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Student Loan Trends in the Third Federal Reserve District

Appendix 1: Introduction to Student Loans

The federal government is by far the largest provider of student loans in the U.S. and has played an instrumental role in shaping the market. The federal government runs a variety of loan programs with varying eligibility requirements (see Table A1 for a summary), but because broad access to education has been a long-term policy objective, student loans have been widely available with little underwriting involved to establish the borrower’s ability to repay the debt. Even private lenders, who would ordinarily have more reason to ensure that their debtors are able to repay their loans, were given an incentive to lend to students through the Federal Family Education Loan Program (FFELP), which provided subsidies and a federal guarantee on privately issued student loans.

The FFELP, along with private loans that held no government guarantee, helped to create significant growth in the private loan market. Combined, they represented 25 percent of all student loan originations by volume in the 2007–08 academic year.a However, that changed in the wake of the financial crisis that hit the economy that year. Because interest rates on FFELP loans were capped, the return was too low to attract private capital in a tight credit market, and many private lenders exited the market.b In 2010, the federal government discontinued the FFELP and switched to an entirely direct lending model, the Federal Direct Loan Program (FDLP). In the 2012–13 academic year, the federal government accounted for roughly 92 percent of the student loan debt issued.c

Student loans are extremely difficult to discharge through bankruptcy proceedings: Only when a student can prove that a loan is causing undue hardship can a loan be discharged, and the bar for proving such a claim is very high. Moreover, the education that is purchased with student loans cannot be used as collateral for a loan, as in the case of a house or a car, so borrowers who find themselves unable to repay their student loans face a very difficult situation. In response to an increasing number of student borrowers struggling to make payments on their loans, the federal government has expanded and introduced new repayment plans for many borrowers and loan types that allow graduated payments, income-related payments, extended repayment periods (from the standard 10 years up to as many as 25 years), loan consolidation, and loan forgiveness for working in designated fields for a set period of time. These options are not available for private student loans, however, and so borrowers who hold private loans, which tend to have higher interest rates and less flexible repayment options to begin with, have received little or no benefit from the federal government’s reforms.

  • a College Board, “Trends in Student Aid 2013,” College Board, 2013.
  • b Kelly Edmiston, Lara Brooks, and Steven Shepelwich, “Student Loans: Overview and Issues,” Federal Reserve Bank of Kansas City, Community Affairs Department Working Paper, 2012.
  • c College Board, “Trends in Student Aid 2013,” College Board, 2013.
Table A1: Types of Student Loans
Federal Direct — Subsidized
Federal Direct — Unsubsidized
Federal Parent PLUS/Grad PLUS
Federal Perkins
Purpose: For students with demonstrated financial need; federal government pays the interest that accrues on the loan while the student is in school For all students, regardless of financial need; student is responsible for interest accrued while in school To meet expenses not covered by other federal aid Low-interest loans for students with exceptional financial need Varies
Volume ($bn), 2012-13: $28 $55 $17 $1 $9
Interest Rate (for loans issued 7/2013 to 6/2014): 3.86% UG: 3.86%
G/P: 5.41%
6.41% 5.00% Varies
Annual Limit:* $3,500-$5,500, depending on year of college $5,500-$7,500, depending on year of college** Up to the cost of education minus other aid UG: $5,500
G/P: $8,000
Aggregate Limit:* $23,000 $31,000** N/A UG: $27,500
G/P: $60,000***

Notes: The Federal Direct (both subsidized and unsubsidized) and PLUS (both parent and graduate) loans were offered through the FFELP before the program was terminated in 2010. Those loans are now offered through the FDLP instead.

UG: undergraduate students; G/P: graduate/professional students

* Limits reported for dependent students; there are higher caps for independent students and undergraduates whose parents are unable to obtain Federal Parent PLUS loans.

** Federal Direct — Unsubsidized limits are for total of subsidized and unsubsidized Federal Direct loans.

*** Includes Federal Perkins loans accrued as an undergraduate.


U.S. Department of Education, "Subsidized and Unsubsidized Loans," 2013, available at studentaid.ed.gov/types/loans/subsidized-unsubsidized (accessed November 6, 2013).

U.S. Department of Education, "PLUS Loans," 2013, available at studentaid.ed.gov/types/loans/plus (accessed November 6, 2013).

U.S. Department of Education, "Perkins Loans," 2013, available at studentaid.ed.gov/types/loans/perkins (accessed November 6, 2013).

  • The views expressed in this publication are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  • Last update: April 8, 2014


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