Federalized student loans poised to become a lot more federal

A bill recently passed in the House should result in cheaper student loans, but heavier consequences for default.

While students bat opinions back and forth about the government’s involvement in health care, many are unaware of a bill on Senate’s table that could dramatically affect how their student loans work.

The bill, H.R. 3221, passed in the house on September 19th and is expected to win in the Senate. If the bill passes, it will mean that the federal government will completely take over the private student lending industry.

Covenant, and about 3,000 other colleges currently use the Federal Family Education Loan program (FFEL) to facilitate students’ Federal Stafford Loans. The FFEL depends mainly on private lenders, like Sallie Mae, to administer and collect the loans.

At Covenant, this means that the Financial Aid Office requires a student to choose a private lender for their loan from a widely-used list of companies. Once students pick a lender, they apply and electronically sign their Master Promissory Note (MPN) online with that lender.

The government currently subsidizes these private lenders, but relies on them to service and collect the loans. In turn, the private lenders pay the government back, but share in interest and compete with each other for lenders. This partnership has been in action since 1965.

If the bill passes Congress, students will have to take out their future Stafford Student Loans through the Department of Education and its Direct Loan Program. Essentially, instead picking of making payments to a bank, students will be borrowing and paying money back directly to the federal government. Basically, there would be no more middleman.

Direct-lending from the federal government has been an option since 1994. The bill would mean that, seventeen years later, it is the only option.

For Covenant’s Financial Aid and Accounting Offices, they are working under the assumption of the “when” and not “if” the bill passes.

“I think in an area like this, the questions are primarily in compliance. In a sense it’s been a federal program all along,” said Vice President of Academic Affairs Jeff Hall.

Though the nationalization of this industry is a massive undertaking, the offices of Financial Aide and Accounting say they don’t think students will see much change on the surface level.

“They’ll simply be sending their check to a different address,” said Accounting Controller Bob Harbert.
The Financial Aid office also says that the changes proposed by HR 3221 it will not affect the money, including scholarships, available to Covenant students in any way.

One thing direct lending will do to the student is make managing their loans more difficult, Financial Aid said.

For example, a student who will be a junior next year (2010-11) who took their Stafford Loans out their first two years and plans to take out those same loans in their final two years will have two years of loans with a private lender and the other two years with the DOE.

The students will only see dramatic change, Harbert believes, if they fail to pay their loans back.

“If former students go into default, they don’t have a bank after them and a collection agency, they have the federal government after them. They can garnish tax refunds, and they can garnish wages much easier than can private collection agencies. I think they’ll find the government will be more aggressive at the collection side than banks can be legally,” Harbert said.

The change also removes the benefits of competition, officials say.

“The government won’t feel any kind of need to make special inducements to get business because they’re going to be only ones making loans,” said Harbert.

Many critics also worry that the sudden shift will result in confusion, a much larger workload, and worse customer service overall.

The Financial Aid office says they will not have to hire more staff to deal with the change. As far as making the July 10, 2010 deadline for the switchover, they say they won’t have a choice but to make it happen if the bill passes. To prepare for the switch, Hall, Harbert, and the Financial Aide office have already undergone some training, and will be attending seminars at the National Federal Student Aid Conference in Nashville, TN this December.

Ultimately, students’ prime concern is if this system is more or less expensive.

Will it be cheaper or better for the students and their families as regards to interest rates, fees, and repayment benefits on the loans taken out through the Direct Loan Program? According to a statement from the Financial Aid office, it appears to be a “little bit cheaper for students.”

The question that students and their families need to be asking their congressmen and women is what will this cost the country in the long run? Where will the money to fund the volume of loans that an additional 3,000 schools will put on the D.O.E. come from?

Hall does not think the switch will hurt the college, but does think may have unforeseeable consequences in the long run.

“It’s not exactly an exciting story for us at this point, but hopefully it won’t get exciting,” said Hall.

External Sources: TIME Magazine, Washington Post, St. Louis Post-Dispatch, NPR.