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Federally Held Loans vs. Federal Student Loans

Federal student loans and Federally Held student loans sound very similar, but slight differences between the two terms can add up to real money for borrowers.

Written By: Michael P. Lux, Esq.

Last Updated:

Federally Held Loans vs. Federal Student Loans

Federal student loans and Federally Held student loans sound very similar, but slight differences between the two terms can add up to real money for borrowers.

Written By: Michael P. Lux, Esq.

Last Updated:

The differences between a federally-held student loan and a federal loan have never been more important.

Federally held loans are eligible for programs like Public Service Forgiveness. Federally held loans are the only loans that benefit from the Covid-19 payment and interest freeze.

Unfortunately, not all federal student loans are “federally held” loans. However, borrowers can convert federal loans into a federally held loan.

What is the Difference Between a Federal Loan and a Federally Held Loan?

The vast majority of federal student loans are “federally held” loans.

Some older student loans are federal, but not federally held. These loans include some Graduate PLUS loans, Parent PLUS loans, and Perkins loans.

With some PLUS loans, a commercial lender issued the loan, and the federal government guaranteed the loan. This practice ended in 2010, but many borrowers still have PLUS loans held by commercial lenders.

Similarly, many colleges issued Perkins loans guaranteed by the federal government. The Perkins Loan Program ended in 2017.

Thus, within the category of federal student loans, we have federally held loans and federally guaranteed loans held by commercial lenders or schools.

The major downside with the federally guaranteed loans is that they don’t qualify for Public Service Loan Forgiveness or benefit from the current Coronavirus relief. However, borrowers can fix this issue.

What Type of Federal Loan do I have?

The federal government keeps a database of all federal student loans.

Borrowers can see detailed loan information in the federal database. This information includes interest rates, loan servicers, and loan types. Navigating the federal student loan database is relatively easy.

These days, there is an easy way to determine if a loan is federally held. If a lender still requires payments during the federal payment freeze, the loan isn’t federally held.

Turning a Federal Loan into a Federally Held Loan

Borrowers who want to convert a federally guaranteed loan into a federally held loan can use student loan consolidation.

During federal direct consolidation, the Department of Education pays off old student loans and creates a new federal direct loan. Borrowers may use this process to turn FFEL loans into federal direct loans eligible for Public Service Loan Forgiveness.

Use Caution with Federal Direct Consolidation: Federal direct consolidation can fix some student loan issues but it can also cause problems. Mistakes in the federal consolidation process can cause progress towards loan forgiveness to be lost. Borrowers may also lose eligibility for certain repayment plans. Before consolidating, borrowers should understand the federal direct consolidation process and have a plan for their loans.

Help on the Horizon?

Borrowers may be able to avoid the consolidation process.

Support in Washington is growing to help borrowers with FFEL loans and other federal loans that are not federally had.

Legislation has been proposed in Congress, but so far none of it has become law. For now, the only way to fix this particular issue is consolidation.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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