MCA is pleased to announce the launching of its online system and accompanying e-books featuring the only US patented college selection process. At the low introductory price of 69.95, our goal is to level the playing field and provide our clients with expert advice at a fraction of the cost of private consultants. To read our press release, please click here.

The Obama Administration is proposing to end the origination of new federally-guaranteed student loans by private banks this summer in favor of 100% direct federal lending through the Ford Direct Loan program of the US Department of Education. It is estimated that taxpayers will save $80 billion over the next ten years by cutting out the bank middlemen who currently earn profits on their originations of federal loans under the Federal Family Education Loan Program (FFELP), as well as through the government’s lower cost of funds. Although the House of Representatives passed the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA) last September, the bill has bogged down in the Senate reportedly due to an aggressive lobbying campaign by the nation’s biggest student lenders – in particular, Sallie Mae – and now faces a far tougher fight.

The student loan industry would be forced out of the federal loan origination business if the proposal became law, and claims the administration’s proposal could put thousands of people out of work at private lending centers nationwide. Private lenders also warn that students may default on their loans more often because they will get less counseling.

Under the bill passed by the House, the switch to 100% Direct Lending would commence July 1, 2010, ending the origination of new FFELP loans. All new federal education loans would be made through the Ford Direct Loan program. Borrowers who have FFELP consolidation loans would be permitted to obtain Direct consolidation loans without needing to provide any justification. The SAFRA legislation has no impact on existing student loans or borrowers who have already graduated. Non-federal (or private) student loans would also be unaffected.

Arne Duncan, U.S. Secretary of Education, commented in a February 26 op-ed in The New York Times:

…Under current law, taxpayers provide as much as $9 billion each year to subsidize guaranteed student loans issued by banks. The banks earn profits on the interest; if students default, taxpayers take the loss, not the banks.

…The Education Department has issued more than $187 billion in student loans since the [Ford] Direct Loan Program was created in 1993. The number of universities participating in the program has more than doubled, to 2,300, in just the past three years. There is no justification to continue wasteful subsidies to banks. It is time to complete the shift to direct lending.

From a practical perspective, most students would not notice much of a difference between the Direct Loan and federally-guaranteed student loan programs. Customer service is said to be a bit better during the loan origination process in the Direct Loan program, but a bit worse during repayment. However, some argue that in light of a number of private student loan scandals in recent years, which several states have taken action to clean up, the Obama administration is trying also to improve and streamline the origination of new federal loans by removing the private middlemen who have earned income from interest on disbursed federal funds with minimal risk.