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.

Mark Kantrowitz, an expert on paying for college and founder of FinAid.org and FastWeb.com (a scholarship search site), replied this month to New York Times reader-submitted questions about the Free Application for Federal Student Aid (FAFSA). The FAFSA is the single most important financial app to fill out because the federal government provides the overwhelming majority of all financial aid. The seven-part question and answer series ran on the Times’ Education blog called The Choice: Demystifying College Admissions and Aid.

For many high school seniors and their parents, January begins the season for tackling the Free Application for Federal Student Aid. While the FAFSA remains much easier to fill out than the CSS PROFILE (used to determine eligibility for institutional financial aid), it has nonetheless been regarded by some as unnecessarily cumbersome. The federal government has begun attempting to streamline this app with the availability of its new 2010-2011 FAFSA. A major manifestation of this simplification is the new 2010-2011 FAFSA on the Web Worksheet — provided to help students and parents prepare to fill out the FAFSA — which asks far fewer questions than before. It can be downloaded here for those who want to get a head-start on the FAFSA:

http://www.fafsa.ed.gov/before012.htm

A good number of the financial aid questions Kantrowitz answers are very specific. Moreover, he has incorporated the latest information, including the impact of federal legislation passed as recently as December 2009. You can view all seven parts of Kantrowitz’s comprehensive and insightful answers on tips on filling out the FAFSA, CSS PROFILE, and general financial aid questions at:

http://thechoice.blogs.nytimes.com/tag/fafsaq-and-a/

It’s easy to find seemingly endless lists of private-scholarship possibilities, especially in the era of the internet. The potential savings add up very quickly in our minds, and the temptation to apply for every private award under the sun can be strong. But don’t get carried away. The increased visibility brought by the web means a lot more competition for the juiciest awards, and the old saw about a scholarship so obscure that the winner was the only person who applied becomes less true every year (and many private scholarships reserve the right not to award any money in a given year if no applicants cut the mustard).

Finding all those awards and writing all those application essays takes time. If you were Bill Murray’s character from the movie Groundhog Day, you would have endless time in which to craft perfect applications to so many private scholarships that college would end up free—but in real life, time is precious, and there are more pragmatic things an incipient college applicant could be doing with her or his time than chasing every private award there is. Remember, scholarships don’t help you get accepted to college, so there is still that little matter to worry about: it would be bad news for a student’s grades, extracurricular participation, or community involvement to suffer because of time spent laboring over scholarship applications. (If parents are involved in the process, hunting down scholarship leads on the web and refining them into a “best-of” list for the student makes a good task for a parent who does not work full-time.)

Locating the necessary info about private scholarships is not rocket science. It is usually as simple as typing a search term (e.g., “hockey” or your ethnicity) into Google followed by the word “scholarship.” It is simply not necessary to pay a scholarship-search company to seek out the opportunities for you—such companies merely charge you a fee for research you could have easily done just as well (and probably more quickly) on your own, and don’t better your student’s chances of winning any of the awards.

So how should a student go about seeking private scholarships? Well, you should always play to your strengths, and when it comes to private scholarships, here are a few of the best situations you can be in:

• You are a member of a minority or special-interest group. And this doesn’t just mean ethnic or religious minorities. There are scholarships for students with every imaginable disability or handicap—even psychological conditions like bipolar disorder or ADHD, or purely cosmetic conditions like the skin disease psoriasis. Remember to think outside the box: if there is anything at all statistically unusual about a student, there’s a good chance a scholarship exists for it—there are even scholarships for students who are interested in polka music! And be advised that a “special” group doesn’t necessarily have to constitute a statistical minority—for example, Christians and women are both numerically majorities of the population, but there are plenty of scholarship opportunities specific to those groups.
• You are extremely good at something. Academic and/or athletic merit are the forms of excellence most commonly honored by scholarships, but not the only ones. Skill at a musical instrument, or at the visual arts, or at composing poetry, can garner financial awards as well. There are even scholarships awarded to promising young stand-up comics! But it is a poor use of a student’s time to suddenly try to get good at something just for a scholarship (since you will be competing against other applicants who are lifelong devotees). The best route is to identify what you are genuinely already interested in and skilled at, and seek out scholarships in that area.
• You are a skilled (i.e., convincing) writer. The last point already established that skill in a given art form can earn scholarship money, so why is writing singled out separately? It’s simple. Because so many scholarship competitions hinge on the composition of an essay, a good writer with a questionable relationship to the awarding organization’s goals will usually outperform a mediocre writer who is more sincere in her or his heart. Maybe you don’t really feel more passionately about endangered species or the swing-dance revival than any other applicant, but if you are a good enough writer and can empathize with the core concern of the organization, it may be a good idea to try. It may not be fair, but it is how things are. Writers with the chops to pull it off should seek out the most lucrative scholarships and tell them what they want to hear.

