Roosevelt is latest university to go straight to Uncle Sam for student loans

Jennifer Smith already had her Chase loan application approved and had submitted her paperwork to the financial aid office at Roosevelt University in Chicago when she was told that, instead, she would be borrowing directly from Uncle Sam.

“They never told me why,” the 24-year-old integrated marketing communication major said. “All of a sudden I had direct loans of this and that much.”

With increasing fears that the credit crunch could spur a student loan crunch, Roosevelt University switched from the Federal Family Education Loan Program (FFELP), which provides students with subsidized, federally guaranteed loans through banks, to the Federal Direct Lending Program, which lends students money directly from the U.S. government.

After reports that some banks were refusing to lend to students at community colleges and smaller colleges, and over 40 private lenders dropped out of the federally guaranteed loan program, Sen. Edward Kennedy (D-Mass.) wrote a letter urging community colleges to make the change to Direct Lending.

Roosevelt University made the Kennedy-endorsed switch, after students were told by private lenders that they were no longer participating in FFELP. Robert Morris College has decided to keep FFELP for its continuing students but has added Direct Lending as an option for incoming freshmen.

The decision to add Direct Lending at Robert Morris College was primarily preventative, said Lee Taylor, vice-president of financial services. None of her students have encountered any trouble securing loans and all of her continuing students are sticking with FFELP. But “we wanted our students to have the ultimate choice.”

“Roosevelt is not by itself by any means,” said Tim Opgenorth, director of financial aid at the University of Chicago, which has been with the Direct Lending program since it began in 1995.

Combined with the fallout from the subprime mortgage crisis and increased legislation over lending practices, the global credit crunch is leading many banks to reconsider participation in FFELP, driving students and schools back to direct loans.

Opgenorth recently attended the National Financial Aid conference in Florida, where “making the change from FFELP to direct lending was a hot issue.” He said estimates were floating around that up to 20 percent of FFELP schools might be switching this year.

According to the Chronicle of Higher Education, close to 300 schools have made the change since February. Only 80 schools switched in all of 2007.

The Federal Direct Lending Program was signed into law by President Clinton in 1993, but according to Jane Glickman, spokeswoman for the Department of Education, its popularity dipped in the late 1990s. Just as mortgage lending was booming, so too were banks rushing to get into the student loan business.

Lenders participating in the FFELP began offering incentives to schools with large numbers of borrowers.
Halfway through Clinton’s first term, the Republican-controlled Congress attempted to dismantle the Direct Lending program. Then, in an era of steep tuition cost increases, banks offering loans at a discount to the federal government eroded the earlier gains of Direct Lending.

But in 2007 New York State Attorney General Andrew M. Cuomo exposed conflicts of interest in the student loan industry involving schools and financial aid counselors receiving kickbacks for pushing certain lenders.

In response to both the allegations of bribery and the years of Republican favor, the newly Democratic Congress passed the College Cost Reduction and Access Act in September. The law reduced federal subsidies for FFELP lenders by about $20 billion, while increasing Pell grants and expanding loan forgiveness and repayment options.

“When Congress cut the lenders’ bottom line by reducing their federal subsidies, the differences between the FFELP Loan and Direct Loan programs for the Stafford Loans have pretty much disappeared,” said Brian Plain, a Certified College Planning Specialist and financial advisor for Wolf Financial Management LLC. “The rate reductions previously offered by many FFELP lenders are now few and far between as profit margins have been reduced for these FFELP lenders that remain in the Federal Loan business.”

“This year, due to everything that’s been happening in the market, Direct Loans are definitely on the rise,” Glickman said.

In May, Congress passed a rescue package for student loan companies designed to keep banks in the federal program. The new rules allow the government to buy loans back from banks participating in the FFELP or for those lenders to receive more government funds, using their portfolios of subsidized loans as collateral. Either option provides cash for banks to lend to students.

But many are concerned the law doesn’t go far enough. Specifically it does not require that banks provide loans to all students, allowing banks to pick and choose which schools and students they want to serve.

Just as less creditworthy homebuyers are getting frozen out of the mortgage market, so too are college students who are traditionally poor bets for paying back their loans. Community college students take out smaller loans and have a higher default rate making them unattractive to lenders, while the paperwork required makes schools with smaller student bodies not worth the trouble.

Sens. Patty Murray (D-Wash.) and Chris Dodd (D-Conn.) introduced legislation in June to require FFELP banks to provide loans to students regardless of the school they attend, the length of their program, or their income level, as long as they are otherwise eligible for federal student loans.

“Lenders offering loans backed by taxpayer dollars shouldn’t be able to discriminate against certain schools or students,” said Sen. Murray in a press release.

As President Bush’s second term winds down, it may be that the future of the FFELP depends on who wins the White House in November. While presumptive Democratic presidential candidate Barack Obama has proposed to end FFELP completely, John McCain wants to keep the private lending market involved.

“McCain believes students should be able to choose and have options for lenders operating in an efficient, appropriately regulated marketplace,” said Wendy Riemann, the Midwest regional communications director for the presumptive Republican presidential nominee.

Both candidates are looking for ways to simplify the Federal Application for Student Aid, and the financing of higher education is looking less private and more public every day.

Although Opgenorth has worked at schools with both federal programs and thinks the differences are negligible for schools and students, “the safest thing, not knowing the future, is Direct Lending.”

For students, the best plan is to think ahead and communicate with the financial aid office. “We continue to reinforce the importance of applying for your loans earlier rather than later, especially this year,” said Plain.

This echoes the advice of financial aid counselors surveyed by the National Association of Student Financial Aid Administrators and released last month. Although 90 percent of those surveyed were either somewhat or very concerned about the current student loan crunch, their main worry was the impact of increased complexity on students and schools.

“Multiple servicers could be an additional burden for students who will need to make payments to each of their servicers,” according to the survey report. “Aid administrators expressed concern that adding even more complexity to the loan programs will lead to more students falling through the administrative cracks and defaulting on their loans.”