Congress has not given final approval to legislation ending federal subsidies for private student loans for college. But Secretary of Education Arne Duncan sent a letter Monday to thousands of colleges and universities urging them to get ready to use the government’s Direct Loan Program in the 2010-11 school year.
The House of Representatives last month passed the Student Aid and Fiscal Responsibility Act, expanding the government’s direct lending and ending the current program of government subsidies and loan guarantees for private lenders. Under that law, all colleges would be required to convert to the federal Direct Loan Program by July 1.
But the Senate has yet to take action on the legislation, and it is uncertain whether it will do so before the health care debate is resolved.
Meanwhile, most of the nation’s 5,000 colleges and universities have not taken the necessary steps to convert to direct federal lending. The letter, sent to some 3,000 campuses that have never used direct lending, was an effort to prod them into action.
“Some campuses are thinking they’ll wait until Congress acts, but to wait is to endanger loan access for students,” said Robert Shireman, the deputy under secretary of education.
In the past year, Mr. Shireman said, about 500 institutions have switched from the subsidized program, the Federal Family Education Loan program, into direct federal lending.
A year and a half ago, when uncertainty in the financial markets threatened the availability of private loans, Congress passed a stopgap law to ensure that families with financial need could get student loans, even if their college was not in the federal direct loan program.
But that temporary legislation, which colleges used to make billions of dollars worth of new loans in the past year, will expire in June. And even if Congress does not act to end the subsidized lending program and require direct federal lending, there is no guarantee that any lenders will continue with the private loan program.
Private lenders are fighting to stop the switch to direct federal lending. And at their third-quarter earnings conference call last Wednesday, executives of Sallie Mae, a private lender, spoke of the “transition risks,” saying many schools’ financial aid offices are thinly staffed, have only just finished processing loans for this academic year and would have trouble making the transition to a new lending system in time for next year.
Mr. Shireman said that for most colleges and universities, it takes three weeks to four months to make the switch, which requires changing computer programs and retraining financial aid administrators.