The difference in the rates was a regulatory oversight on the Dept of Ed. You are correct: Direct lending means you are borrowing directly from the gov't and anyone else would be called a "FFEL" lender where you borrow from a bank and the gov't guarantees the loan (there are a few middlemen). Among the parties in the FFEL program are the actual lender, the guarantee agency (they carry the insurance) and maybe a servicer (paid by the bank to deal with you). Lenders reserve the right to sell your loan at will based on the year funded and not based on the fact they are all yours. They are also in in to make money-- they are a business afterall. Read the fine print about benefits and repayment incentives carefully and know they can be revolked if the profit gets cut into (which is the case now).
Direct offers one repayment incentive and that is a 1.5% rebate on your sub, unsub and PLUS provided you make your first 12 payments on time. The way it works is as follows: loan fees are set by law and for next year it will be 2.5% on a sub and unsub but you get 1.5% of it upfront: think of it as they are only skimming .5% off each disbursement. On a GradPLUS the fees are 4% but they will only be skimming off 2.5%. If you fail to make the first 12 payments they will add the 1.5% they gave you back to the principal of the loan. They also give a .25% rate reduction for EFT payments. I'm not sure what the different FFEL lenders are offering but I can assure you that if you decide later to consolidate before meeting their criteria, they'll add them right back on.
Direct as far as I can see offers stability: no selling and I don't see the Dept of Ed getting out of lending unlike some of the banks.
The vast majority of my kids, once they understand who the two parties are and how each operates in the grand scheme of things both pro and con, choose the stability of Direct. All students tend to gravitate towards the lowest rate or best incentive but once I point out how having 4 different lenders (or more if you are taking your sub/unsub from one and GradPLUS from another) conclude early on that they don't want multiple lenders to have to deal with: time is money and the more folks reporting to the credit bureaus the more likely one is wrong the more you have to keep track of... Consolidation began so borrowers would have 1 lender since a lot of borrowers were getting sick having multiple lenders to keep happy and a longer reapayment period. Project out 4 years (or more) and factor the "ease of use" into your decision making process and not just what appears to be the cheapest option every year.
