Student Loan Blog : Department of Educaiton

Direct Loan Program Gaining Ground on Bank-Based FFEL Program

Student Loan Girl — Wed, 29 Oct 2008 23:27:00 GMT

According to a recent survey of college financial aid directors, the federal government’s Direct Loan Program — through which families get federal student loans directly from the Department of Education — could eclipse the government’s now dominant Federal Family Education Loan Program by next school year.

The survey’s findings reveal that the bank–based FFEL program is losing its hold as schools’ loan program of choice, now that 168 FFELP lenders have suspended all or part of their federal student loan programs. Third-party lenders have continued to drop out of the FFEL program as the ongoing credit crisis has choked investor interest in federal student loans, crippling lenders’ ability to sell loans in order to originate enough capital to issue new ones.

Of the 416 colleges and universities surveyed in a Web-based poll by Student Lending Analytics, a company that provides colleges with financial aid advice, 6 percent of schools currently using the bank-based system plan to switch to direct lending for the 2009–10 academic year, and 29 percent are considering a migration to direct lending (“Direct Lending Could Overtake Bank-Based Student Loan Programs Next Year,” The Chronicle of Higher Education, Oct. 28, 2008).

If only 57 percent of those schools who said they were considering the switch actually made it, The Chronicle suggests, the Direct Loan Program would edge out the FFEL program as the leading supplier of federal student loans.

Currently, 1,458 colleges and universities use the Direct Loan Program, up from 1,010 colleges last school year, while the number of colleges using the FFEL program is down from 4,417 schools to 4,274.

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Nonprofit Lenders Hurt by Legislation Intended to Help Them

Student Loan Girl — Sat, 02 Aug 2008 01:53:00 GMT

Legislation that went into effect in October with the College Cost Reduction and Access Act cut federal subsidies to for-profit student loan lenders partly in an attempt to give nonprofit lenders a more competitive edge in the student loan market.

But as lenders continue to scale back or suspend their student loan programs amid a troubled economy and now-unprofitable federal education loans, newer legislation designed to help struggling lenders — nonprofit student loan providers in particular — may be doing more harm than good, writes Paul Basken in The Chronicle of Higher Education (“Federal Rescue Plan May Have Overlooked Nonprofit Lenders,” Aug. 1, 2008).

Government Positioned to Provide Lenders With Funds … But Only If Funds Are Already There

When it became clear that skittish investors, burned by the collapse of subprime credit markets, would no longer buy lender’s student loan portfolios in the secondary market, the government responded by passing the Ensuring Continued Access to Student Loans Act in May, allowing the Department of Education to purchase federal student loans from lenders or to use a lender’s student loan portfolio as collateral for a low-interest line of credit. Both provisions were intended to provide lenders with the needed capital to make new loans, which investors were no longer providing.

The continuing credit crunch, however, has hit nonprofit lenders so hard that they lack the liquidity to even begin issuing new student loans; without new loans, these lenders have nothing to sell or offer as collateral to the Education Department.

Peter Warren, executive vice president of the Education Finance Council, an association of nonprofit lenders, suggests that the recent legislation, by leaving nonprofit lenders still unable to bankroll federal student loans, has not done its job of shoring up the student loan market.

“You need to have access to funds in order to play in this game,” Warren says. “It’s essentially a Catch-22.”

Lower Interest Rates Cripple Lenders

Nonprofit lenders’ inability to secure capital has been even further aggravated by the recent drop in interest rates brought about by the subprime mortgage crisis, which has left student-loan lenders with a “negative subsidy” rate.

As Basken explains, lenders are now actually in the position of having to pay interest to the government on each unsubsidized student loan they issue, since the fixed 6.8-percent interest rate on these student loans is higher than current market rates. Meanwhile, lenders may not be receiving any corresponding principal or interest income from student loan borrowers, who aren’t required to make payments on these federal student loans while they’re in school at least half time.

These lenders, says Shelly Repp, general counsel for the National Council of Higher Education Loan Programs, simply “don’t have enough working capital to carry all the expenditures they’re expected to make.”

In response to the ongoing liquidity issues facing nonprofit lenders, lawmakers are pushing the federal government to come up with new solutions quickly, calling for a hearing next month to consider new options for student loan providers and asking President Bush to offer additional help to nonprofit lenders.

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Proposed Bill Combines House, Senate Versions of the Higher Education Act

Student Loan Girl — Wed, 14 May 2008 23:51:00 GMT

Congressional aides hope to finalize a renewal of the Higher Education Act by Memorial Day that merges different versions of the proposed bill passed separately by the House of Representatives and the Senate last year, according to an article in The Chronicle of Higher Education (“Compromise Higher-Education Bill Takes Shape in Congress,” May 14, 2008).

Although the draft of the measure that is circulating Washington does not include provisions on graduate education, new programs, or private student loans — three of the bill’s 11 sections — the measure is already nearly 700 pages.

The issues that the two houses appear to have reached a compromise on include college cost watch lists, accreditation, and campus piracy:

Negotiators hope to give consumers more accurate and useful information about higher education costs by bolstering current watch lists. These lists, established by the House bill, already identify the most and least expensive colleges and those with the highest percentage of tuition increases. But under the compromise bill, institutions with the highest and lowest “net price” would also be listed.

The current 15 members of the National Advisory Committee on Institutional Quality and Integrity, which advises the Department of Education on accreditation, would be replaced with 18 new members, six each appointed by the secretary of education, the Senate, and the House.

Colleges would be required to develop plans to detect and prevent illegal downloading of music and videos on college campuses and to offer alternatives to such illegal downloading.

Issues that are still being negotiated include whether states should be punished for cutting their higher education budgets, whether textbook publishers and colleges should be required to disclose more information about the costs of the books, and whether colleges should be required to notify students and employees within 30 minutes of a campus emergency.

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