Private student loans nixed

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Starting next academic year, Yale will switch from relying on private lenders in favor of a federally funded student loans program, Yale Director of Student Financial Services Caesar Storlazzi said Tuesday.

While Yale previously resisted adopting the government’s Direct Loans program, the University announced it will make the switch even before it becomes mandatory with the passage of the Student Aid and Fiscal Responsibility Act, expected as early as December.

Yale initially listed compromised service and higher fees among its concerns with the Direct Loans program, but the changes will not affect student loan availability or eligibility, Storlazzi said.

Yale currently uses the Federal Family Education Loan (FFEL) program, through which students receive federally subsidized loans from private banks. The new law would replace FFEL with the Direct Loans program, which lends federal funds directly to students and their families. Yale will make the switch in advance of the legislation’s likely passage because Storlazzi’s office must install new software and adopt new administrative procedures in preparation for Direct Loans, Storlazzi said. Under the new program, Yale will be held responsible for overseeing the distribution of federal student loans — a job that was done by private lenders under FFEL, he said — and also for restructuring the Financial Aid Office.

“The writing is on the wall, and we want to make sure that there is a smooth transition to the Direct Loans program when it passes,” Storlazzi said.

Discussion over plans to adopt the Direct Loans program has been on the agenda for more than two years, Storlazzi said. But Yale has been reluctant to assent to government requests that the University adopt the program (just last month, Secretary of Education Arne Duncan sent a letter to 3,000 colleges urging them to do so) because private lenders traditionally provided better service and borrower benefits such as lower interest rates, Storlazzi said. FFEL loan providers likewise have expressed concerns about the loss of innovation and default counseling services generated by competition among multiple private lenders.

Other benefits provided by private lenders included reduced interest rates during repayment for on-time payments, up-front fee reductions and better mortgage rates for consistent on-time payments, Storlazzi said.

But he noted that due to the economic crisis, such borrower benefits have disappeared, making FFEL and direct loans very similar.

Storlazzi pointed to Bank of America’s decision two weeks ago to pull out of the FFEL program and Congress’s refusal to renew the Ensuring Continued Access to Student Loan Act (ECASLA), which ensured the continued availability of federal funds to private lenders through the economic crisis, as evidence that a switch to the Direct Loans program is all but inevitable.

According to data from the Yale Financial Aid Office, 399 Yale undergraduates currently hold Stafford Loans, the student loans subsidized or funded by the federal government, whose funding source will switch from private lenders to the federal government once the Direct Loans legislation passes. Storlazzi said he expects these students will barely notice the switch.

“Only the source of funding for student loans has changed,” he said. “Application procedures, eligibility and loan regulations will remain the same.”

Yale students who take Yale Student Loans or alternative loans provided by banks but not subsidized by the government — the two other lending options allowed by the Financial Aid Office — are not affected by the changes, and parents using the Federal PLUS loan, which helps parents pay their contribution, will see their interest rate drop to 7.9 percent from 8.5 percent, Storlazzi added.

Kevin Bruns, executive director of America’s Student Loans Providers, an organization that represents FFEL lenders, said competition among private lenders created incentives for lenders to develop new services geared toward increasing customer satisfaction. Among the innovations were the creation of an electronic signature tool that allowed students to complete their loan applications online.

Counseling services that help students who are about to default on their loan repayments will also disappear once the Direct Loans legislation is passed, said Richard Croce, senior vice-president and general counsel of Connecticut Student Loan Providers, an agency that guarantees FFEL loans.

Still, Zakiya Smith, policy advisor in the Office of the Under Secretary of Education, said concerns over compromised service are unwarranted. Under the direct loans program, 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. — whose contract renewals will take into account the level of customer satisfaction and default prevention, Smith said.

Still, Yale’s decision to switch to the Direct Loans program will mean the University will now face added administrative burdens, said Mark Kantrowitz, publisher of FinAid.org, a Web site that offers financial aid information and advice to college-bound students.

Yale students holding Stafford Loans will be notified of the changes to the source of their funding by the Financial Aid Office beginning January of next year. An updated version of Yale’s financial aid application will also be made available that month.

Once legislation on Direct Loans is passed, universities will be required to convert their loans by July 1, 2010.