University to switch to direct lending

President Barack Obama’s plan to reform student financial aid remains in limbo, but USC is planning to switch to direct lending — a move that would likely be required if the legislation is passed — regardless of what happens in Washington, D.C.

Under the current system, borrowers may choose either a bank-funded Federal Family Education Loan or a U.S. Treasury-funded Federal Direct Loan, depending on which program their school uses.

The Student Financial Aid and Fiscal Responsibility Act that passed the House of Representatives in September included provisions to eliminate FFEL and switch entirely to direct lending; the Senate version of the bill is expected to contain this requirement too.

The bill has stalled since moving to the Senate, but Katharine Harrington, USC’s dean of Admission and Financial Aid, said USC will switch to the direct lending program for next year.

“Due to the volatility of current credit markets, cuts in government subsidies and the uncertain future of pending legislation that may force a change in the nation’s student loan delivery system, the university is switching its participation from the Federal Family Education Loan Program to the Federal Direct Loan Program for the 2010-11 academic year,” Harrington wrote in an e-mail.

Harrington said the direct-lending program should simplify the loan process for students. Loans will come from the U.S. Treasury, which she said is a more stable funding source than many of the private banks and loan companies that have been hit hard by the economy.

The school has been working to prepare for this move for several months, Harrington said, and the system will be in place in time for the 2010-2011 school year.

“Although the change has created additional work, we are well positioned to complete it in the coming weeks,” Harrington wrote. “Both the university and our student borrowers will benefit from this move to the Federal Direct Loan Program.”

USC Credit Union Vice President Michael Kim said USCCU has loaned up to $130 million annually with only $30 million in assets but will revamp its loan program this summer because of financial uncertainty — officials are hoping to circumvent this exact problem with direct lending.

“We don’t want to offer something we can’t guarantee long term,” he said.

During the last three years, according to USA Today, about 550 colleges eliminated the FFEL program while the number of schools using direct lending doubled.

Though USC will switch to the direct-lending program one way or another, officials are still waiting to see action on SAFRA, which contains a number of other changes to financial-aid policies.

Beyond the switch to direct lending, SAFRA would change the maximum Pell Grant to one percent above the inflation rate, quadruple the Perkins Loan program, increase subsidies for historically black and minority-serving universities, provide loan forgiveness to military members active during school, and simplify the Free Application for Student Aid.

SAFRA would save more than $80 billion during the next decade, according to the Congressional Budget Office. The U.S. Department of Education can borrow money from the U.S. Treasury at about two percent interest — cheaper than private institutions.

By charging interest rates of up to 6.8 percent as set by Congress, the DOE reaps profits that would be used to increase Pell Grant awards to $5,550 in 2010 and to $6,900 by 2019.

Over the past few months, SAFRA has taken a back seat in the Senate as the health care bill stole the spotlight.

Senate Democrats are hoping to pass their version of the financial-aid bill using a special vote known as budget reconciliation, which requires approval by 51 votes instead of 60. As reconciliation can only be used once per session, and Democrats want to save it for health care reform legislation, the student-aid bill will have to wait.

Recently, however, government officials have begun to talk about the possibility of merging part of the health care bill with SAFRA, a move that would expedite the passage of what many consider to be a critical bill.

“We think making more aid available to students is important because it is essential in today’s economy to have more students go to college and graduate,” DOE spokesperson Jane Glickman said.

One obstacle SAFRA faces is opposition from lenders. Under SAFRA, the four lenders with government contracts — Sallie Mae, Great Lakes, Nelnet and PHEAA — would still handle support, billing, disclosures and payments once a student receives a loan.

According to Sallie Mae Vice President for Public Affairs Conwey Casillas, lenders support Obama’s plan but are advocating for two changes to the bill.

First, lenders want borrowers to be able to choose which lender services a loan, rather than having the lender chosen by the DOE. Under the current FFEL program, borrowers choose their own lender.

Another amendment proposed by lenders would penalize servicers 3 percent on loans defaulted by their borrowers. They say such a provision, which is also in FFEL, would align the interest of servicers with that of students and taxpayers.

“These enhancements allow for competition and choice, superior default prevention services and bipartisan support,” Casillas said.

The Senate has yet to adopt the lenders’ amendments because of the lenders’ insistence on receiving payments totaling nearly $13 billion over 10 years from the government for originating loans.

Mark Kantrowitz, a financial aid expert and publisher of FinAid.org, said he expects the Senate to pass the bill in time for the changes to go into effect July 1, the last date colleges may adopt direct lending for the 2010-2011 academic year.

But co-director of USC’s Center for Urban Education Alicia Dowd said she fears the bill may fail as the health care bill has thus far.

“Obama’s plan to recycle money back into the system is a step in the right direction,” she said. “But my fear is the financial lobby will derail this bill. Students and families have to become aware and speak out against subsidies going to the banks and not the students.”