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We know you’re tired after a long school year and you don’t feel like pondering higher education politics when the summer hot spots are calling your name. However, the latest legislation is almost certain to affect college parents and students who use federal financial aid. Part of President Obama’s higher education budget proposes that, starting in academic year 2010-2011, all new student loans be originated through the Direct Student Loan program, thereby marching all Federal Family Education Loan Program (FFELP) student loan lenders to their demise. You can explore the proposed changes here, but we’ve outlined some of the arguments on both sides below:
In the past, banks and other student loan lenders have competed for your federal loan business. Student loan borrowers have benefited from this competitive environment through better customer service, efficient processes and additional borrower incentives, like interest rate reduction rewards for making on-time payments. Although interest rates on federal student loans are the same everywhere, it is the varying array of lender incentives that have often been the deciding factor for families selecting a loan product.
The most spirited capitalists would discourage the government from taking over any industry and eliminating choice for the customer. If the legislation becomes law, students’ and parents’ only option if they need federal student loans will be to apply for a loan with the Department of Education through the William D. Ford Direct Loan Program. Have you ever been forced to use a company because they had a monopoly on the market? The reality is that if you are unhappy with the service they provide you, there are no alternatives. Until the government finds a way to provide great service that is on par with the private sector, this will probably remain a negative point.
On the flip side, according to the Congressional Budget Office, the Department becoming the sole provider of federal student loans saves taxpayers’ money - money the Department of Education plans to use to increase Pell Grant scholarship and provide for other forms of student aid and still save $1 billion in taxpayers’ money. If the CBO’s budget calculations are correct (and this is being debated), over the next ten years shifting loans from the private sector to the Department would save taxpayers almost $100 billion dollars. Rep. George Miller, chairman of the House Education and Labor Committee, says that these billions of dollars in savings can “be used to further boost college aid and reduce our deficit,” while also “making our nation more competitive” in the long run.
According to recent data from the Department of Education, they are. Only 5.3% of borrowers in the direct loan program default compared to 7.3% in the bank-based program. The accuracy of this data has been disputed by lenders who noted that the data came out one day before the proposed legislation and similar program comparison numbers have not been published for several years. School type (such as for profits, versus not-for profits), can skew this as well and most for-profit schools have trended higher in default rates and are often not Direct Loan Program participants. Sallie Mae has recently pointed out that its borrowers, who participate in default prevention programs through state loan guarantee agencies, are 30 percent less likely to default than Direct Loan borrowers.
All schools currently in the FFEL program would be required to change their operational systems to support the Direct Lending model. For schools currently in the FFEL program, this would mean investing staff time and money to change systems and processes at a time where budgets have been cut to the core. It’s realistic to imagine that those costs may have to be absorbed through increased tuition and student fees.
The recent crisis in the credit markets made it very difficult for private banks and lenders to raise money to lend to students. A loan access crisis was averted by the creation of a stopgap government financing and loan purchase program, allowing the FFEL program to continue to function during the credit crunch. But, the argument goes, if banks are using government money to lend to students today, it makes sense that the government could just step in and lend the money directly to students itself through the Direct Loan Program.
On the other hand, just how much more money would the government need to lend if they discontinues the FFEL program and transitioned all new loan volume into Direct lending? Well, the number is growing every year, but it is now about $60 billion annually. That’s a big jump for the Direct Lending program to make in one year. If you’re a student and the legislation passes, expect the first few years to have some bumps along the way as the government ramps up. Just make sure you stay on top of your student loan paperwork and disbursements.