Overhaul of Student Loan System in the Works

Student Loan Girl — Mon, 22 Jun 2009 15:30:00 GMT

A bill to overhaul the student loan industry may reach Congress as early as next week; education-committee chairs are working behind the scenes on a piece of legislation that would eliminate the third-party student loan system called the Federal Family Education Loan Program, The Chronicle of Higher Education reports (“Behind the Scenes, a Student-Loan Overhaul Takes Shape,” June 16, 2009).

Although few details have been released about the proposed legislation, lenders and a large number of Congressmen are hoping the FFEL program won’t end up on the chopping block like President Obama has proposed. Already as many as 13 counterproposals to the elimination of FFELP have begun circulating Congress, including a detailed plan from lending giant Sallie Mae.

It’s not likely, however, that the FFEL program will survive this legislative session, some Congressmen say, considering taxpayers could see as much as $94 billion in savings over the next 10 years if FFELP were eliminated, according to estimates from the Congressional Budget Office.

Obama had originally suggested that these savings, which have been readjusted down to $87 billion, could be used to increase Pell Grants award amounts each year at a rate equal to the Consumer Price Index. It now looks like Congress will, instead, propose that the money be infused into the Pell Grant program to allow appropriators to “continue to set the maximum [Pell Grant] award” so as not to end up capping the maximum award amount.

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More Schools Offering Direct Student Loans

Student Loan Girl — Fri, 13 Mar 2009 21:25:00 GMT

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.”

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Student Loan Blog : Sallie Mae, student loan industry

Overhaul of Student Loan System in the Works

More Schools Offering Direct Student Loans