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What's the difference for students between the direct loan program and the federal guarantee program? The rates are all the same, right? So, the only difference would be in the origination fees, and the who handles the servicing. Some lenders will repay your origination fees if you pay on time, but Direct doesn't.

The two programs are very similar, and so you are right to question if they aren't in fact "the same".

The Direct Loan program is newer than the Federal Family education laon program. "Direct Loans" was authorized by the 1993 amendments to the Higher Education Act---it was a Clinton Administration initiative, even though he almost traded away having the program because of intense lobbying pressure by (probably) Sallie Mae.

The two loan programs actually have their own separate regulations, too. the FFEL is Part 682 of the relevant Code of Federal Regulations (Title 34), and Direct is Part 685. (You only need to know that if someone tries to apply the wrong regs to your loans--and I've had that happen with the definition of "deferment". It's different in Part 682 and 685.)

You mention about origination fees. It's really more than that. Direct Loans is the U.S. Treasury's own money, (our money really), being lent back to you. FFEL ("Staffords") are some creditor's money (a bank, for example), being lent to you.

Congress sets the rates in both programs, because it's ultimately the U.S. Treasury that has to foot the bill if the creditor doesn't get paid. So they tell the lenders, that if they want to be in the program, they have to adhere to certain rules about fees, rates, etc., or forget about having that nice coverage in the event the student defaults. (They won't be considered part of the program and lose that protection from default.)

Nothing stops a lender from giving a deal better than what Congress outlined, but they have to give at least what Congress says.

The only rates that are the same are the initial rates for Direct and Stafford Loans. Right now they are the sum of the late-May, 90-day T-bill auction rate plus 2.3% (or plus 1.7% in school and grace period.) In the wild world of consolidations, people can end up with many different rates, depending on what gets combined.

That .8% discount so talked about on this board was authorized by Congress. Congress let the Secretary of Education reduce the interest rate by a predetermined amount, representing the "savings" in administering the Direct Loan program. Congress felt that 2.3% was maybe too high an add-on for whatever it takes to administer a student loan (you send out a bill and you collect a check, by and large.) It was very easy for a Democrat Secretary of Education to see how this savings should be granted to the lender, but Republican Secretaries generally have a problem seeing these same things.

The reason you won't see .8% again in the near future is that it ticked off a lot of the private lenders, who want that rate to be as high as they can get away with. If you look at some of my old posts from way back, I go into how the private lender has to make more from you than they pay to whoever they are getting your loan money from. And you know, they have their "costs" to process the loan, so . . .

(With Pennsylvania Higher Education Assistance Agency in the early 1990's, part of those costs was fancy wood paneling in the headquaters' offices, so you see about "costs".)

Given a choice, I would always go with Direct, since it is the program set up for students, not for students (but really for private lenders!). FFEL is the one where the banks make a buck. The Education Department isn't making a buck off Direct.

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