College administrators face a student lending landscape in upheaval at a time when students are borrowing more money than ever to pay for college. 

The Obama administration wants to end federal subsidies for private student loans, forcing colleges to shift to a direct-lending model from the government–and the House of Representatives passed legislation in September to make that happen. But the Senate has yet to take up the bill, and Capitol Hill staffers say that’s not likely to happen until after lawmakers resolve the health-care debate.

Now, the Education Department (ED) is trying to force the issue. Education Secretary Arne Duncan urged colleges and universities last month to prepare to use the government’s Direct Loan Program for the next school year. But college financial aid directors are split in their support for the switch, which could require the use of new software and training.

In a letter sent to thousands of colleges and universities on Oct. 26, Duncan pointed out that a law passed about a year and a half ago to ensure that students with financial need could get a loan even if their college did not participate in the federal direct loan program will expire in June.

"Congress acted quickly to provide the Department of Education with unprecedented temporary authority to directly finance loans made through FFELP [Federal Family Education Loan Program] lenders," he wrote. "However, while there are encouraging signs that the financial markets are rebounding, the most prudent course of action is for you to ensure that your institution is Direct Loan-ready for the 2010-11 academic year. That way, loan access for your students will be assured."

Some schools balking

ED provides software to help institutions make the switch, but colleges still must implement the software and train their staff members how to use it–a costly and time-consuming undertaking. Some financial aid administrators are hesitant to make the move for this reason, while others object on principle.

Clint Hanson, vice president for administration and director of financial aid at Thomas More College in New Hampshire, said his school does not plan to switch to the Direct Loan Program until there is a mandate from Congress.

"The primary reasons for not making the switch are, one, currently enrolled students will be forced into having two different loans–Federal Stafford and Federal Direct–when they graduate; and two, the current Federal Stafford Loan program is an example of a very effective and very financially stable public-private partnership in the delivery of student loan services to students," he said.

Hanson, who has been a financial aid officer for 30 years, said he has seen numerous funding issues with federal student aid programs in the past, and he sees more significant issues ahead given the large national debt.

"It is clear that the negative perception of the Federal Stafford Loan program is a result of some overly aggressive proprietary lenders," he said. "The irony is that if the Congress had not changed the law to allow nonprofit lenders like Sallie Mae to become for-profit entities, many of the excesses exemplified by the Sallie Mae model would have been avoided."

Hanson said Thomas More has had a very positive experience over many years with the nonprofit organization it works with, the NHHEAF (New Hampshire Higher Education Assistance Foundation) Network Organizations. He said he believes allowing nonprofits to supply student loans is a sensible alternative to direct government lending.

"The nonprofit student loan lenders should be the principal partners in the delivery of federal student loans, rather than a bloated federal bureaucracy or the many greedy for-profit lenders," he said.

‘The writing is on the wall’

Yale University, which previously had resisted the switch, will adopt the Direct Loan approach beginning next year, Director of Student Financial Services Caesar Storlazzi said Nov. 17.

Yale will make the switch before being mandated by Congress, because the university must install new software and adopt new administrative procedures in preparation for direct lending, Storlazzi said. "The writing is on the wall, and we want to make sure that there is a smooth transition to the Direct Loan program when it passes," he told the Yale Daily News.

Discussion about whether Yale should adopt the Direct Loan program has been going on for more than two years, Storlazzi told the campus newspaper. Yale has been reluctant to make the switch before, because private lenders traditionally offered better service and borrower benefits, such as lower interest rates, he said. But he noted that, owing to the economic crisis, such benefits have all but disappeared–making FFELP and direct loans very similar.

Rollins College in Florida has been a direct-loan institution since the mid-1990s, said Financial Aid Director Steve Booker, and he said there are many benefits to providing federal loans directly to students.

"The benefits to the student really are the same. There is no difference to the student. They’re going to get the funds regardless, and the Department of Education really runs both programs," he said. "For the school, you have a little more control over it. You can disperse the funds a little bit faster."

The steps involved in making the switch, Booker said, mostly depend on what kind of technology a school has in place.

"[For] those schools that have the major [software] systems [such as] Banner and PeopleSoft, it’s not an issue, because there are plenty of schools that are on direct lending and FFELP, and those systems have been around for a number of years and have supported both direct lending and FFELP," he said.

Schools that are likely to have the most trouble, Booker said, are those that have homegrown student information systems that don’t support direct loans.

"With homegrown systems, it’s really up to you to come up with the modifications and to work out communications back and forth. If you’re on a homegrown system … then someone on your campus has to write all that code and all that programming language" to set up the system for direct lending, he said.

Booker said that while he was with his previous institution a few years ago, the school saw the declining economy and the need for a switch to direct lending coming and decided to begin making the change then.

He also noted that many banks and private lenders are no longer offering student loans or have to sell their loans to the federal government, so he doesn’t understand why opponents to the Direct Loan Program claim the switch is a government takeover.

"The Department of Education controls the program regardless. It’s just how they deliver the funds. And direct lending is similar to how we get all the other funds from the federal government right now. So we get our Pell Grants, our work-study funds, and so on, the same exact way that we get our Direct Loan funds," he said.

"With the credit environment we’re in, the banks don’t have funding to lend, so they wind up selling the loans back to the Department of Education anyway. So the ultimate holder ends up being the Department of Education, not the bank."

Booker said it makes sense for schools to begin to make the switch even without Congress’ mandate. "That way, you’re sure to have the funds when students start school in the fall," he said.

A growing need for loans

The changes in student lending come as more students and parents are looking for ways to pay for a college education amid a slumping economy, including applying for more loans.

Students are borrowing more to pay for college, according to numbers from ED. Federal student-loan disbursements, which is the total amount borrowed by students and received by schools, in the 2008-09 academic year totaled $75.1 billion, growing about 25 percent over the previous year.

Scott Klene, senior director of student financial services at Bellevue University in Nebraska, said he has seen a significant increase in students applying for federal aid at his school as well.

"There’s an increase in need," he said. "But overall, students are still getting financing in the way they were before. We haven’t seen a decrease in students who are able to pay for school."

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Direct Loan Program