Unsubsidized Stafford Loans: Are Private Lenders Willing to Be Competitive?
Stafford Loans are student loans the federal government makes available to undergraduate and graduate college students. There are two kinds of Stafford loans: subsidized and unsubsidized. Subsidized Stafford loans are restricted to applicants with low incomes, but unsubsidized Stafford loans are available to any eligible applicant who wants one, regardless of income level. The interest rate on unsubsidized Stafford loans is fixed at 6.8% for all applicants.
Unsubsidized Stafford loans are a good deal for undergraduate students whose incomes are too high to qualify for subsidized Stafford loans. The maximum loan amounts may not seem like much, but may in fact cover all or almost all your college costs if you attend an in-state public university or community college.
Annual Stafford loan limits for dependent students are:
- $5,500 for your first year of school (no more than $3,500 subsidized)
- $6,500 for your second year (no more than $4,500 subsidized)
- $7,500 for your third year (no more than $5,500 subsidized)
- $7,500 for your fourth year (no more than $5,500 subsidized)
Annual Stafford loan limits for independent students are:
- $9,500 for your first year of school (no more than $3,500 subsidized)
- $10,500 for your second year (no more than $4,500 subsidized)
- $12,500 for your third year (no more than $5,500 subsidized)
- $12,500 for your fourth year (no more than $5,500 subsidized)
2 Federal Loan Methods: Direct Loan Program vs. Bank-based FFELP
Unsubsidized Stafford loans are currently offered through two federal loan programs, the Direct Loan Program and the bank-based Federal Family Education Loan Program (FFELP). The loan funds for the Direct Loan program are supplied by the U.S. Treasury. Loan funds for the FFELP are supplied by private financial institutions, who get subsidies from the government for making their money available for federal student loans at interest rates and fees set by the government. There’s a good chance the FFELP will be shut down some time next year, however, because the Obama administration believes the Direct Loan program is more cost-efficient.
The Student Loan Market
The administration’s decision to stop the subsidies to private lenders and offer federal loans solely via the Direct Loan program has caused a lot of unhappiness among the financial institutions and financial aid administrators who benefited from the FFEL program. If you read any news stories about their protests, you’ll see complaints about how the federal government is trying to “drive private lenders out of the student loan market” and how the “lack of free market competition” caused by the government’s soon-to-be “monopoly” on student loans will deprive students and families of student loan choice.
But the truth is, the federal government providing federal student loans through the Direct Loan program doesn’t have anything to do with the availability of private (or, alternative) student loans. There is nothing in the FFELP shut-down plan that says that private lenders will be barred from offering their own student loans. Nothing that says college students MUST take out federal student loans and are not allowed to take out private student loans if they wish to. Nothing that says private lenders cannot continue to offer student loans from the private sector, just like they already do.
If the new Direct Loan plan goes into effect, federal loan money will come from a federal source and private loan money will come from private sources, and the two will compete for student loan business. No one is forcing private lenders out of the student loan market— they will still be able to offer all the student loans they want. Just not through the government’s program.
Public-Sector/Private-Sector Competition Benefits the Student:
Federal Unsubsidized Stafford Loans vs. Commercial Lender Student Loans
In fact, the only impact the elimination of FFELP may have on private lenders (assuming they want to stay in the student loan market) is to motivate them to lower their interest rates and fees and increase their borrower rights and protections in order to be competitive with the federal Direct Loan program. Private lenders could even undercut the federal loan program by offering even lower interest rates and fees and even better borrower rights and protections than the federal government does. Then everyone will want a private loan instead of a federal loan.
It remains to be seen if the Obama administration has the right idea about offering only Direct Loans, but the hype about private lenders being driven out of the student loan market is misleading. In the meantime, until private lenders are willing to be more competitive, the fixed 6.8% interest rate, no credit check, and no loan payments until after graduation make unsubsidized Stafford loans the best student loan deal around.