FFELP facts
In 2008, three in four colleges participated in FFELP and one in four participated in the Direct Loan program.
One in four Direct Loan colleges also participated in FFELP.
More than 1,600 colleges and universities provide loans through the Direct Loan program.
548 colleges have joined Direct Loan since last year.
The number of colleges offering FFELP loans fell 3.6 percent in the last year.
Since the credit crisis, Direct Loan program loan volume increased 40 percent, while FFELP loan volume increased 12 percent.
Source: National Association of Student Financial Aid Administrators
Federally insured loans offered under FFELP
Stafford Loan: Interest paid by government when student is in school, 6.8 percent interest.
Unsubsidized Stafford Loan: Interest not paid by government when student is in school, 6.8 percent interest.
PLUS Loan: Enables parents to borrow to pay the cost of higher education for dependent undergraduates and graduate students, 8.5 percent interest.
Source: U.S. Dept. of Education
The White House is pushing to eliminate federally backed private student loans in a move to save billions of dollars and make the federal government the only provider of student loans.
Financial aid officers and lawmakers in Tennessee and Georgia are critical of the plan, saying it could squelch competition and cut “back-end” benefits — such as lower interest rates — students can get through private companies.
U.S. education officials say $47.5 billion to $97 billion could be saved if the Federal Family Education Loan Program is cut and the U.S. Department of Education Direct Loan program begins originating and managing student loans.
Eliminating the private program “would decrease competition in the student loan industry and reduce the number of financial options families have to send their kids to college,” said U.S. Rep. Zach Wamp, R-Tenn. “Congress sometimes has different priorities than the executive branch, and I hope this is one of those times.”
But the savings could allow the White House to make Pell Grants a federal entitlement such as Social Security and Medicare, officials say.
“We want to stop subsidizing banks,” U.S. Education Secretary Arne Duncan told the Chattanooga Times Free Press. “We will get a lot of push-back from the banks.”
The interest rate for the private and the Direct Loan programs are the same, 6.8 percent. But some banks and lending institutions have offered even lower rates as incentives for repayment on FFELP loans, said Rexanne Bumpus, financial aid director at the University of Tennessee at Chattanooga.
“Students have gotten a reduction in interest rates if they make so many payments on time or do automated payments,” she said.
The only incentive offered by the Direct Loan program is a 0.25 percent rate cut for students who make automated payments, officials say.
Yet some say loan discounts — which could get as high as 2 percent — are a thing of the past.
Mark Kantrowitz publishes FinAid.org, a Web site that tracks financial aid.
He said that when Congress cut lender subsidies in late 2007, many lenders responded by cutting their discounts to students.
And with the recession limiting cash flow, many banks are selling their loans to the Department of Education, which doesn’t allow discounts that aren’t set by the federal government, he said.
“They can’t promise the borrower a better discount,” he said.
Shrinking participation
Seventy percent of colleges and universities in the United States now participate in the Federal Family Education Loan Program, but that number is dwindling.
More than 25 percent of FFELP participants said they either are considering or already are committed to moving into the Direct Loan program next year, according to the National Association of Student Financial Aid Administrators.
James Mooney, a financial aid officer at the University of Georgia, said the school shifted to Direct Loan more than a decade ago to simplify lending and cut out the middleman.
“We absolutely love it,” he said.
But making Direct Loan the only option could have its downside, said Sen. Lamar Alexander, R-Tenn., who is calling President Barack Obama’s plan to cut the private program “another Washington takeover.”
“Instead of letting 12 million students decide they would prefer to borrow from 2,000 institutions on 4,400 campuses all across America, they are saying, ‘No, everybody just line up at the U.S. Department of Education to get your student loan,’” Sen. Alexander said last week on the Senate floor. “It makes no sense to turn the U.S. Department of Education into a national bank for student loans. ... The savings are illusory.”
Mr. Mooney, like many financial aid experts, favors a compromise.
He said the federal government should provide capital for student loans and allow lenders such as Sallie Mae, one of the largest providers of private student loans, to issue and manage the loans.
“The government would be the beneficial owner,” he said.
In the end, either scenario involving the private loan program could have more impact on banks and colleges than students, Mr. Kantrowitz said. Students still will receive loans, and the maximum interest rate will remain the same.
“Money is green wherever it comes from,” he said.
Joan Garrett McClane has been a staff writer for the Times Free Press since August 2007. Before becoming a general assignment writer for the paper, she wrote about business, higher education and the court systems. She grew up the oldest of five sisters near Birmingham, Ala., and graduated with a master's and bachelor's degrees in journalism from the University of Alabama. Before landing her first full-time job as a reporter at the Times Free Press, ...
