Understanding the William D. Ford Federal Direct Loan Program

The William D. Ford Federal Direct Loan Program, also known as FDLP or FDSLP, stands as the largest single source of federal financial aid, offering low-interest loans to students and parents to cover the costs of post-secondary education. Administered by the Department of Education, this program distinguishes itself by providing loans directly from the government, rather than through banks or other financial institutions. It's named after William D. Ford.

The Rise of Student Loans

In 1940, approximately 500,000 Americans attended college. By 1970, this number had surged to nearly 7.5 million, and is now estimated to be around 14 million. Since 1970, family incomes for 80% of Americans have failed to make inflation-adjusted gains.

Key Features of the Direct Loan Program

Following the passage of the Health Care and Education Reconciliation Act of 2010, the Federal Direct Loan Program became the sole government-backed loan program in the United States. It replaced the Federal Family Education Loan (FFEL) program, which involved private lenders backed by government guarantees. As of now, the Federal Direct Loan Program holds an outstanding loan portfolio of approximately $1.5 trillion, a figure expected to rise alongside default rates. President Barack Obama organized all new loans under the Direct Loan program by July 2010.

Types of Direct Loans

The Direct Loan Program encompasses several types of loans, each designed to meet specific needs:

Direct Subsidized Loans: Available to eligible students with demonstrated financial need, these loans help cover costs at various institutions, including four-year colleges, community colleges, and vocational schools. The school determines the loan amount. The Secretary subsidizes the interest while the borrower is in an in-school, grace, or deferment period, except that the Secretary does not subsidize the interest that accrues during the grace period on a loan for which the first disbursement is made on or after July 1, 2012 and before July 1, 2014.

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Direct Unsubsidized Loans: Unlike subsidized loans, these do not require students to demonstrate financial need. Borrowers are responsible for paying interest on the loan during all periods. The school determines the amount you can borrow based on the cost of attendance and other financial aid you receive.
Direct PLUS Loans: These loans are available to graduate or professional students and parents of undergraduate students to help pay for education expenses not covered by other financial aid. Credit is necessary for eligibility, but financial need is not a factor.
Direct Consolidation Loans: This option allows students to combine multiple federal loans into a single loan, simplifying repayment with one monthly payment at the average interest rate of the consolidated loans. One disadvantage is that students cannot lower their interest rates.

Loan Amounts and Limits

Students can borrow different amounts depending on their academic level. Freshmen can borrow $5500, Sophomores $6500, and juniors $7500. Graduate or professional students can get up to $138,500 in combined subsidized and unsubsidized loans, but no more than $65,500 of that amount can be in subsidized loans. There are limits on the total amounts you may borrow for your undergraduate and graduate study (aggregate loan limits) and there’s annual loan limits.

Interest Rates

Interest rates vary based on when the loan was first disbursed. The interest rate for loans first disbursed during any 12-month period beginning on July 1 and ending on June 30 is determined on the June 1 preceding that period and is a fixed rate for the life of the loan.

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Loan Fees and Charges

The Secretary may require that the borrower or any endorser pay costs incurred by the Secretary or the Secretary's agents in collecting installments not paid when due.

Eligibility Requirements

To get a Direct Subsidized Loan or a Direct Unsubsidized Loan, you must be enrolled at least half-time at a school that participates in the Direct Loan Program. Direct Subsidized Loans are available only to undergraduate students who have financial need.

How to Apply

Applying for federal student loans is free. All you need to do is complete the Free Application for Federal Student Aid (FAFSA®). The easiest and fastest way to file the FAFSA® and check your eligibility for federal student loans is online. Your application will be processed within 3-5 days. You should never pay to submit the FAFSA®-filing is always totally free and there’s only one official FAFSA® form.

