Controversy is rising in the U.S. Education Department over the possible sale of government-owned direct student loans. Officials are strongly considering a plan to sell a portion of the $100 billion assets in an attempt to increase financial-aid spending.
Supporters of direct lending fear the loss of borrowers’ rights and perhaps even a complete termination of the loan program if such a plan were to be put into action.
Direct lending is a financial alternative to other federal-loan programs commonly used by students to finance their college educations. This alternative provides loans directly to students through their colleges rather than through private lending firms. Created in 1993 by Congress, the direct-loan program provides almost a third of the $50 billion in federal student loans that are allotted each year to students at universities nationwide.
Loan-industry officials said the Education Department is considering a plan to securitize direct loans. This plan would collect a group of borrowers’ direct loans and convert them into financial instruments, such as bonds or mutual funds, and sell them to investors. Federal student loans are attractive to investors, because they come with a government guarantee to cover most of the losses that occur if a borrower defaults.
However, supporters of direct-loan programs are worried about the potential trouble borrowers could face when attempting to switch payment options.
Steve Van Ess, University of Wisconsin director of student financial services, said all federal loan programs are virtually “seamless” to students, that they follow the same terms and conditions. The only setbacks to downsizing direct lending would be to the schools, which would have to change lenders.
There are two main federal loan programs — direct lending and the Federal Family Educational Loan Program. Schools must choose one of the two programs. Approximately 70 percent of the nation’s schools, including UW, use FFELP. This program offers guaranteed loans, insured by the federal government, from private lenders.
“Of all the aid that all of our UW students receive … $100 million comes just from the FFELP program,” Van Ess said.
Half of all financial aid that goes to UW students, including federal, state and institutional, comes from the FFELP.
Since UW does not work directly with direct lending, Van Ess said there will be no immediate impact on the student body regarding the potential plan.
When the direct lending program was first set up, some argued it would be inefficient to have two separate loan programs.
“Having the existence of the two programs turned out to improve both programs,” Van Ess said. “If direct lending goes away, it may eliminate some of the competition.”
The Education Department supports both loan programs and reported it will not proceed with any plans that would impair borrowers.