This is wonderful, in the mid 80's before private banks got involved in student loans, my student loan provided a 3% fixed loan for tution and books. With term that allowed me to get my career going, and pay back the loan. I did and thank you federal governement.
I was required to begin paying back after I graduated, with a term of 10 years for 3%.
This is wonderful for young people, who are are now getting robbed by greety banks.
UTC School of Engineering, without the loan progam, my dreams would not have been possible. Get the greety bankers out of the student loan program ASAP.
By all means, eliminate private banking followed by private everything along with contract law...and eventually erasing the Tenth Amendment. We are already well on the way to doing that.
The federal government is so much better than private enterprise at giving the people what they want [rather than what they need].
"From each according to his ability, to each according to his need." Or something like that.
I wonder what yesteryear's honored dead would make of that. Appears their deaths were in vain after all. No wonder we have such difficulty fielding an army today...
Herein lies the problem:
"But the savings could allow the White House to make Pell Grants a federal entitlement such as Social Security and Medicare, officials say."
I cannot believe someone would hold these two entitlement programs up as examples when both are well on their way to bankruptcy because of inept government management and the inability of government officials to control their spend-happy ways.
And now they want to create another entitlement in this vein?
Congress started the downfall of the FFELP when they cut the subsidies. Lenders warned them in advance that they would leave the program if this was done, but they went ahead anyway. It was so much easier to throw out the baby with the bath water, than to perform the meaningful oversight they are supposed to.
Now, they ignore the fact that they themselves started the FFELP's problems and say that it is a 'failed' program.
All the benefits and savings of getting rid of the program go to those who do not take out federal loans.
http://www.collegeloanconsultant.com/federal-direct-student-loans.html
I will be in debt for quite sometime after I graduate. I remember Obama calling this student loan stuff a mortgage and it really is once you think about it. My interest rate is 6% on an unsubsidized student loan, which encrusts interest while I am still in college.
After I graduate or get out, all of that money is bulked together and then interest builds on interest, which sums up to double jeopardy!
For all those who think banks are the solution, look around to where the banking business is today. Grants have been the heart of mainstream students for decades. Education is the key to our economy in this competitive world. The recession is forcing colleges to look outside the box, like shrinking four years into three. Most smart kids today have the equivalent of a year college by the end of high school anyway.
"Most smart kids today have the equivalent of a year college by the end of high school anyway."
Good point, EaTn.
Education -- self-education -- is the key. Do not expect our public schools to teach much of anything... too many of their students can hardly read when entering HS.
When my kids, my neighbors kids, my friends' kids and their friends' kids entered school at 6 yrs or age, essentially all could read at today's 4th grade level AT A MINIMUM. Today the military services have to teach its HS grad repair people how to read before sending them to Tech School!
If you want your kids -- or yourself -- to excel in today's competitive world, you had better follow the Asian-American lead, stop the partying and teach/help/monitor them [or study] at night after work.
Most of banking's problems were brought on by the fed gov't EaTn. Examples abound; allowing banks to combine their commercial and their private banking systems, encouraging sub-prime ARMs with no ability to repay, etc.
Yes, the banks were greedy and jumped at the chance to rake it in; regulation is necessary but it got out of hand, for the gov't is also greedy. Greedy in a different way called "bureaucracy building".
Status within the gov't civil service is directly related to the number of people you command/control. The more people, the higher up the ladder and the higher the pay. It is self-feeding. I suspect Dear Leader hasn't grown above that mantra and is now instituting it.
The Federal Stafford Loan (www.StaffordLoan.com) has always been the best option for students. These are diffenrent from Private Student Loans (www.PrivateStudentLoans.com) which are not guaranteed by the government. Banks heavily promoted the program through schools and to their customers - ensuring everyone knew about this great option. Is the government going to do the same job - promoting the program to students, delivering customer service and insuring low default rates? I would guess no - we'll know in a couple of years when students start complaining...
The article is misleading in it's headline. Private loans are loans not connected to any government guarantee and carry near credit card rates.
What is proposed to eliminate are the private lenders in what has become a corrupt and inefficient method of financial aid delivery.
The Sallie Mae CEO has taken nearly a half billion dollars personally as a middleman. He now owns three mansioned estates (annapolis, MD / Harwood, MD / Naples, FL), one with a private 18 hole golf course - although an old photo and the golf course is still under construction, you can see where taxpayer subsidy dollars go via Google Maps at coordinates 38°51'38.52"N, 76°40'4.47"W
Sallie Mae owns two private jets - they used to own three. The jets are tail numbered N50FD and N188AK.
