Direct, Indirect, and FFEL Student Loans: What's the Difference?

If you have a student loan that the federal government provided or guarantees, your loan likely falls into one of two categories: direct loans or indirect loans. Private student loans, however, are different.

Updated by , Attorney · University of Denver Sturm College of Law

Student loans that the federal government provides or guarantees usually fall into two categories: Federal Direct Loans or Federal Family Education Loans (FFELs). FFELs are also called "indirect loans."

Private student loans come from a bank, credit union, or private lender without government involvement. These loans are similar to any other kind of loan you might obtain from a bank or lender, like to buy a house or a car.

For most student loan borrowers, federal student loans are better than private student loans. Interest rates are typically lower, repayment options are more flexible, and cancellation options exist. Students should use federal student loans to the extent available—after first exploring scholarship and grant availability—and consider private loans only when federal aid isn't enough to cover their education costs.

How Federal Student Loans Work

For many students, available scholarships, grants, and work options won't cover all of their college costs. So, you might need to consider taking out student loans. But not all loans are created equal.

What Is a Federal Direct Loan?

The Department of Education makes Federal Direct Loans. The four main types of Direct Loans are Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.

Direct Subsidized Loans

Undergraduate students who show they need financial help can get this kind of loan. The government pays the interest on a Direct Subsidized Loan during the following periods:

  • while you're in school at least half-time
  • during the grace period (in most cases), and
  • during a period of deferment (when loan payments are postponed).

Direct Unsubsidized Loans

With an unsubsidized loan, you—not the government—pay the interest during all periods. Direct Unsubsidized Loans are available to undergraduate and graduate students without having to show financial need.

Direct PLUS Loans

Direct PLUS Loans are available to:

  • graduate or professional students who are enrolled at least half-time at a school with a program leading towards their graduate or professional degree or certificate and
  • to parents of a dependent undergraduate student enrolled at least half-time at an eligible school.

Unlike other federal student loans, a credit check is part of the application process, and applicants can't have an adverse credit history.

Direct Consolidation Loans

With a Direct Consolidation Loan, you can combine (consolidate) your federal education loans into one loan.

What Is a Federal Family Education Loan (FFEL)?

Before July 1, 2010, the federal government also guaranteed loans that private lenders made. These loans, called "Federal Family Education Loans" or "FFELs," are also considered federal student loans. Again, FFELs are sometimes called "indirect loans."

In January 2010, the government passed legislation ending the FFEL program, and no FFELs were made after June 30, 2010. So, if you took out your federal student loan after June 30, 2010, your loan is a Direct Loan.

Federal Perkins Loans

Perkins Loans were previously available to undergraduate, graduate, and professional students with exceptional financial needs. Under federal law, the authority for schools to make new Perkins Loans ended on September 30, 2017, with final disbursements permitted through June 30, 2018. Students can no longer receive Perkins Loans.

Federal Student Loans: Pros and Cons

Federal student loans have many advantages compared to private student loans and just a few disadvantages.

Advantages

Federal student loans are almost always a better choice than private student loans. Here's why:

  • Federal student loans have generous and flexible repayment options that can lower your monthly payment.
  • Federal student loans have various cancellation options.
  • As of 2006, all federal student loans have fixed interest rates.
  • Federal student loans are eligible for deferment and forbearance.
  • While private student loans require either a good credit history or a co-signer with a good credit history, federal student loans generally do not.
  • Federal student loans can be consolidated into a Federal Direct Consolidation Loan. (Private student loans can't be consolidated into this kind of loan.)
  • Federal student loans don't have a prepayment penalty fee. You won't have to pay extra fees if you pay off your loans early.

Disadvantages

If you default on a federal student loan, the federal government has more options to collect from you than a private lender. The federal government can garnish your wages without first getting a court judgment. It can also intercept your tax refund and some Social Security payments.

Also, federal student loans don't have a statute of limitations. But remember that the various repayment plans available with federal student loans make it much less likely that you'll default in the first place.

How to Repay Your Federal Student Loans

You might feel stuck in your current repayment plan if you have federal student loan debt, but you probably have more options than you think. The U.S. Department of Education offers several types of student loan repayment plans. (Private student loans, however, are different; see below).

Which repayment plan you can—and should—pick depends mainly on what type of federal student loans you have and your circumstances. Not all loans qualify for every repayment plan, and not every alternative suits all borrowers.

The basic repayment plans available for federal student loans are a standard repayment plan, a graduated repayment plan, and an extended repayment plan. Also, several income-driven plans are available if your income is low or unstable or you have moderate income with very high student loan debt. Your payment amount under an income-driven repayment plan is generally a percentage of your discretionary income.

