Student Loan Overhaul

President Obama has proposed a federal student loan overhaul that focuses on eliminating the long-standing Federal Family Education Loan (FFEL) Program and using the savings to provide permanent, mandatory funding for Pell Grants. This would make the Pell Grant program a new entitlement program for low-income students. (Social Security is another example of a federal entitlement program.) In place of FFELP student loans, President Obama’s plan would provide student loans entirely through the federal Direct Loan Program.

Currently, federal Stafford Loans and PLUS Loans are available through both the FFEL Program and the Direct Loan Program. It’s just the funding source that distinguishes the two programs.  FFELP loans are funded by banks and other commercial lending institutions that get subsidies from the Department of Education in order to offer students lower interest rates and fees. Direct Lending loans are administered by students’ schools and financed by the U.S. Department of Education itself, using funds from the U.S. Treasury. In the Direct Loan Program, students monitor their loan transactions and repayment process through a 24/7 website, the Direct Loan  Servicing Center.

President Obama’s student loan overhaul would do away with the FFEL program (which was prone to conflict-of-interest corruption exposed through investigation in 2007), transfer all outstanding FFELP loans over to the Direct Loan Program, and issue all new federal students loans as Direct Loans.


It may be either the lingering effects of the private loan scandal or the more recent effect of the credit crisis, but whatever the reason, the expected loud resistance to the president’s student loan overhaul proposal has not materialized.  This has surprised student loan watchdogs, but pleased student advocates who have long called for a more efficient and more helpful financial aid system. Keep an eye on higher education debate in Washington and check back here for news of the student loan overhaul progress.

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