David P. Smole
Specialist in Education Policy
The William D. Ford Federal Direct Loan (DL) program, authorized under Title IV, Part D of the Higher Education Act of 1965 (HEA), as amended, is the primary federal student loan program administered by the U.S. Department of Education (ED). The program makes available loans to undergraduate and graduate students and the parents of dependent undergraduate students to help them finance their postsecondary education expenses. Four types of loans are offered: Subsidized Stafford Loans for undergraduate students; Unsubsidized Stafford Loans for undergraduate and graduate students; PLUS Loans for graduate students and the parents of dependent undergraduate students; and Consolidation Loans through which borrowers may combine multiple loans into a single loan. For FY2014, ED estimates that 21.9 million loans (not including Consolidation Loans) totaling $112.1 billion will be made to students and their parents through the DL program.
Until July 1, 2010, Subsidized Stafford Loans, Unsubsidized Stafford Loans, PLUS Loans, and Consolidation Loans were also available through the Federal Family Education Loan (FFEL) program. The SAFRA Act, part of the Health Care and Education Reconciliation Act of 2010 (HCERA; P.L. 111-152), terminated the authority to make new loans under the FFEL program after June 30, 2010. While new FFEL program loans are no longer being made, approximately $294 billion in outstanding FFEL program loans are due to be repaid over the coming years.
FFEL and DL program loans are low-interest loans, with maximum interest rates for each type of loan established by statute. Subsidized Stafford Loans are unique in that they are only available to undergraduate students demonstrating financial need. With certain exceptions, the federal government pays the interest that accrues on Subsidized Stafford Loans while the borrower is enrolled in school on at least a half-time basis, during a six-month grace period thereafter, and during periods of authorized deferment. Unsubsidized Stafford Loans and PLUS Loans are available to borrowers irrespective of their financial need; and borrowers are responsible for paying all the interest that accrues on these loans. FFEL and DL program loans have terms and conditions that may be more favorable to borrowers than private and other non-federal loans. These beneficial terms and conditions include interest rates that are often lower than rates that might be obtained from other lenders, opportunities for repayment relief through deferment and forbearance, loan consolidation, and several loan forgiveness programs.
In the recent years, numerous changes were made to the terms and conditions of DL program loans. The Budget Control Act of 2011 (BCA; P.L. 112-25) eliminated the availability of Subsidized Stafford Loans to graduate and professional students for periods of instruction beginning on or after July 1, 2012; and terminated the availability of certain repayment incentives for loans made on or after July 1, 2012. The College Cost Reduction and Access Act of 2007 (CCRAA; P.L. 110-84) incrementally lowered, from 6.8% to 3.4%, the fixed interest rates charged to undergraduate borrowers of Subsidized Stafford Loans made during the four award years spanning July 1, 2008, to June 30, 2012. The Moving Ahead for Progress in the 21st Century Act (MAP-21; P.L. 112-141) extended the 3.4% interest rate to apply to Subsidized Stafford Loans made from July 1, 2012 June 30, 2013.
In the 113th Congress, bills affecting student loan interest rates may be considered. These include H.R. 1911, which would establish a new market-indexed variable interest rate structure for all DL program loans made on or after July 1, 2013; and S. 953, which would extend the 3.4% interest rate on Subsidized Stafford Loans to apply to loans disbursed from July 1, 2013, through June 30, 2015. Under current law, Subsidized Stafford Loans made on or after July 1, 2013, will have a fixed interest rate of 6.8%.
Date of Report: May 17, 2013
Number of Pages: 71
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