More Schools Offering Direct Student Loans
The direct student loan program — which President Obama wants to
establish as the sole provider of federal student loans by 2010 — is
swiftly gaining ground on the Federal Family Education Loan Program.
In the past year, the number of college and universities originating
loans through the Direct Loan Program has increased by more than 50
percent, reports USA Today (“Government’s Direct Student Loan
Program Gets a Boost,” March 10, 2009). More than 1,600 schools are
offering direct loans, up from 548 schools in 2007, according to the
Department of Education, while the number of schools offering FFELP
loans fell by 3.6 percent during the same time period.
Currently, students are able to get federal student loans from one
of two government programs: the Federal Family Education Loan
Program, through which students borrow money from private third-
party lenders that are subsidized by the government, or the Direct
Loan Program, through which families borrow money directly from the
Department of Education.
Direct Loan Program: The Future of Federal Student Loans
However, President Obama recently announced a plan that would
eliminate the proven 44-year-old FFEL program, which is responsible
for making three out of every four federal student loans. The move
would transform the Direct Loan Program from a minority player in
the student loan industry to the nation’s only originator of federal
student loans.
The president’s plan could reduce the government’s student loan
costs and save the government $4 billion, Obama administration
officials suggest.
Critics of the president’s proposal — which include private student
loan lenders — contest the government’s $4 billion savings estimate
and fear that the Department of Education won’t be able to handle
the surge in loan volume that would occur if the Direct Lending
Program became the only originator of federal student loans.
Families could be forced to endure poor customer service from an
overburdened system, and could encounter difficulties in getting the
funds they need for school, critics say.
Besides excellent customer service and a long-running track record
of success, private lenders have another advantage over direct
lending, says Barry Feierstein, executive vice president of Sallie
Mae.
“Private lender and loan guarantors have a system to help borrowers
avoid defaulting on their loans,” he says. “That level of outreach
doesn't exist in the federal direct loan program.”