The Direct loan program began about 15 years ago and in reliable American fashion was used to remove the middle man. Instead of having the banks, credit unions and other private businesses lend money to students and their parents, the Federal government loans the dollars directly.

    Since they duplicate in a few ways the FFEL schemes, it is critical for lenders to target which program they want as both offer Stafford and PLUS loans. Direct loans have similar criteria for eligibility; they adhere to similar need-based guidelines, or have similar credit check requirements for non-need-based services. Providing similar programs according to a similar standard raises a natural question, how to pick between them?


    More concrete differences between the two products do exist, though, since FFELP loans are funded and serviced by private financial institutions who you sign a promissory note and could possibly not be who you re-pay the loan to, it is a basic practice for lenders to re-sell loans to other businesses. You may have gone to the trouble of discovering a lender and services you like. You could have decided on the rate and repayment terms, preferring their customer service and then, for example, find that the loan has been sold to another business. You may now be repaying the loan to a company you rejected. However, in the situation of Direct loans, the Federal government is the lender. Hence, the loans are not sold to any third party.

    The most critical difference to many people will be the possibility that rates, charges and repayment terms could differ between the two. Officially the interest rates of both Stafford and PLUS loans are fixed. Nevertheless, private lenders have some flexibility in other areas.

    The lenders could possibly charge or not charge origination and insurance charges (officially assessed at 3% and 1% according to the Federal laws, which themselves are changing in the next few years). Though the fees are still there the lender may agree to absorb them in order to obtain your business. They could possibly modify the dates on which interest charges are calculated, or extend grace periods or lengthen the re-payment time.