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Federal Student Loans Go Direct

April 19, 2010

On March 30, 2010, the President signed into law legislation to end the bank-based FFELP (Federal Family Education Loan Program) as of June 30, 2010. Students and parents needing new Federal loans for the 2010-2011 year will primarily borrow directly from the government, through the Direct Loan Program. The savings in eliminating the FFELP program will primarily be passed on to students in the form of increased Pell Grant funds. Other savings will be passed on to community colleges and education-related programs. Approximately $10 billion dollars in savings will go to help pay the cost of the new health care reform bill. The new law also includes provisions that will cap the amount that low-income borrowers pay on their students loans to 10% of their disposable income, down from 15%.

How does this law impact students and colleges?

All colleges that participate in the Title IV program will be required to transition to Direct Lending (if they are not already participating in this program) by no later than July 1, 2010. Students attending schools that participated in just the FFELP program will now need to borrow from the government, through the Direct Loan program.

Students and Parents: Remember to submit your FAFSA (Free Application for Federal Student Aid) each year after January 1st in order to determine eligibility for federal and state financial aid.

How does this law impact student loan providers and banks?

As of July 1, private student loan providers will no longer be able to offer federal (FFELP) student loans to students and parents. However, the Department of Education will be contracting with some of those same entities to service and collect on Direct student loans. While some jobs will be lost with ending the FFELP Program, there will be additional jobs created to support the Department’s servicing needs.

Although no longer able to offer Federal student loans, some banks and student loan providers still offer private student loans to help students fund the gap between federal, state, and institutional aid and their cost of education. The size of the private loan market has declined substantially since the credit crisis in 2007, and it’s possible that with the end of FFELP, some banks may decide to reenter or increase their presence in the private loan space. And other lenders may decide to exit student lending altogether due to the changes in the student lending market.

College students are an important market for many financial institutions. Securing the business of college students today provides lenders with a potentially significant market for their other products in the future, such as auto and home loans. With privately funded federal student loans soon a thing of the past, it remains to be seen what creative techniques financial institutions will employ to attract and retain college students as customers in the years ahead.