Private student loan program fading

Private student loan program fading

May 25th, 2009 by Joan Garrett McClane in News

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, 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.