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What is the Federal Family Education Loan Program?

Carrieanne Larmore
Carrieanne Larmore

The Federal Family Education Loan (FFEL) program was initiated by the U.S. Higher Education Act of 1965 to provide private lenders with incentives to make federally guaranteed student loans. Parents and students could apply for these loans at a lower rate than they would otherwise receive outside of the program; the money was intended to cover the costs of higher education. According to the U.S. Department of Education, $67 billion US Dollars (USD) was made available in 2009 alone through the Federal Family Education Loan program to fund students pursuing a higher education.

The purpose of providing the incentives was to stimulate education-related lending to students and parents. Before the Federal Family Education Loan Program, it was too costly for most lower- to middle-class families to afford to send their children for higher education. Banks were also less likely to provide loans to students, because they were considered to have a high risk of defaulting. This program provided a needed link so students from lower-income households could still obtain a higher education at a vocational school, college, or university.

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Man climbing a rope

Private lenders financed student loans to receive subsidies from the federal government. The subsidies compensated lenders for lowering interest rates and for all fees associated with processing and maintaining these student loans. The government also reimbursed lenders if students or parents default on their loans. Students and parents were capped on the amount they could borrow each semester based on their income level and the number of credit hours the student was enrolled in school.

Loan types offered under the Federal Family Education Loan program included subsidized Stafford loans, unsubsidized Stafford loans, federal PLUS loans, and federal consolidation loans. The government paid the interest on subsidized Stafford loans until after the students graduated from their program. The federal PLUS loans were created for parents of students to have access to lower borrowing rates for covering education expenses. Federal consolidation loans allowed students to combine multiple loans into one by using a weighted average formula.

The Federal Family Education Loan program ended on 26 March 2010, after the Health Care and Education Reconciliation Act of 2010 was passed. Loans were distributed under this program until 30 June 2010. The Health Care and Education Reconciliation Act introduced a new program, called the Direct Loan program. Under the new program, the government directly provides the loans to students instead of having banks act as middlemen. The purpose of restructuring this program was to save taxpayers money by no longer paying a premium when going through the lenders.

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