The U.S. Senate voted today to change the way student loans are made, a measure that private lenders say will cost them jobs and college loan officers say will simplify lending.
A provision that takes private lenders out of the business of originating student loans through the Federal Family Education Loan Program and switches it to the William D. Ford Federal Direct Loan Program was included in President Barack Obama’s health-care overhaul.
The transition to government loans will generate $61 billion over a decade for low-income scholarships and debt reduction, according to Senator Tom Harkin, an Iowa Democrat and chairman of the committee handling education. While SLM Corp., the Reston, Virginia-based lender called Sallie Mae, said the move will force it to fire 2,500 workers, loan officers at colleges said it may not prove disruptive to students and their parents.
“There’s a lot less change than people were expecting,” said Alison Rabil, the vice provost and director of financial aid at Duke University, in Durham, North Carolina. “Our families are not going to see a significant difference in their day-to-day handling of the loans and what they pay for them.”
Among the roughly 5,000 colleges, universities and trade schools that take part in the federal loan programs, 87 percent have switched to Direct Loans or are doing so, said Justin Hamilton, a spokesman for the U.S. Education Department.
Republicans call the measure a government takeover. America’s Student Loan Providers, an industry lobbying group in Washington, said customer service will suffer. Existing lenders will compete for contracts to service the government loans, according to the Education Department.
There will be some benefits to students. The size of Pell Grants, the federal scholarships for low-income students, will increase to $5,975 in 2017 from $5,550 this year, according to a fact sheet from Harkin’s office. It also lowers the cap on monthly student loan payments, so borrowers won’t pay more than 10 percent of their income on loan repayment, down from 15 percent.
Duke would have made the transition to Direct Loans anyway, because lenders were bundling the loans and selling them to the government through a 2008 federal program designed to ensure loans were made during the credit crisis, Rabil said. That was creating confusion among students, she said.
“Students didn’t know where their loans were,” Rabil said. “We need to make this complicated process as easy as possible for students to pay back their loans. If they don’t know where they are, how can they do it?”
Dealing only with loans from the government instead of three private lenders will simplify assistance at Meredith College, an all-women’s school in Raleigh, North Carolina, said Kevin Michaelsen, the director of financial aid. Meredith handled loans from Sallie Mae; Wachovia, now a unit of San Francisco-based Wells Fargo & Co.; and the College Foundation of North Carolina, a nonprofit based in Raleigh.
“It will help us to some extent where it will be a one- stop shop,” Michaelsen said. “Now that we’re dealing with just one lender, I hope it will streamline the process.
There are bureaucratic hurdles to making the transition, including updating software at some schools and asking students to re-sign promissory notes, said Virginia Hazen, director of financial aid at Dartmouth College in Hanover, New Hampshire. About 700 students will have to sign new notes, although she said she didn’t anticipate any problems getting them to do so.
Dartmouth is switching and expects to be converted to Direct Loans on July 1, Hazen said.
“So far, it’s gone very smoothly,” Hazen said.