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What’s the Difference Between Direct, Indirect, and FFEL Student Loans?

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In a Nutshell

Federal student loans are designed to help students and their families pay for college expenses. There are two types of federal student loans: Direct and Indirect. Direct Loans are issued by the U.S. Department of Education, while indirect loans are made by colleges and universities. Federal Family Education Loans (FFEL) and Perkins Loans are two common types of indirect loans. These loans were made by private lenders and guaranteed by the federal government. Both programs have since ended, but millions of borrowers carry loan balances on these loans. Direct Loans are eligible for more forgiveness and loan repayment options than indirect loans, especially when it comes to income-driven repayment plans. It's important to understand the differences between these types of loans when considering borrowing for college expenses.

Written by Attorney Paige Hooper
Updated December 21, 2023

What Is a Direct Student Loan?

Direct Loans are federal student loans issued by the U.S. Department of Education under the William D. Ford Federal Direct Loan Program. The borrowed money comes directly from the federal government instead of from a third party (such as a bank).

Direct Loans have been available since the mid-1990s. But before 2010, only around 25% of federal student loans were Direct Loans. Today, all new federal student loans are made through the Direct Loan Program. 

What Are the 4 Types of ​​Federal Direct Loans?

The Department of Education offers four types of loans through the Direct Loan Program.

Direct Subsidized Loans

Most students seeking to finance their higher education take out a Direct Subsidized Loan, a Direct Unsubsidized Loan, or both. With subsidized loans, the federal government subsidizes (pays) the interest that accrues on the loan while you’re in school and for the six-month grace period after you leave school. The government also pays interest that accrues during any periods of deferment or forbearance

There are some eligibility requirements for Direct Subsidized Loans, such as demonstrating financial need. Lenders determine your financial need by looking at your Expected Family Contribution (based on your Free Application for Federal Student Aid, or FAFSA) and the cost of attendance at your school.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are similar to subsidized loans, but there are three major differences:

  • These loans are available to undergraduates and graduate and professional students. Subsidized loans, by contrast, are only available to undergraduate students.

  • The federal government doesn’t subsidize any accrued interest on these loans. Borrowers aren’t required to make interest payments while in school, for six months after leaving school, or during any deferment or forbearance periods. But any unpaid interest will capitalize (be added to the principal balance) when the borrower enters repayment.  

  • Because there is no government subsidy, borrowers don’t need to show financial need to qualify for these loans.

Direct PLUS Loans

The U.S. Department of Education sets limits on how much students can borrow in subsidized and unsubsidized loans each academic year. Unfortunately, the cost of education sometimes exceeds the maximum amount allowed. Direct PLUS Loans offer a way to cover the difference.

PLUS loans are available to two types of borrowers:

  • Graduate or professional students

  • Parents or grandparents of dependent undergraduate students (for these loans, the parent or grandparent is the borrower)

    • Note that the grandparent must be the legal guardian of the student in order to qualify for a PLUS loan.

PLUS loans work almost exactly like Direct Unsubsidized Loans, except that they’re not subject to the national loan limits. These loans are not need-based, but borrowers must pass a credit check to qualify. This means your credit history and credit score may factor into your eligibility.

Direct Consolidation Loans

Students must reapply for financial aid each year. So after four years of college, many borrowers have multiple student loans. Consolidation Loans allow borrowers to combine all of their student loans into a single loan, with a single lender and fixed interest rate. Many students choose to consolidate their loans after graduation, though you can consolidate at any time. 

Nearly all federal loans are eligible for direct consolidation. This includes indirect loans but not private student loans (more about these loan types below). When a borrower consolidates indirect loans through the Direct Loan Program, the new consolidation loan is considered a Direct Loan. This means it’s eligible for federal repayment plans and federal forgiveness programs.

This includes the one-time account adjustments (loan forgiveness) that's currently happening under the Biden Administration for borrowers enrolled PSLF or and IDR plan that's retroactively forgiving loan balances for qualified individuals.

⚠️ To qualify for the one-time account adjustment (forgiveness) happening now, the Department of Education advises FFEL and HEAL loan holders to consolidate their loans into a federal Direct Consolidation Loan by April 30, 2024. To learn more, read this Federal Student Aid announcement. To consolidate your loans, call your loan servicer or apply online through ⚠️

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What Is an Indirect Student Loan?

Indirect loans are student loans that are issued by private lenders, such as banks, but backed by the federal government. Indirect loans are different from private loans (more about those later), which are not backed by the federal government. Before 2010, most federal student loans were indirect loans. 

Federal Family Education Loans (FFEL)

From 1992 to 2010, the Federal Family Education Loan (FFEL) Program operated alongside the Direct Loan Program. Borrowers’ loan options usually depended on which program their school participated in. Just like the Direct Loan Program, the FFEL program offered subsidized and unsubsidized loans — called Stafford Loans — PLUS loans for parents and graduate students, and Consolidation Loans. 

The only difference between FFEL program loans and their Direct Loan counterparts was that FFEL program loans were disbursed, owned, and serviced by private lenders. While these loans are no longer issued, millions of borrowers are still in repayment on billions of dollars of FFEL program loans.

