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Federal Student Loan Program Models
November 1, 2024
The federal government has played a central role in
facilitating the making of loans to finance students'
postsecondary education since at least 1958. The program
models used to provide federal student loans have since
changed considerably.
The Higher Education Act (HEA; P.L. 89-329, as amended)
authorizes the primary federal student loan program-the
William D. Ford Federal Direct Loan (Direct Loan)
program-which uses a direct loan model. Other federal
student loan programs authorized under the HEA include
the Federal Family Education Loan (FFEL) program, which
uses a loan guarantee model, and the Perkins Loan
program, which uses an institutional revolving loanfund
model. This In Focus describes each of these models and
selected pros and cons of each.
Outstanding HEA federal student loan debt totals about
$1.6 trillion borrowed by or on behalf of about 42 million
individuals. This debt represents loans made under all three
of the loan models.
Direct Loan Mode
Per the Federal Credit Reform Act (FCRA; P.L. 101-508), a
direct loan is a disbursement of funds by the Government
to a non-Federal borrower under a contract that requires the
repayment of such funds with or without interest. Under
this model, the federal government acts a lender, making
loans using federal funds. Once made, the federal
government owns the loans.
The federal government is also responsible for program
administration. In the case of the Direct Loan program, the
U.S. Department of Education (ED) is responsible for
overall program administration, and HEA Section 456
requires ED to the extent practicable to award contracts
for many of the program's administrative functions, such as
loan servicing. Thus, many of the day-to-day functions of
the program (e.g., processing monthly loan payments) are
fulfilled by federal contractors rather than federal
employees.
Most federal student loans made and outstanding today are
Direct Loan program loans, totaling about $1.4 trillion in
outstanding loan debt.
Loan uarantee Mode
FCRA defines a loan guarantee as any guarantee,
insurance, or other pledge with respect to the payment of all
or part of the principal or interest on any debt obligation of
a non-Federal borrower to a non-Federal lender. Under a
loan guarantee model, private sector or state lenders make
loans to borrowers with nonfederal funds, and the federal
government guarantees those loans against loss due to
specified reasons such as borrower default or death. If one
of these events occurs, the federal government reimburses
lenders for some or all of the borrower's loan balance.
While the federal government is responsible for the overall
administration of a loan guarantee program (e.g., program
oversight, establishment of broad program policies), lenders
typically are responsible for administering the day-to-day
aspects of the program, such as loan servicing.
In the FFEL program, other entities known as guaranty
agencies (GAs) also play a role in program administration.
GAs are state and nonprofit entities that receive federal
funds to play a role in administering aspects of the federal
loan guarantee, including taking possession of defaulted
loans to initiate collection work and reimbursing lenders
(using federal funds) when loans default. Along with the
loan guarantee, FFEL lenders receive other types of federal
payments as an incentive to participate in the program. For
instance, they receive special allowance payments if the
HEA-specified interest rates on their FFEL program loans
are lower than the market-indexed lender rate.
The FFEL program (and its predecessors) was the primary
federal student loan program prior to the Direct Loan
program. (From 1994 to 2010, the Direct Loan program and
FFEL program operated side-by-side. During this time,
institutions of higher education [IHEs] could participate in
the program of their choice.) Title II of the Health Care and
Education Reconciliation Act of 2010 (P.L. 111-152)
terminated the authority to make new FFEL program loans
effective July 1, 2010.
While loans are no longer being made through the FFEL
program, FFEL program loans totaling $169.0 billion
remain outstanding; borrowers remain responsible for
repaying those loans, and some administrative functions
continue.
Insttutiona Revo v ng Loan Fund Mode
FCRA does not address institutional revolving loan funds.
Typically, under this model IHEs make loans using
institutionally established revolving loan funds, which are
financed with a combination of federal and institutional
money. Borrowers repay their loans, plus interest, to the
IHE, and the IHEs use those repayments to extend new
loans to new borrowers.
Although the federal government is responsible for overall
program administration (e.g., program oversight,
establishment of program policies), IHEs typically are
responsible for administering day-to-day aspects of the
program, including loan servicing.](ViewImageLocal?handle=hein.crs/goveref0001&div=1&collection=&method=preview&ext=.png&size=3)