with money provided to it by the Department of Education. Certain default rules and repayment options are slightly different with Perkins loans.
If you default, it is the school that will collect, but often, schools will assign their claims to the government to collect defaulted loans.
Consolidation loan is a separate loan that pays off a borrower’s existing loans into one larger loan after repayment on the loans has begun. There is no credit check required for a consolidation loan and the interest rates are established—there is no ability to shop around for a particular interest rate. Application for a consolidation loan is straightforward -- your lender or servicer can send you an application. (Learn more about student consolidation loans.)
Looking Up Your Loan
You can find information on your federal student loans at the National Student Loan Data System, http://www.nslds.ed.gov/nslds_SA/. Private Loans are not on this database.