By Carl C. Dalstrom, USA Funds® President and CEO
Six out of 10 college students will use student loans to pay a portion of their college expenses. 2005 marked the 40th anniversary of the Federal Family Education Loan Program, the student-loan program that is the largest single federal source of financial aid for college.
Since its inception, the FFELP has delivered more than one-half trillion dollars of financial aid to more than 50 million students across the country. Last year alone the FFELP provided nearly $55 billion in college funding for students and parents.
The FFELP offers students and parents the benefit of below-market interest rates, currently at just over 5 percent for students repaying their loans and at just over 6 percent for parents who take out loans to pay for their children’s education. Moreover, if students have financial need, the federal government will subsidize the loan interest while the student attends college and for six months after graduation.
Borrowers with FFELP loans also benefit from flexible options for repaying their loans. For example, students aren’t required to begin paying back their loans until six months after they leave school. This grace period is designed to give them time to find a job and get established before having to make payments. FFELP borrowers also can select from several options for paying back their loans. They can choose an option under which payments gradually rise consistent with career earnings, or a plan that ties payments to the borrower’s income level, or options for extending the repayment period to provide a lower monthly payment.
In addition, FFELP borrowers who are unemployed or facing certain other economic hardships have the option to defer their payments for a maximum of three years, if necessary. Although the program provides significant repayment flexibility, student-loan borrowers are expected to pay back their loans. In fact, the federal government’s standard measure of student-loan default has been cut in recent years to just over 5 percent of borrowers.
The FFELP is administered by a unique public-private partnership that includes the U.S. Department of Education; colleges, universities and career schools; private lenders and nonprofit student-loan secondary markets; and nonprofit and state-agency guarantors. By relying on private-sector entities to fund and deliver student loans, the FFELP offers colleges, students and their parents the benefit of competition and choice.
Daily competition among these private-sector student-loan providers has generated significant improvements in student-loan service and driven loan costs lower. For example, students can apply for and sign for their loans online. Student loans can be approved in seconds with the dollars electronically disbursed to campus.
Many education lenders and guarantors subsidize upfront loan fees for FFELP borrowers, and many lenders offer additional interest-rate discounts, for example, for borrowers who allow automatic deduction of their loan payments from their bank accounts or who have a history of on-time loan payments. Using these discounts, FFELP borrowers can save hundreds, and in some cases, thousands of dollars in interest costs.
The FFELP also is cost-effective for taxpayers. Although spending on other government entitlement programs has risen significantly, adjusted for inflation, during the past decade, federal cash outlays for FFELP have declined during the same period.
Given the critical role of student-loan dollars in helping families pay for college, maintaining a strong and reliable FFELP should be a top priority for Congress.