Standard Repayment Plan

Under the standard repayment plan, you'll make the same monthly payment for the life of the loan. With this kind of plan, you'll typically pay off your loan in the shortest time—up to ten years. (For Consolidation Loans, though, the repayment period is up to 30 years.)

So, you'll pay the most per month but the least interest over the loan term.

Graduated Repayment Plan

Under a graduated plan, your payments start low and increase during the repayment period, usually every two years. This option might be appropriate if your income is low when you graduate but will likely increase quickly.

Like with a standard repayment plan, the timeline is up to ten years, except for FFEL Consolidation Loans and Direct Consolidation Loans, which can have a repayment term of up to 30 years. Because you carry a larger balance at the beginning of the repayment period, you'll pay more interest than a standard repayment plan.

Extended Repayment Plan

An extended plan allows you to have fixed or graduated payments stretched over a period of up to 25 years. To be eligible for this plan, you must have an outstanding loan balance of more than $30,000.

Income Based Repayment Plan (IBR)

You must have a high debt relative to your income for the IBR plan. The payments generally are:

  • 10% of your discretionary income if you're a new borrower on or after July 1, 2014 (but never more than the ten-year standard repayment plan amount) or
  • 15% of your discretionary income if you're not a new borrower on or after July 1, 2014 (again, never more than the ten-year standard repayment plan amount).

If you haven't paid off your loan after 20 years (new borrowers on or after July 1, 2014) or 25 years (if you're not a new borrower on or after July 1, 2014), the government will forgive the remaining balance.

Saving on a Valuable Education (SAVE) Plan

In 2023, the Biden Administration created the Saving on a Valuable Education (SAVE) plan. This income-driven repayment plan cuts undergraduate borrowers' monthly payments in half (from 10% to 5% of your discretionary income), saving borrowers more than $1,000 per year on payments, allowing them to make $0 monthly payments in some cases, and ensuring loan balances won't increase due to unpaid interest. (If you have undergraduate and graduate loans, you'll pay a weighted average between 5% and 10% of your income, depending on the original principal balances of those loans.)

The plan also raises the amount of income considered as non-discretionary income. So, more money is protected from repayment. The program guarantees no borrower earning under 225% of the federal poverty level will have to make a monthly payment.

In addition, the loan balance is forgiven after 10 years of payments for borrowers with original loan balances of $12,000 or less, with the maximum repayment period before forgiveness rising by one year for every additional $1,000 borrowed up to a maximum of 20 or 25 years. So, if you originally borrowed $14,000, you'd get loan forgiveness after 12 years. Payments you made before 2024 and those made thereafter count toward these forgiveness timeframes.

With the SAVE plan, unpaid interest won't accrue if you make full monthly payments. So, unlike other income-driven repayment plans, your loan balance won't grow if you make your monthly payments, which could be as low as $0.

All student borrowers in repayment are eligible for the SAVE plan, and borrowers already in a Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in SAVE. Go to the Education Department's website to learn more about the SAVE plan.

The Department of Education paused student loan payments for SAVE borrowers for July 2024 to recalculate payments according to the new formula that will lower them from 10% of a borrower's income to 5%. If you're a SAVE borrower and the Department of Education notifying you about this adjustment, then you can skip your July payment.

Income Contingent Repayment Plan (ICR)

Under the ICR plan, your payment is the lesser of:

  • 20% of your discretionary income or
  • what you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.

Like with all income-driven repayment plans, you'll have to reapply yearly, and the payment amount will likely be adjusted. The government will forgive the remaining balance if you haven't paid off your loan after 25 years.

Pay As You Earn Repayment Plan (PAYE)

With PAYE, your maximum monthly payments are 10% of your discretionary income. The government will forgive the remaining balance if you haven't paid off your loan after 20 years.

Revised Pay As You Earn Repayment Plan (REPAYE)

Like PAYE, with REPAYE, your maximum monthly payments will be 10% of your discretionary income. The main differences between PAYE and REPAYE are:

  • To qualify for PAYE, you must be a new borrower on or after October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011. For REPAYE, any Direct Loan borrower with an eligible loan type can pick this plan.
  • Under PAYE, if you're married, your spouse's income or loan debt will be considered only if you file a joint tax return. Under REPAYE, your income and your spouse's income or loan debt will be considered, whether you file taxes jointly or separately (subject to some limited exceptions).

Under REPAYE, the government forgives the balance if you haven't paid off the loan after 20 years (if all loans were for undergraduate study) or 25 years (if any loans were taken out for graduate or professional study).

