Now that the Federal Family Education Loan Program (FFELP) is being overhauled by the Direct Loan Program, what exactly are the glaring differences between the two? And why, exactly, does the Direct Loan Program become advantageous for most borrowers? Below is a list of what each type of program does, and why the Direct Loan Program is more advantageous to begin with.

Funding Source – The FFELP’s source for funding comes from banks and lending institutions. On the other hand, in the Direct Loan Program, the funds come straight from the US Department of Education, which in turn comes straight from the US treasury. Where the loan is coming from doesn’t necessarily mean much to the borrower, but it does help when the borrower is looking for said loan.

Consolidation – Consolidated loans tend to make things easier when it comes time for the borrower to repay the loans. In this scenario, a borrower can take out one loan to pay off all the other different loans. This can in turn secure a lower, and fixed, interest rate, as well as gives the borrower a convenience in repaying just one loan. Since this process is unprofitable for FFELP lenders, most of them don’t offer this option. The Direct Loan program offers this at http://loanconsolidation.ed.gov/.

Interest Rate – While Congress sets a maximum interest rate in both the FFELP and Direct Loan Program, there is a similarity and a difference between the two. When it comes to the Stafford Loan, both the FFELP and Direct Loan Program are identical. The PLUS loan, on the other hand, differs slightly. FFELP has a 8.5% interest rate of repayment, while the Direct Loan Program has a 7.9% rate of repayment.

PLUS Loans – Approval rates for PLUS loans are usually dependent on the check of the borrower’s history. In this case, it’s usually the parents’ credit history. There is more likely to be a PLUS loan approval in the Direct Loan Program. According to data in 2007-2008, there was a 42% denial rate in the FFELP, while only half (21%) of the applications were denied in the Direct Loan Program.

Repayment Plans – Both FFELP and Direct Loan Program offer a standard repayment and graduated repayment plan. Income-contingent repayments (loans being repaid directly out of the student’s wages) are only available in direct loans, whereas income-sensitive repayments (fixed percentage of the borrower’s gross monthly income, at 4%-25%) are only offered by the FFELP. FFELP payment plans can only be changed a few times a year, while Direct Loan Programs allow the borrower to change the payment plan anytime. The third type of repayment—income-based repayment (which caps monthly payments at a percentage of the borrower’s discretionary income)—has also been implemented for both plans.

Loan Forgiveness – The public service loan forgiveness is only available in Direct Loan Programs. The only way FFELP borrowers may obtain loan forgiveness is by consolidating their FFELP loans into a Direct Loan Program.