You can see these jets at the following links: http://www.airliners.net/photo/Israel-IAI-1125A-Astra/0523432/L/ http://www.airliners.net/photo/Israel-IAI-1124-Westwind/0841982/M/
That is where the taxpayer subsidies are going, private golf courses and private jets.
Let's not forget the corruption that the subsidies fund. The following student aid administrators got into more than a little hot water for taking kickbacks and other inducements from the student loan industry - most lost their jobs: Ellen Frishberg - Johns Hopkins Catherine Thomas - USC David Charlow - Columbia Lawrence Burt - University of Texas Walter Cathie - Widener University Tim Lehmann - Capella University Daniel Pinch - Emerson College
The National Association of Financial Aid Administrators (NASFAA) defended the actions of these individuals. Some receiving tens of thousands of dollars from the private lending companies. And, the hits just keep a'comin . . . this month, the City Attorney for the City of San Francisco raided the City College of SF for alledged financial irregularities by their previous Chancellor, who just happens to be the President of the NASFAA.
Choice and competition is a lie under the ffelp. In 2008, more than 100 Universities were under investigation for more than 90% of their FFELP loans going to one provider. The notion that there is competition in this "market" is ridiculous - the student loan companies pay or induce schools for preferred lender status resulting in nearly all loans at any one school going to one provider. In the above instances, those inducements were to the administrators themselves. From "School as Lender" to call centers to printing - the inducements to schools are great and the payoffs for the middlemen even greater.
And Lamar Alexander - he is one of the top ten who receive contributions from the student loan industry - so his position is not a surprise.
Mark Kantowitz is absolutely right, when congress slashed subsidies it was the end of many of the lender benefits to students. That said Mike 1212 is as wrong as Mark is right. There was a lot of choices for students before Congress started tinkering with the program. Was there some taking advantage of the program? Yes, but they were a small percentage of the problem. The initial formula for students loans is a good one; Lenders lend the money Guaranty agencies act as a middleman and the only cost to the government is when a student defaults (where the real money for all those jets and mansions came from) plus the Fed paid a small fee for sending out bills and servicing the accounts. Were banks making money yes but they didn’t get rich off student loans they made more money after the relationship was established. Student loans were almost a loss leader for credit cards, car loans and mortgages. But now the Fed comes along and claims that they can be the source of funds do all the servicing (which they will pay someone to do ) and absorb all the defaults for not only less money but save 50-100 billion in 10 years. Sorry it just doesn’t pass the smell test.
Mike1212 is not wrong. Cutting subsidies came after the scandals. The scandals showed how choice by the Student (the choice that matters) was eliminated as preferred lender lists funneled student loans into one lender more than 90% of the time at more than 100 schools.
The corruption by individuals was minor - maybe 6-10 Administrators (at least that got caught). The corruption was huge on the institutional level from call centers, printing, School as lender, and other items that incentived and induced efforts that the FA office could take off budget; or, profit for return of near exclusivity in loan origination.
Then, you have the DOE with a COO who prevented effective oversight (see the Invetigator General report from last month regarding this issue). Combine that with her lieutenant for oversight on the take ($100K from a lender), and public sentiment starts to turn.
Then, you have a SLM CEO with a private golf course when he's not in one of the three company jets - and the natural conclusion is that these middlemen aren't needed; or, don't need all the subsidies they are getting.
The FFELP lenders brought this upon themselves. and now, they are whining like little girls who dropped their ice cream.
Mr. Kantowitz's continued career depends in some degree on continuation of the FFELP. He runs to every media outlet he can to position as expert. Now that the gig might be up - his self interests are dictating his view.
Review the history of the program, with each reauthorization of the Higher Education Act (at least the last 3) subsidies have been reduced. While the subsidies were gutted after the scandal broke this was not the first time subsidies were cut. For the sake of argument let’s say everything you say is true (and most of it is) do you really believe that ending the program is the answer? Do you really think students will benefit more where competition is stifled. Do you believe that there will actually be 50- 100 billion dollars in savings? I certainly don’t. What I believe is there will be no savings and student will pay for the added cost by paying a fixed rate (another bad change by the fed) interest rate that is substantially higher then the Feds cost of funds. This is bad medicine and somebody should point out that there is a reason (customer service, processing advantages, problem resolution, training ) that until recently 4 out of 5 colleges chose the FFEL program.
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