Direct Loan FAQ

The University of Colorado Denver made the decision to move the Downtown Campus into the Federal Direct Loan Program for the 2008-09 school year.

As we moved into the Federal Direct Loan Program, a number of critical questions from parents and students have come to light.

Below is a list of questions and answers related to the Direct Loan Program that should help families understand how this program will serve their student.

Q. Why did UC Denver enter the Direct Loan Program?

A. Federal Direct Lending provides the most stable source of loan funding available because the funds are provided by the U.S. Treasury. The current instability of the debt markets strongly influenced our decision to find the most secure solution possible. Numerous Federal Family Education Loan Program (FFELP) lenders have exited the business. Some lenders have even had to withhold second disbursements of previously approved loans.

The majority of students at AMC received their FFELP loans through the school as lender program. This program allowed the university to earn income as a lender and then use that income to fund need-based grants to students. UC Denver’s partner in the school as lender program is unable to fund the program for the 08-09 school year.

Since our partner can no longer fund the program those students will now need to select a new lender and sign a new promissory note. By entering the Direct Loan Program, students will not have to shop around for a lender or worry that the lender they chose may not still be in the program in future years. The Direct Loan Program provides certainty that access to student loans will not be a problem in the future.

Q. What are the primary differences between Direct Loans and the Federal Family Education Loan Program (FFELP)?

A. The primary difference is the source of the loan funding. Direct Loans come straight from the U. S. Department of Education using funds obtained from the U.S. Treasury. This program offers students one single source of contact since these federal loans are made, guaranteed and serviced by the U.S. Department of Education. In the FFEL Program the lender, guarantor and servicer can involve any combination of banks and agencies across the country. It is often the case that the student’s lender will sell their loan to another lender or loan servicer. This can add complexity for students, especially in the event an error or problem in the processing of their loans should occur. Under Direct Loans, there is a single point of contact for students and their school to turn to with any problems that might arise.

Q. What are the interest rates and fees charged in Direct Loans compared to FFELP?

A. See Chart below for 2008-09 interest and fees:

NOTE: As you can see, students in the Direct Loan Program will have a .5 percent fee deducted from their loan amount. (Example: If you borrow $4,500, you will actually receive $4477.50, or $22.50 less.) Another 1.5 percent fee will be deferred until a student goes into repayment. After making the first 12 loan payments, the 1.5 percent will not be applied to the loan balance. There may be a few lenders in the FFELP program who are still able to offer a zero-fee loan, but not likely for longer than the next year. Many banks will start charging the full 2 percent fee. Congress is phasing out the loan origination fee, so by the year 2010-11, no federal loans will have this fee. Banks are allowed to charge up to 1 percent in a default fee and that will likely continue. The Direct Loan Program will not charge more than the .5 percent default fee. We know that many students who borrowed through UC Denver over the past several years are accustomed to a loan with no fees. It is important to know that the current crisis in the financial markets limits the ability of lenders to offer these discounted fees. Thus, the loan fees in both programs will become comparable in the next two years.

Q. How do I apply for the Direct Loan?

A. The process is similar to what students have used in the past. Students complete the federal application (FAFSA) and check the area on the application indicating they wish to be considered for a loan. UC Denver’s financial aid office will review the application and notify a student of eligibility for the loan and the maximum amount they can receive. The financial aid office will notify the student to sign a promissory note, which can be done electronically. This time, the U.S. Department of Education will be the lender. Students only need to sign once; as a student requests loans for subsequent years, the loans will be added to their Master Promissory Note. After the note is signed, we will request the Department of Education to send the student’s funds for the semester and those loan funds will be placed in the student’s account.

Q. What are the benefits in the Direct Loan Program?

A. There are several benefits in the Direct Loan Program:

1. A guaranteed source of funding for student loans.
2. The option of an income-contingent repayment plan or an income-based repayment plan when a student enters repayment. This means a student has the option of ensuring that the loan repayment amount will always be affordable based on what the borrower’s income will allow.
3. Students in the Direct Loan Program who enter into public service jobs can have any remaining balance on the loans forgiven after 10 years of repayment while in public service work. (While this option does not exist in the FFEL Program, students who borrowed in that program can consolidate their loans into the Direct Loan Program in order to take advantage of this forgiveness.)
4. The PLUS loan for parents and for graduate/professional students through the Direct Loan uses a more liberal credit assessment. More parents and graduate students may qualify for these programs under the Direct Loan Program than in the FFEL Program.
5. The interest rate for the parent loan and for the graduate student loan is 7.9 percent in the Direct Loan Program compared to 8.5 percent in the FFEL Program.
6. Most lenders offer benefits during repayment after a student makes payments for two to four years. Very few students end up receiving those benefits. In the Direct Loan Program, students earn benefits after only one year.
7. Should a student make payments late under the Direct Loan Program, the late fees charged are less than the late fees charged by lenders in the FFEL Program.

Q. What if I find a lender that offers a better loan than the Direct Loan?

A. The interest rates and fees in Direct Loan are comparable to, or better than, those in the FFELP. The University believes that the simplicity and stability in the Direct Loan Program outweigh the uncertainty and possibility of a slightly lower fee in the FFEL Program.

Q. Why can’t I have a choice in which lender to use for my student loans?

A. Most students tell us that they just want to know that their student loans will be there for them and are not too concerned with who the lender is. Since fewer banks will continue to offer any discounts or benefits while a student is in school, the best time for students to exercise a choice is when they enter repayment. A student can always choose to consolidate their loans with any lender they wish during repayment. That’s the time for students to shop around for the best deal.

Q. What happens if some of my federal student loans are from UC Denver or another lender and now part of my loans will be through the Department of Education?

A. The source of the loan application and funding is semester- and year-specific. The combination of FFELP and Direct Loan funding is not unusual. Since the choice to participate in either FFELP or Direct Loan Program is a decision that each school must make, it already happens that a student could have loans in both programs. This is the case for students who begin their education at a school that uses the Direct Loan Program and then transfers to a school using the FFEL Program; that student would have loans with each program. Many of our transfer and graduate students already have this combination. In order to make repayment to one source once repayment starts, many students take out a consolidation loan which combines both types of loans into a single loan.

Q. How does the consolidation process work?

A. Once a student graduates or chooses to no longer attend school on a half-time basis, the student can contact the Direct Loan Program for an application for a Direct Consolidation Loan, which will combine the FFELP and Direct Loans into a single loan. When it comes time to begin repaying the loans, the borrower will be provided with several options concerning consolidation and will be able to choose which one has the greatest advantage. Students can move all their loans to Direct Loans or they can move all loans to FFELP. The choice will be up to the student.

Q. I have heard that private lenders such as banks can do a better job than the federal government in processing and servicing my loans. Is this true?

A. We do not believe this to be the case. In fact, the U.S. Department of Education uses private contractors to help administer and service direct student loans. Some of those contractors could be the same ones that a bank might use in servicing its student loans.

For additional information on the Federal Direct Loan Program or for questions about student financial aid, contact UC Denver’s Financial Aid Office at 303-556-2886 or via e-mail at financial.aid@cudenver.edu.