US House passes student loan overhaul

Private student loan providers would get the boot under the Student Aid and Fiscal Responsibility Act.

Mark Humphrey/AP/File
Students seeking loans for education may have only one lender to deal with come July 1: the federal government. A house bill passed Thursday would save money, the Congressional Budget Office estimates, by eliminating subsidized loan programs and instead route all student loans through the Department of Education.

The US House of Representatives passed legislation Thursday that will knock private lenders out of the student lending market while beefing up funding for Pell Grants and, the Congressional Budget Office reports, save taxpayers $13.3 billion between 2009 and 2014.

The Student Aid and Fiscal Responsibility Act, passed 253-171 largely along party lines, sets a deadline of July 1, 2010, for all American higher education institutions to switch their loan systems over to the federal direct loan plan, creating savings by eliminating the Federal Family Education Loan program, which currently allows private banks to originate loans for students at subsidized rates.

The Senate has not yet passed a bill. Republicans argue that the move amounts to a government takeover of the program, which could backfire if the Department of Education performs poorly.

The department's direct loan system is the smaller of the two loan programs. The FFEL program serviced 4,424 schools through February 2009, according to the National Association of Student Financial Aid Administrators (NASFAA), while 1,620 schools used the direct loans program. The groups are not mutually exclusive, with some schools using both programs.

The short deadline and the significant increase in workload for the Department of Education has some worried that schools won’t be able to convert their systems in time, said Justin Draeger, vice president of public policy at NASFAA.

The University of Florida switched entirely to direct loans in 1994 after playing what director of student financial affairs Karen Fooks called “hide and seek,” trying to troubleshoot a loan system with “hundreds” of banks.

For Ms. Fooks, the change was a positive one.

“We’ve been very, very pleased with the way the direct loans worked. We’ve been kind of disappointed by some of the misinformation out there about how rates will rise and how service will decline. We haven’t seen any of that to be true,” she said.

Another plus, from the universities' point of view, is that federal Pell Grants, offered to low-income students, will be pegged to the consumer price index plus 1 percent.

“That it’s indexed for consumer price increases ensures that we don’t have to fight the appropriations battle every year,” Mr. Draeger said.

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