Direct Lending Bill Sparks Tough Decisions for Colleges

Even though a bill to make the federal direct loan program mandatory has not passed the Senate, many private lenders are migrating from the market, leaving some universities in a tight spot.

“Out of that planning on the part of lenders, you’re seeing schools having to go to direct lending because they don’t have a choice,” said Ruben Garcia, financial aid and student accounts product manager for Campus Management Corp. 

In July 2009, 56 percent of the 453 colleges that answered an e-mail flash survey from Student Lending Analytics reported that they were sticking with the Federal Family Education Loan (FFEL) program, while 8 percent decided to shift to the William D. Ford Federal Direct Loan Program for 2009-10. That's in addition to the 19 percent who said they were already in the direct loan program.

With private lenders jumping ship due to the economy and the pending Student Aid and Fiscal Responsibility Act of 2009, colleges and universities are left to sort out which course to take next.
 

Colleges continue course

The University of Nebraska-Lincoln (UNL) has been in the direct lending program since 1995, the second year of the program's existence, and has exclusively used direct loans for all but two of those years, said Craig Munier, director of the university's Office of Scholarships and Financial Aid. The direct loans cost less to administer and are easier for students to understand. They also provide lower interest rates by cutting out the middleman, in this case, private banks.

The major difference between the two programs is whether students are borrowing from private banks or the U.S. Treasury, said Munier, who volunteers as a board member and served as a former chair of the National Direct Student Loan Coalition.

“The bottom line is whose capital are we going to use to make loans to students and at what cost to taxpayers?" Munier asked. "Everything else about jobs and choice, etc. are really just red herrings in my opinion.”

The FFEL program is set to expire on June 30, and so far, Congress has said it will not extend it. If the Senate does make changes to the federal lending processes for a number of programs, including making the direct loans mandatory starting July 1, the move could reduce federal spending by $40.7 billion over five years and $87 billion over 10 years, according to a Congressional Budget Office (CBO) report made in July 2009.

But in a letter to Sen. Judd Gregg that same month, CBO Director Douglas Elmendorf  said, "If the projected savings for the president's proposal was calculated using risk-adjusted discount rates, those savings would be $47 billion over the 2010-2019 period — a difference of $33 billion relative to CBO's cost estimate for H.R. 3221 issued on July 24." The Education Department maintains that the initial number should be used in congressional decisions about the programs.

In October 2009, Education Secretary Arne Duncan sent a letter to 3,500 colleges and universities that urged them to "ensure uninterrupted access to federal student loans" by having the capability to issue direct loans for the 2010-2011 academic year.

The FFEL program has never worked well for public large universities such as UNL, whose enrollment hit 24,100 this fall, because they attract students from all 50 states. However, the program probably works best for small regional institutions that draw students from a narrow geographic location around their campuses, he said.

At Indiana University-Purdue University Fort Wayne, the FFEL program has served its purpose, and the direct loan program will not take its place unless Congress makes the program compulsory, said Financial Aid Director Judy Cramer. 

“There’s no mandate to do so, and we enjoy working with lenders who are right in our community," Cramer said. "We’ve been fortunate that our lenders have not left us. I know many schools have chosen direct loans because they couldn’t find an adequate group of lenders, but that’s not our problem at all.”

If the Senate does pass the financial aid act, the 13,000-student university will be adequately prepared to move to direct lending, but like every system conversion, it will be disruptive and something to be reckoned with. Cramer said she wishes that students had some say in the matter because it will impact them and could result in them having loans in different places.

Colleges change course

For most of the past 35 to 40 years, the University of Wisconsin-Madison had a great relationship with lending partners in the FFEL program. The last couple of years, however, have been difficult, because the lenders have struggled to come up with capital, said Susan Fischer, director of the Office of Student Financial Aid.

Some offered loans sporadically or sold their loans to the Education Department, which sometimes changed the students' minimum monthly payment amount, payment due date or account number. Other faithful lenders became nervous because of the legislation pending in Congress, so they moved out of the market.

As a result, the university discontinued the FFEL program and replaced it with the direct loan program for the 2010-11 academic year.

“The combination of all those things made it seem like it was the right time,” Fischer said.

To prepare for the switch, a number of teams are communicating with students and parents, as well as testing their software to see how it will handle the direct lending. Large universities including Duke are sharing what's worked for them and allowing others to use the financial aid information they have on their site.

"It’s scary no matter what, but when you have people saying, 'Whatever you need, we’ll help you,' boy does that make a difference," Fischer said. "It’s really a wonderful thing.”

The university has about 17,000 Federal Stafford Loan borrowers a year, but it will test the system on a smaller cohort of a few thousand students who sign up for summer school.

In the Colorado Community College System, all 13 schools moved away from the FFEL program into direct lending in 2009 because many lenders stopped participating in the Stafford Loan program — a move that's made the loan process faster for Director of Financial Aid Matthew Martinez, who works at Lamar Community College.

With the students who still have loans through the FFEL program, he has to spend more time verifying whether students are taking the right amount of credit hours and what they're enrolled in for the semester.

“I have had to certify a few students, and it can take up to about an hour a person to certify a loan and get it all entered into our software," Martinez said, "whereas with the new direct loan in our software, it takes me about 5 minutes to do everything that I need to for about 10 students. It’s a lot easier.”

Whether colleges have decided to switch to the direct lending program or not, they should be ready in case the Senate does make it mandatory this summer, Munier said.

“An institution would be best advised to at least be prepared to make a direct loan for next year," he said. "Most institutions are quite dependent on financial aid and especially student borrowing for their cash flow, and it’s just too critical of an issue not only for the well being of the students, but for the well being of the institution, to leave that much money to chance.”