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

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, though, 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 a better choice 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 they are 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 can 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.

A credit check is part of the application process, unlike other federal student loans, 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 who had exceptional financial need. 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 when 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. If you pay off your loans early, you won’t have to pay extra fees.

Disadvantages

If you go into 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 keep in mind that the various repayment plans available with federal student loans make it much less likely that you’ll default in the first place.

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 that undermine 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).

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 website and the Federal Trade Commission website. 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.