Office of Student Aid : Loans : Federal Direct Stafford Loan Q & A

Q. Why did Penn State enter the Direct Loan Program?

A. Federal Direct Lending provides the most stable source of loan funding available because the funds are provided directly by the U.S. Treasury. The instability of the debt markets, and uncertainty with what will happen next, strongly influenced Penn State's decision to find the most secure solution possible. This same instability and uncertainty in the markets is what led to PHEAA’s decision to suspend its function as a lender. While there are many private lenders still in the Federal Family Education Loan Program (FFEL) Program, Penn State was concerned about future developments that could negatively impact students, who are already being impacted by PHEAA's decision.

Since approximately 40,800 Penn State students have their Stafford loans through PHEAA, these students will now need to select a new lender and sign a new promissory note. By entering the Direct Loan Program, students will not have to shop around for a lender or worry that the lender they chose may not still be in the program in future years to meet their student loan needs. The Direct Loan (DL) Program provides certainty that access to student loans will not be a problem in the future. Students must first complete the Free Application for Federal Student Aid (FAFSA on the Web) in order to be reviewed for either a DL or FFELP Stafford Loan.

Q. What are the primary differences between DL and the FFELP?

A. The primary difference is the source of the loan funding. Direct Loans come straight from the U.S. Department of Education using funds obtained from the U.S. Treasury. This program offers students one single source of contact since the loans are made, guaranteed and serviced by the U.S. Department of Education. In the FFEL Program the lender, guarantor, and servicer can involve any combination of banks and agencies across the country. It is often the case that the student’s lender will sell their loan to another lender or loan servicer. This can add complexity for students, especially in the event an error or problem in the processing of their loans should occur. The student and the school must first find out who is processing and servicing the loan to even begin to solve a problem. Under DL, there is a single point of contact for students and their school to turn to with any problems that might arise.

Q. What is the interest rate and fees charged in DL compared to FFELP?

A. See Chart below for 2008-09 interest and fees:

Please Note: As you can see, students in the DL Program will have a 0.5% fee deducted from their loan amount. (Example: If you borrow $4500, you will actually receive $4477.50, or $22.50 less). Another 1.5% fee will be deferred until you go into repayment. After you make your first 12 loan payments, the 1.5% will not be applied to your loan balance. There may be a few lenders in the FFEL Program who are still able to offer a zero-fee loan, but not likely for longer than the next year. Many banks will start charging the full 2% fee. Congress is phasing out the loan origination fee, so by the year 2010-11 no federal loans will have this fee. Banks are allowed to charge up to 1% in a default fee and that will likely continue. The DL Program will not charge more than the 0.5% default fee. We know that many students who borrowed through PHEAA over the past several years have been accustomed to a loan with no fees. It is important to know that the current crisis in the financial market will limit the ability of lenders to offer these discounted fees. Thus, the loans fees in both programs will become comparable in the next two years.

Q. How do I apply for the DL?

A. The process is similar to what you have used in the past. Students complete the Free Application for Federal Student Aid (FAFSA) and check on the application that they wish to be considered for a loan. Penn State will then review their application and notify them of their eligibility for the loan and the maximum amount they can receive. Prior to the semester tuition billing cycle, Penn State will notify students to sign their promissory note, which can be done electronically. The note will be signed with the U.S. Department of Education as the lender. The note will only need to be signed once; as loans are requested for subsequent years, the loans will be added to the student's Master Promissory Note. After the note is signed, Penn State will request the Department of Education to send the funds for the semester and will put the loan funds into the student account.

Q. What are the benefits in the DL Program?

A. There are several benefits in the DL Program:

• A guaranteed source of funding for student loans.
• The option of an income-contingent repayment plan or an income-based repayment plan when the student enters repayment. The student will have the option of ensuring that his or her loan repayment amount will always be affordable based on what his or her income will allow.
• Students in the DL Program who enter into public service jobs can have any remaining balance on their loans forgiven after ten years of public service work. (While this option does not exist in the FFEL Program, students who borrowed in this program can consolidate their loans into the DL Program in order to take advantage of this forgiveness program.)
• The PLUS loan for parents and for graduate/professional students through DL uses a more liberal credit assessment. More parents and graduate students may qualify for these programs in the Direct Loan Program than in the FFEL Program.
• The interest rate for the parent loan and for the graduate student loan is 7.9% in the DL Program compared to 8.5% in the FFEL Program.
• Most lenders offer benefits during repayment after a student makes payments from two to four years. Very few students end up receiving these benefits. In DL, students earn benefits after only one year.
• Should a student make payments late under DL, the late fees charged are less than the late fees charged in the FFEL Program.

Q. What if I find a lender that offers a better loan than the DL?

A. The interest rates and fees in DL are comparable to, or better than, those in the FFEL Program. The University believes that the simplicity and stability in the DL Program outweigh the uncertainty and possibility of a slightly lower fee in the FFEL Program.

Q. Why can’t I have a choice in which lender to use for my student loans?

A. Most students tell us that they just want to know that their student loans will be there for them and are not too concerned with who the lender is. Since fewer banks will continue to offer any discounts or benefits while students are in school, the best time for students to exercise a choice is when they enter repayment. A student can always choose to consolidate their loans with any lender they wish during repayment. That is the time for students to shop around for the best deal.

Q. What happens if some of my federal student loans are from PHEAA or another lender and now part of my loans will be through the Department of Education?

A. The source of the loan application and funding is semester and year specific. The combination of FFEL Program and DL loans is not unusual. In the case of the DL Program, since the choice to participate in either FFEL Program or DL is a decision that each school must make, it already happens that a student could have loans in both programs. This is the case for students who begin their education at a school that uses the DL Program and then transfers to a school using the FFEL Program; that student would have loans with each program. Many Penn State transfer and graduate students already have this combination. In order to make repayment to one source once repayment starts, many students take out a consolidation loan which combines both types of loans into a single loan.

Q. How does the consolidation process work?

A. Once a student graduates or chooses to no longer attend school on a half-time basis, the student can contact the DL Program for an application for a Direct Consolidation Loan, which will combine the FFEL Program and DL loans into one type of loan. When it comes time to begin repaying the loans, the student will be provided with several options concerning consolidation and he or she will be able to choose which one has the greatest advantage. Students can move all of their loans to DL or they can move all of their loans to FFEL. The choice will be theirs.

Q. I have heard that private lenders such as banks can do a better job than the Federal Government in processing and servicing loans. Is this true?

A. Penn State does not believe this to be the case. In fact, the U.S. Department of Education uses private contractors to help administer and service student loans. Some of these contractors could be the same ones that a bank might use in servicing their student loans.

Q. Will other student aid programs such as federal and state grants be affected by what is happening with student loans?

A. No, these programs are not affected. In fact, students who qualify for the Federal Pell Grant Program will see an increase in their grant awards in 2008-09. As for the Pennsylvania State Grant, for students who are residents of Pennsylvania, the awards can go up or down in a given year depending upon the amount of funds appropriated by the state legislature and the number of students who apply for these grants.

Q. If I have borrowed through both DL and FFELP, will I still have a six-month grace period?

A. Yes, repayment begins after your one-time grace period--six months after you graduate from your degree program or are not enrolled at least half-time (6 credits for undergraduate students) for both your DL and FFELP Stafford Loans. For additional information about repayment, please visit the repayment section of our Web site.

Q. Can I borrow a federal loan through both DL and FFELP?

A. No, because Penn State has made a decision to participate in DL, all federal loans borrowed for Summer 2008 and forward, will be through DL.