Spokane Journal of Business

Changes to make federal student loan processing faster

New legislation effective July 1 ends bank-based federal student loans

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Changes to make federal student loan processing faster

For college students looking to apply for federal financial aid, the process of securing a federal loan this school year will be faster and more streamlined, but despite big changes in how the U.S. government runs the program, impacts on students should be minor, financial aid officials at colleges here say.

As part of the Health Care and Education Reconciliation Act of 2010, President Obama's much-debated health-care reform bill, the maximum amount of a Pell Grant will be increased, and bank-based federal student loans will be completely eliminated.

The Federal Family Education Loan Program (FFEL), which handled Stafford, PLUS, and Consolidation loans, has been replaced by the new Federal Direct Loan Program (FDLP). Now, all federal student loans are awarded directly by the U.S. Department of Education, rather than by private sector banks and lending agencies as they formerly were under the FFEL, the Department of Education says.

Under the old program, recipients of Stafford or PLUS loans were required to choose a bank to serve as the direct lender of the federally guaranteed money. Now, under the new Direct Loan Program, federal loan money comes directly from the U.S. Treasury, cutting out banks as the middlemen, the Department of Education says.

"It's actually a little more streamlined and quicker than the bank loan process. That is really the appeal to it," says Bruce DeFrates, director of financial aid and scholarships at Eastern Washington University.

The U.S. government still assigns the loans to private servicers, which will collect payments on the loans on its behalf, he says.

"The main difference," says Sherry Oberst, associate director of financial aid for Gonzaga University, "is that they go through the school, rather than the lender. In some ways it's a much easier process."

Oberst says that the loans themselves have not changed at all as a result of the new legislation.

Some institutions have been providing direct loans for over a decade, including Community Colleges of Spokane, which was not affected by the change.

"We have been a direct loan school since at least 1993," says Tammy Zidell, director of financial aid services at Spokane Community College.

Zidell says that before the legislation, colleges would choose to offer only direct loans to their students, or only bank-based loans, but now no longer have that option.

"Direct student loans have always been around, but being required is what is new," she says.

Because of the change, banks are losing a chunk of business, the industry says.

Before the change, banks were making some profit from the interest they charged on the federally-backed loans to students, but in most cases it was less than 2 percent or 3 percent, says Harrison Wadsworth, a student loan specialist with the Consumer Bankers Association, in Arlington, Va.

"The segment of the industry involved in federally-guaranteed student loans is closing up, so it's a major impact on the student lending part of the banks. A law has passed that is putting them out of business," he says.

Banks and credit unions still make student loans, but not under a federally-guaranteed program. Some large lenders have reduced the interest rates they charge for such private student loans, including Wells Fargo & Co., which said that it will start offering student loans to qualified borrowers at rates as low as 3.5 percent. Wadsworth, however, says such moves aren't directly related to the recent change in legislation, but rather are due to the competition among lenders.

"Banks are still making non-federal loans, which are normally borrowed after a student has exhausted their federal student loan eligibility," he says.

Wadsworth estimates that in 2009, banks and other financial institutions made about $12 billion nationally in private student loans, while federally backed student loans totaled around $58 billion.

Another aspect of the federal student loan reform is an increase in money available for federal Pell Grants, which don't have to be paid back upon graduation and are awarded to the neediest students. The Department of Education says that the savings generated by the switch from the FFEL to the FDLP program is what has allowed the Pell Grant increase.

DeFrates says the maximum amount for Pell Grants went up $200 per student per year between the 2008-2009 school year and the current school year, and now is at $5,550.

The legislation will provide $36.1 billion to the Pell Grant program over the next 10 years, and increases each year will be based on inflation rates, says the Pennsylvania Higher Education Assistance Agency, one of four major servicers of loans made under the new FDLP.

Many students who took out federal loans before the education reform passed have been and continue to be notified by the Department of Education that some of their loans have been sold by the bank that formerly held them to the U.S government. The sales of loans taken out during certain time periods should be complete in September, Wadsworth says.

Students who had their loans sold and are still in school are required to sign an electronic promissory note with the government, "which hasn't been a big deal," DeFrates says.

Many of the outstanding federal loans that were sold to the government still will be serviced by the banks that originally lent the money, Wadsworth says.

New federal loans made through the FDLP will be assigned to one of four servicing agents, as designated by the federal government, Defrates says. Those servicers are Sallie Mae, Nelnet (National Education Loan Network), Great Lakes Higher Education Corporation, and the Pennsylvania Higher Education Assistance Agency, he says.

Before the transition, more than 3,000 lenders nationwide were making federal student loans, Wadsworth says.

For students who now are dealing with loans that were sold to the Department of Education and may be scattered around with different servicers, consolidating their federal loans is another option that is part of the new FDLP, DeFrates says.

When consolidating loans, interest rates are based from the weighted average of each loan's total amount and its interest rate, Wadsworth says.

Another new feature introduced by the government one year ago, the Income-Based Repayment Plan (IBR) allows federal student loan borrowers to make their monthly payments based on their income and family size, the department says.

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