Income Sensitive Repayment Plan (ISR)

In this plan, your payments are based on your annual income. The ISR plan is available only to low-income borrowers and only for FFEL loans. Because FFELs were discontinued in 2010, recent borrowers aren't eligible for an ISR plan.

How to Choose a Federal Student Loan Repayment Plan

Your loan servicer will automatically enroll you in a Standard Repayment Plan unless you decide on another plan. Here's one approach for choosing a repayment plan.

Consider an Income-Driven Plan If You Qualify for Public Service Loan Forgiveness

Under the Public Service Loan Forgiveness (PSLF) program, your federal Direct Loans or Direct Consolidation loans are forgiven after you make 120 qualifying monthly payments under a qualifying repayment plan while:

  • working full-time for the government
  • working full-time for a nonprofit organization that's tax-exempt under Section 501(c)(3) of the Internal Revenue Code
  • working full-time for a nonprofit organization that isn't tax-exempt, but the organization's primary purpose is to provide certain types of qualifying public services, or
  • volunteering full-time with AmeriCorps or the Peace Corps.

All of the income-driven repayment plans count as qualifying repayment plans for PSLF. So, if you're eligible for PSLF, consider an income-driven plan: IBR, ICR, PAYE, or REPAYE (but not ISR because you can't qualify for PSLF with this plan).

Also, you should submit a certification form every year or whenever you change jobs. The Department of Education will then let you know if you're on track for PSLF. And you can use this tool to assist you in completing the forms required for this program.

You can also qualify for PSLF if you choose the ten-year standard repayment plan, but if you're in this plan the entire time you're working towards PSLF, you won't have a remaining balance left to forgive after you've made 120 qualifying PSLF payments.

If PSLF Isn't an Option, Consider the Standard Repayment Plan (If You Can Afford It)

Under the Standard Repayment Plan, you'll pay off your loans in ten years or less. So, you'll pay less interest and get out of debt quicker than another repayment plan.

Don't Forget About SAVE

The SAVE plan is also a good option, especially if you have a relatively small debt amount and can qualify for forgiveness after 10 or so years.

Look Into Other Plans

One way to figure out which of the other plans might work for you is by using the Department of Education's repayment estimator or contacting your loan servicer. Find out who your loan servicer is by logging in the the Federal Student Aid website.

Switching Repayment Plans

Keep these tips in mind when considering different repayment plans.

  • Don't wait to switch payment plans until you're seriously behind in your payments. If you're in default on your loans, many of these options won't be available to you. For most federal student loans, you're in default if you haven't made a payment in more than 270 days.
  • You aren't locked into the plan you choose. If you switch plans and you're not happy with it, you can change again.

How Private Student Loans Work

A private student loan is a loan taken out from a bank, credit union, or another private lender to cover post-secondary education expenses and, if taken out before July 1, 2010, not guaranteed by the federal government.

Private Student Loans: Pros and Cons

Private student loans have a few upsides, but for the most part, the long list of downsides outweighs them.

Advantages

The main advantage of private student loans is that they're available when you've exhausted your ability to borrow federal loans. Unfortunately, with the rising cost of college and graduate school, many students must take out some private loans because they've maxed out on the available federal student loans.

Also, unlike federal student loans, private student loans are subject to a statute of limitations when you default. The statute of limitations varies by state, generally ranging from three to 10 years. If the statute of limitations expires, lenders have few options to collect from you.

Disadvantages

The biggest downsides to private student loans are:

  • higher interest rates (typically)
  • the interest rate might be variable
  • less flexible repayment terms, and
  • the unavailability of deferment, forbearance, and cancellation options.

Also, paying your private student loans isn't always straightforward. Borrowers with private student loans have cited numerous problems related to making loan payments, like dealing with loan servicers that:

  • frequently lose payments
  • misapply funds when borrowers try to pay down their loans more quickly
  • fail to notify customers when accounts are transferred to new servicers, and
  • engage in other practices undermining borrowers' ability to get information about and pay their loans.

If you have a complaint about a private student loan, contact the Consumer Financial Protection Bureau (CFPB).

Payment Relief for Private Student Loans

Private student loans aren't eligible for the repayment plans discussed in this article. If you have private student loans, contact your lender, loan holder, or loan servicer to learn about repayment options.

Getting Help

To learn more about federal student loans and student loans in general, visit the U.S. Department of Education's Federal Student Aid and Federal Trade Commission websites.

If you need more information or advice after visiting these websites and doing your own research on student loans, consider consulting with a student loan attorney or debt settlement attorney who deals with student loans.

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