The Growing Crisis of Student Loan Debt

Student loan debt has become the second highest consumer debt category behind mortgage debt. The Federal Student Aid office (FSA) reported that at the end of 2009 there were $1.5 trillion of loans outstanding which is spread out over 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. At the end of 2019, there were $657 billion in outstanding Direct Loan program loans for 32.1 million recipients. Currently, there are $1.2 trillion in principal and interest on direct loans remained outstanding (borrowed by 34.5 million individuals).

Default and Delinquency

Default and delinquency are increasingly common and are a large risk the government bears when giving out low-interest rate loans. Delinquency, or late or missing payments, will result in those payments being reported to the credit bureaus and credit scores being adjusted accordingly. 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 principal and interest are due in full as well as collection costs. 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. Over the average length of repayment which is 19 years, 250,000 students default on their loans each quarter while 1.5 trillion outstanding dollars are still supposed to be paid.

Pew Charitable Trusts research highlights the increasing number of student loan borrowers who encounter repayment problems or interruptions. 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. Defaulting can disqualify a student for any additional Title IV federal student aid in the future. Default consequences are severe and can include damaged credit, ineligibility for future student loans, garnishment of wages, high collection fees, loss of federal income tax refunds or Social Security and prohibition from other federal assistance programs. Additionally, the increasing number of defaults has an impact on the taxpayer.

Addressing the Student Loan Crisis

The government combats this large outstanding balance with student loan forgiveness which come in several forms, the two most popular being Public Service Loan Forgiveness and Teacher Loan Forgiveness. Looking at Public Service Loan Forgiveness, there are 890,516 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.

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. 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.

Another solution to the problem was discussed in the 2020 Presidential Election. Candidates Bernie Sanders and Elizabeth Warren both offered programs for loan forgiveness. Senator Bernie Sanders proposed canceling all $1.6 trillion of outstanding student loan debt in the United States while Senator Elizabeth Warren proposed canceling $640 billion of the debt. Both have goals to make public university tuition free, reducing the need for borrowing. According to the Department of Education, 45% of student loans are used to attend public colleges and universities. The department also reports that 40% of loans are taken out to attend graduate or professional school, meaning most loans are taken out for post-graduate education or private schools. So even if all debt is wiped out, the rate at which it grows would remain the same.

Repayment Options and Loan Forgiveness

There are different types of repayment options for federal student loans. It's always a good idea to do your research and see what repayment options might be best for you. In some situations, you can have your federal student loans forgiven, canceled, or discharged.

Public Service Loan Forgiveness (PLSF): Federal loan borrowers can qualify for loan forgiveness if they work for a qualifying public service employer, including 501(c)(3) not-for-profits and government agencies. They must work for a qualifying employer full-time for 10 years and make 120 payments under a qualifying payment plan. For borrowers pursuing PSLF, Mohela is their loan servicer.
Income Driven Repayment Discharge: Under an IDR plan, you get a reduced payment based on your discretionary income and a new loan term of 20 or 25 years. The government forgives the remaining amount if you still have a loan balance at the end of your term. The new SAVE repayment plan offers the lowest monthly payments of any income-driven repayment (IDR) plan for qualified borrowers.
Teacher Loan Forgiveness: Another way the government combats the large outstanding balance with student loan forgiveness.

Loan Servicers

Your federal student loans were assigned to a servicer after they disbursed to your student account. Your loan servicer manages your loan repayment. Visit studentaid.gov to view your dashboard which includes your federal student loan borrowing history and loan servicer contact information for repayment information. Contact your servicer and verify that your contact information is accurate and up to date so you can ensure you are receiving your billing statements and important repayment updates.

The Future of Student Loans

The Stafford Student Loan Program is a subsidized loan that has been criticized for its lack of reform. Its 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. The issue that it is a disincentive for students to save is widely cited. The government is issuing cheap loans that are widely available and more than ever, students are attending expensive schools and are less worried about their ability to repay the debt. Students are not incentivized to attend schools with lower tuition. This is exacerbated by the fact 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-profit 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. It has been argued that at the individual level student loan debt affects students when it comes to their credit worthiness and future financial stability.

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