When it comes to private scholarships, the name of the game is focus. A student who applies willy-nilly for fifty scholarships may feel lucky when she or he drops the envelopes into the mailbox, but then not win a single one. Conversely, a student who carefully selects three well-fitting scholarship opportunities and meticulously crafts those apps stands a much better chance of seeing her or his efforts pay off.

For example, the maximum amount potentially awarded by a Pell Grant—the most famous and widespread form of government need-based grant—has recently increased to $5,350, with an added option for receiving an additional $2,675 in the summer. And those maximums are slated to keep climbing through 2012.

Additionally, the interest rate on a Stafford Loan, the most common type of unsubsidized government loan, has recently dropped to 5.6%, and will continue to drop—to 4.5% in June, and then to a very low 3.4% at the same time in 2011 (before jumping back to the former rate of 6.8% in 2012). And while this next bit of information doesn’t help new college students, older friends and siblings who borrowed prior to July 2006 would do well to reconsolidate now, if they haven’t done so already, as a locked-in rate of just 2.5% is currently available (along with a rate of 3.38% for parents in the process of repaying PLUS loans). And while exploring post-graduation career options, students should bear in mind that borrowers entering nonprofit or civil-service (government) careers will have the remainder of their debt written off by the feds after ten years. And there are more jobs that count as “government” ones than you might realize (teaching in a public school, for example)!

A new policy known as Income-Based Repayment (IBR) is more welcome news. Borrowers who find themselves struggling with their payment plan will be able to cut a deal enabling them to pay 15% of their discretionary income (i.e., income in excess of 1.5 times the poverty level for their family size) per month instead of a flat minimum. What happens if you’re making less than 1.5 times the poverty level? You pay nothing, for as long as that remains the case. And no matter how much (or how little) you pay, the government forgives the remainder after 25 years. Of course, the longer you take to repay a loan, the more interest builds up, so a good educated guess about your future will save you money: if you think you’ll end up paying off your student loans in less than 25 years, do it fast; if not, do it slow. This now applies to any federal student loan, from any lender, no matter when you took it out!

It’s clear that the current environment has made the increased affordability of higher education a greater priority. New policies, or more changes to the current ones, are certainly possible, so keep your eyes and ears open—but the bottom line is that, now more than ever, pursuing loans from private lenders is definitely a last resort.

Applying for financial aid might seem intimidating, as there are many forms to complete. It may help to know that although these forms are long, they are fairly straightforward; if you read the instructions carefully you shouldn’t have too hard a time.

The most important app you’ll fill out for financial aid is the Free Application for Federal Student Aid (FAFSA). This form is required if you want to be considered for any type of aid or loan, and must be completed for dependent and independent students. The FAFSA determines need-based aid for both graduate and undergraduate students; several weeks after submitting this form you (and the schools you’ve selected) will receive a Student Aid Report (SAR) which summarizes the information reported.

Another form required by some colleges is the CSS/Financial Aid PROFILE. The information reported on this form determines non-federal student aid; you only need to fill out this form if a school you’re interested in asks for it.

New York State residents must complete a Tution Assistance Program (TAP) form for state aid. To qualify for these funds, you must be a resident of New York State for at least a year before applying. Several states have similar programs, so you should check on your state government website before applying for aid.

The out-of-pocket cost of college can be dramatically reduced by scholarships – need and merit-based grants offered by colleges, as well as private ones available from a variety of sources: civic organizations, foundations and corporations, just to name a few. You’ll be able to learn more about scholarships and other ways of reducing college costs by speaking to the financial aid officers of the colleges and universities you’re applying to.

Be sure to keep careful track of all application and financial aid deadlines – in today’s challenging economy it’s especially important to get all the financial aid you qualify for.