ED-Held vs. Commercially Held FFEL Loans

Before 2010, the vast majority of student loans were FFEL program loans. But during the banking crisis of 2008, private lenders grew concerned about whether they could afford to keep making federal student loans (which have low interest rates and no monthly payment for years). 

In response, Congress passed the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). ECASLA temporarily authorized the Department of Education (ED) to buy existing FFEL program loans from private lenders, which helped free up funds for those lenders to make new loans. 

Here’s where things get complicated: Under ECASLA, the ED bought many, but not all, outstanding FFEL program loans. Some FFEL program loans are still owned by private lenders, such as Navient, Nelnet, or MOHELA. These commercially held FFEL program loans are in a gray area legally: They still qualify as federal loans and are still entitled to most of the same benefits as Direct Loans.

Borrowers with Direct Loans often get these benefits automatically. But borrowers with commercially held FFEL program loans must usually contact their loan servicers to receive these benefits.

⚠️ To qualify for the one-time account adjustment (forgiveness) happening now, the Department of Education advises FFEL and HEAL loan holders to consolidate their loans into a federal Direct Consolidation Loan by April 30, 2024. To learn more, read this Federal Student Aid announcement. To consolidate your loans, call your loan servicer or apply online through ⚠️

What Are Perkins and HEAL Loans?

Like FFEL program loans, Perkins Loans were federally backed student loans. But instead of being owned and serviced by private lenders, Perkins Loans were owned and serviced by the borrower’s school. The Perkins program ended on September 30, 2017, and no new Perkins Loans have been disbursed since June 30, 2018. Some Perkins Loans have been purchased by or assigned to the Department of Education, some are still owned by the borrower’s school, and some have been transferred to private lenders. 

Student loans issued under the Health Education Assistance Loan (HEAL) Program were only available to graduate students in medical- or health-related fields. Like FFEL program loans, HEAL program loans qualify as federal loans and were insured by the U.S. government but owned and serviced by private lenders. The HEAL program ended on September 30, 1998, but some borrowers are still in repayment. Most outstanding HEAL program loans are still commercially held, though some have been assigned to the Department of Education.

Federal Student Aid advises borrowers with HEAL loans to consolidate their loans into a Direct Consolidation Loan by April 30, 2024, to be eligible for automatic one-time account adjustments (student loan forgiveness) for the PSLF program or IDR plan participants.

How Are Private Student Loans Different From Federal Student Loans? 

Most federal student loans are owned by the Department of Education, but as discussed above, some are owned by schools or private lenders. What makes federal loans different from private loans is that federal loans are insured by the U.S. government. Private student loans are always owned by private lenders that set the repayment terms.

Because these loans aren’t backed by the government, they aren’t eligible for government programs and benefits, such as lower interest rates, flexible repayment plans (such as income-driven repayment plans), grace periods, the Public Service Loan Forgiveness or other loan forgiveness programs.

Here are some key differences:

  • Private loan amounts can exceed federal loan limits. These loans may have fixed or variable interest rates. They typically require a credit check. If you have an adverse credit history, you may be subject to higher interest rates or be required to get a co-signer. 

  • Unlike federal loans, borrowers must usually start repaying private loans while they’re still in school. There is no grace period.

  • Defaulted private loans are usually subject to a statute of limitations, which means lenders can’t collect them after a certain length of time. There is no statute of limitations on federal loans.

I Can’t Afford My Student Loan Payments! What Are My Options?

If you’re struggling to pay your student loans, contact your loan servicer to see what options are available. (Read our article How To Get Your Federal Student Loan Info From the NSLDS to figure out who your loan servicer is.)

Here are some options to consider:

If you’ve tried everything and are still in over your head, you may be able to file bankruptcy to erase or reduce your student loan debt. Student debt is treated differently than other debts in bankruptcy. To get rid of student loans in bankruptcy, you have to take a few extra steps. After you file your bankruptcy case, you also must file an adversary proceeding. In this proceeding, you must prove to the court that paying your student loans would cause you undue hardship. 

Different jurisdictions use different tests to determine undue hardship, but in general terms, you must show that:

  • You aren’t able to repay your loan(s),

  • This inability is likely to continue in the future, and

  • You’ve made a good-faith attempt to repay your loan(s).

Proving undue hardship is a little simpler if your loans are owned by the Department of Education. The ED, together with the Department of Justice, recently released guidelines that specify what qualifies as undue hardship. If you qualify under the guidelines, the ED will recommend that the bankruptcy court discharge (wipe out) some or all of your loan debt. 

If you have a Direct Loan or Direct Consolidation Loan, Upsolve may be able to help for free. We now offer a free tool to help borrowers discharge their student loan debt in Chapter 7 bankruptcy. Start our free screener now to see if you qualify.

If you have private or commercially held loans, though, your lender isn’t bound by these guidelines, and may require more proof. Discharge isn’t impossible for these loans, but you’ll likely need to work with a bankruptcy attorney.

Written By:

Attorney Paige Hooper


Paige Hooper is a seasoned consumer bankruptcy attorney with 15 years of experience successfully representing debtors in Chapter 7, Chapter 11 and Chapter 13 cases. Paige began practicing bankruptcy law in 2006 and started her own solo, multi-state bankruptcy practice in 2012. Gi... read more about Attorney Paige Hooper

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