News

Students face new direct lending

With contributions by Christine Frear

CLARION, Pa. – Students who applied for loans this fall semester found themselves faced with Direct Lending, a new not-for-profit federal student loan program.

Students were directed to log onto studentloans.gov for their entrance interview and to sign a new promissory note with the federal government.

As of July, the federal government put into effect the Direct Lending policy in which students receive all new loans directly from the Treasury.

Before, private banks were the originating source of student loans.

The types of loans stay the same, such as Stafford and PLUS, but the entity backing the loan has changed.

The program eliminated by Direct Lending was known as FFELP, or Federal Family Education Loan Program, which ended in late March.

Benjamin Rosenberger, director of Financial Aid at Reading Area Community College, commented on the switch.

“It’s my job to get the best package of aid to the students, and that is Direct Lending,” Rosenberger said.

The concept of Direct Lending goes back to Sen. Edward Kennedy some 15 years ago.

Kennedy was well known for speaking out against the private sector dealing in education affairs.

“It’s a shame that he died [some] months before the passage,” Rosenberger said.

“In the end, for me, Direct Lending is a piece of cake,” Rosenberger said.

Rosenberger said a 24-hour approval process versus FFELP’s two weeks isn’t a benefit only to him.

Direct Lending has no impact on interest rates, Rosenberger said, but instead initiated a discount on the origination fee of the loan.

In a letter to the president of Reading Area Community College, Rosenberger said the implications of the switch for students include simplicity of access, increased ability to manage, plentiful supply, objectivity in loan
determination and increased options with loan forgiveness, among many others.

While these are easily identified, the implications for the economy are more complicated.

Rosenberger said the removal of the student loan banking operation has resulted in significant job loss and the obliteration of competition and many unhappy not-for-profit lending entities that were not given the chance to amend their policies to compete with the current program.

Rosenberger said he is confident that “as a consumer, you’re protected a lot better through Direct Lending.”

Rosenberger said the switch can also be attributed to the downfall of the securities market as it experienced its heart attack in July 2008.

The banks had the ability to originate student loans, guaranteed by the federal government. These loans, based upon amount, risk type and loan type, were sold off and exchanged as a means of moving risk and increasing liquidity.

Banks shuddering under the weight of risk and continued student demand were given the ability to put their student loans to the Department of Education by way of the Ensuring Continued Access to Student Loans Act.

This meant that banks with liquidity issues would sell their loans to the government during a certain given period, which almost every bank did, according to Rosenberger. This was a good set-up for switching to Direct Lending.

“These changes are more effective because in the past students had to become a member of a credit union to apply for loans through the state,” said Clarion University’s Director of Financial Aid, Kenneth Grugel.

“This was troublesome for many if they or their parents were already members of another bank,” Grugel said.

Students who want to apply for a federal loan can fill out an application with student services or a FAFSA form online at studentloans.gov.

It is not too late to apply. The deadline for aid is not until May 2011.