There are two distribution channels for Federal student loans. The channels are identified by their names: Federal Direct Student Loans and Federal Family Education Loans. Federal Direct Student Loans, also known as Direct Loans, or FDLP loans are funded from public capital originating with the U.S. Treasury. FDLP loans are distributed through a channel that begins with the U.S. Treasury Department, and from there passes through the U.S. Department of Education, then to the college or university and then to the student. Federal Family Education Loan Program loans, also known as FFEL loans or FFELP loans, are funded with private capital provided by banking institutions (i.e., banks, savings and loans, and credit unions). Because the FFELP loans use private capital as their source, students who use FFELP loans are able to take advantage of payment options that are similar to those available to customers who take out a home loan or a consumer loan. For example, some institutions will allow a discount for automatic payments, or a series of on-time payments. In 2005, approximately two-thirds of all federally subsidized student loans are FFELP.
According to the U.S. Education Department, more than 6,000 colleges, universities and technical schools participate in FFELP, which represents about 80 percent of all schools. FFELP lending represents 75 percent of all federal student loan volume.
The maximum amount that any student can borrow is adjusted from time-to-time as Federal policies change. A study published in the Winter, 1996 edition of the Journal of Student Financial Aid, titled “How Much Student Loan Debt is Too Much” suggested that debt for the average undergraduate should not exceed 8% of total income after graduation. Some financial aid advisors have referred to the 8% level as “the 8% rule.” Circumstances vary for individuals, so the 8% level is an indicator, not a rule set in stone.
For Private Loans it is far simpler. The lender generally disburses the money directly to the school.