Government may take over student loans

While the University has resisted government urging to convert its private bank-based student loan system to one that is federally funded, legislation set to pass the Senate as early as next month may force Yale to comply.

The Student Aid and Fiscal Responsibility Act, passed by the House of Representatives in September, would require all college students to borrow directly from the government’s Direct Loans program. This would eliminate the Federal Family Education Loan (FFEL) program, currently used by Yale, which lends to students through a host of private lenders whose loans are guaranteed to be repaid by the government if borrowers default. By contrast, the Direct Loans program lends federal funds directly to students and their families, saving the government an estimated $87 billion.

The legislation is expected to be approved by the Senate, and would require all colleges to switch to the Direct Loans program by July 1, 2010. For students, the paperwork and eligibility requirements will remain largely the same, said Mark Kantrowitz, the publisher of FinAid.org, an informational Web site on financial aid and college applications.

But since the legislation was first proposed over a year ago, the University has expressed its reluctance to adopt the proposed changes, arguing that students will experience lower quality service and fewer loan benefits under the Direct Loans program, said Caesar Storlazzi, Yale’s director of Student Financial Services. Still, Storlazzi said Yale will comply with the new legislation if it passes.

“The majority of schools have felt the same as Yale and have remained in the government-created FFEL program,” Storlazzi said.

Indeed, Yale is one of around 3,000 of the roughly 5,000 colleges across the nation that have not converted to the Direct Loans program, despite prompting by Secretary of Education Arne Duncan. Last month, Duncan sent a letter to each of these 3,000 universities, calling on them to prepare to adopt the new program.

Under the private FFEL system, competition among private lenders gives students access to an array of borrower benefits, ranging from reduced interest for on-time repayments to better mortgage rates for consistent on-time repayments. Storlazzi said he expects these benefits to disappear under the government’s program, under which Direct Loans would become the sole student loan lender.

Kayla Hansen ’12, who recently took out a student loan with Citibank, said having the option to choose among private lenders allowed her to secure flexible repayment arrangements.

“Choice — even if it only amounts to small differences — does matter,” she said. “My loan with Citibank allows me to put off repayments for longer than six months after graduation, something which other lenders don’t usually offer.”

While private lenders have begun lending less money over the past six months because of the credit crunch, non-monetary benefits could also be lost with the abolition of FFEL, said Kevin Bruns, executive director of America’s Student Loan Providers, which distributes student loans under FFEL.

“Once Direct Loans holds a monopoly on student lending, service will be confined to the backwaters since there will no longer be any pressure to improve,” he added.

For example, the private system created measures such as a personal identification number, known as an e-signature, which allows students and parents to take out loans online, Bruns said. Direct Loans has now adopted the e-signature, he said.

After the government begins administering student loans, there will be no need for guaranteeing agencies, which repay lenders when students default, said Richard Croce, senior vice president and general counsel of Connecticut Student Loan Providers, one such agency.

Currently, his agency provides extra services such as default prevention counseling and help filling out the Free Application for Federal Student Aid form.

Still, Christine Lindstrom, higher education program director for U.S. Public Interest Research Group, an education lobbying group, said the new system would cut some of the unnecessary expenses of the old system.

Lindstrom said the $87 billion the government will save will go directly to helping students.

“We should not be relying on the whim of private lenders to provide us with benefits which are indirectly paid for by federal guarantees and subsidies.”

Zakiya Smith, policy advisor in the Office of the Under Secretary of Education, said the government will maintain the quality of the services currently offered to students and families by private lenders. The government outsources its lending to four private companies — Sallie Mae, American Education Services/Pennsylvania Higher Education Assistance Agency, Great Lakes Education Loan Services, Inc. and Nelnet, Inc. — and will renew these contracts based on customer satisfaction and default aversion.

If the proposed legislation on the Direct Loans program is passed by the Senate in December, Yale students will be individually informed of the changes in January when financial aid applications for the next academic year become available. As of March 2009, 10 percent of undergraduates had taken out student loans.

Comments

  • Yale law grad

    This is a good change. FFEL was corporate welfare at its worst!

    The government direct loans are far more efficient, and all the private lenders can continue to offer unsubsidized loans to their hearts’ content to any students who want them.

  • Recent Alum

    Yale law grad, “government” and “efficient” really do not belong together in the same clause unless separated by “non,” “not” or “never.” Then again, you are probably among those who still think that the public option is a good idea, so probably not worth arguing with.

  • Monday morning

    Ha ha, you said “government” and “efficient” in the same sentence, now that’s just silly.

  • Tanner

    Beware “The Educational Industrial Complex.”

    Of course the story no one wants to blazen in big headlines is that the continual raising tuition costs. Where is the cry of “Big Education” there costs rise much higher then any big oil company could imagine.

  • Ted

    Cost of tuition and cost of student loans will not be lowered by the legislation. the government will be borrow money at a lower rate, charge the borrower the same rate as today, and spread the wealth by having borrower subsidize another party’s education under Pell Grant (entitlement). with a government monopoly in place supported by “low cost” bidders to service on its behalf, you can expect poor service and no forgiveness on debt, as the federal government will “own you” on this one.

  • James

    law grad, your statement shows exactly how much you know about federal aid and the process, nothing. Unsubsidized loans are currently part of the FFEL and DL programs and part of the Stafford(Student) Loan package. If schools are forced to switch to DL then FFEL “private” lenders would not be able to offer unsubsidized loans. As a matter of fact, many would get out of the loan business all together, meaning no bar loans for law school graduates.

    Tanner, the reason for significant increases in tuition that Congress and lawmakers at the state level don’t want you to know is due to a significant decrees in funding by the states and a severe drop off in giving from donors. Not only would the switch to DL not help this issue, it would make it worse. Many smaller schools would have to have new employees in their financial aid offices due to more responsibility being shifted from lenders to the schools. More employees, no additional funding from the state or federal government equals higher tuition for the students. The other alternative to tuition increases is to “do away with” programs at the school who do not have a significant student population associated with them. This could mean that some schools will drop their theater major, some schools would no longer have greek organizations, some schools would drop sports, and yet others would need to shut their doors due to significant income loss. Students continue to want more when it comes to colleges, however, with more “stuff” comes higher costs. The forgone revenue that schools tend to lose with most of their scholarships(Ivy league schools are the exception) are not income for the school.

    I could go on for days on this subject but will leave you with this…..What price are you willing to pay for a quality education? Who should pay for it you or the person standing next to you?