A r c h i v e d I n f o r m a t i o n

       FOR RELEASE       October 8, 1996      Media Contacts: Stephanie Babyak/ Jane Glickman (202) 401-1576     Program Contact: 1-800-4-FED-AID  (1-800-433-3243)

Borrowers Realize Education, Career and Personal Goals Through Direct Lending

When Temple University students David Germroth and wife Rebecca Hudson earned graduate degrees in political science in 1990, they realized a dream -- with a $70,000 price tag. They soon found that even with two incomes from professional careers, their $1,200 monthly student loan payments made them ineligible for a home mortgage.

Or, consider a 40 year old law school graduate from the State University of New York at Buffalo, Anne Pokras, who wanted to pursue a career in public interest law. How could she make $700 monthly payments on an estimated $50,000 student loan debt from a job with a starting annual salary of $23,000?

Thanks to the William D. Ford Federal Direct Loan Program, David, Rebecca and Anne have been able to reduce monthly loan payments by taking advantage of a repayment option based on what they can afford. They can take longer to repay their loans, with payments adjusted annually as their incomes rise or fall.

Since 1994, Germroth and Hudson have made single monthly payments of $545, less than half the original monthly amount. Last August, they purchased their first home.

Pokras reduced her monthly payment to $307, allowing her to work for the Center for Dispute Settlement in Rochester, N.Y., which she describes as "a cutting edge community mediation organization that handles everything from neighbor disputes to human rights conflicts."

These examples illustrate the key benefits of direct lending's flexible repayment options that give borrowers more control over both their finances and career choices. The direct loan program offers four repayment plans:

Under the standard repayment plan, borrowers pay a fixed amount each month -- at least $50 -- for up to 10 years.
Under the extended plan, loans may be repaid over 12 to 30 years rather than the standard 10 year fixed amount. The minimum monthly payment is $50.
Under the graduated plan, payments are lower at first and then increase every two years over a period of time generally ranging from 12 to 30 years. The actual length of the repayment period depends on the loan amount. Monthly payments may range from 50 percent to 150 percent of what they would be under the standard repayment option.
The income contingent plan bases monthly payments on yearly income and loan amount. As income rises or falls (based on federal income tax returns), so do payments.

Borrowers may switch among plans whenever necessary. And of course, like all loans, the longer it takes to repay, the more interest accrues. Another important note: there is never a penalty for early payoff of any student loan.

Under direct lending, the federal government makes loans directly to students through schools, bypassing the maze of more than 7,000 private lending institutions, some 36 guaranty agencies, and more than 50 secondary markets that comprise the unwieldy guaranteed loan program, also called the Federal Family Education Loan Program (FFEL).

Students may be forced to deal with several entities to manage financial forms and paperwork. Repayment often becomes confusing because loans are frequently sold to the secondary markets, and borrowers end up making payments to a number of servicers at different times of the month. With direct lending, the borrower deals with only one servicer throughout the life of the loan.

In addition, schools report that students with direct loans are borrowing less because they know that it is easy to obtain additional funds if needed compared to the hassle and time involved in the FFEL program. With direct loans, funds are available within days rather than weeks, which also means that students have their loan money earlier in the school year to pay for books and other up front expenses.

This academic year, which began July 1, is the third year of the direct loan program. Today, approximately 1.7 million borrowers finance their college education through direct loans at more than 1,600 schools nationwide. Many more borrowers, now out of school, have selected direct lending's consolidation plan to make repaying their loans simpler and more financially manageable.

"Competition has improved service for students and schools in both the direct and guaranteed loan programs," said U.S. Secretary of Education Richard W. Riley. "We are committed to allowing schools to choose the program that best suits their needs."

Students interested in obtaining more information about direct loans and other federal financial aid for college may contact the Federal Student Aid Information Center at 1 800 4 FED AID (1 800 433 3243).

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