College Loans Say Uncle
May 30, 2010
The $50,000 college bill hasarrived. Harvard recently announced that the cost of tuition, room, board and other fees will come to $50,724 for the 2010-2011 academic year. Yale sets those outlays at $49,800 but estimates the total cost of attendance at $52,900, including books and personal expenses. Other universities are in the same neighborhood.
Many colleges are less expensive, and scholarships may be available. Nonetheless, some clients will find it difficult to pay college expenses solely from earnings and savings. To fill the gap, they may have to borrow-and they will soon discover that the procedure has changed.
For years, most college students and parents who got federal student loans did so through the Federal Family Education Loan (FFEL) program. Most colleges and universities participated in this program; eligible students at those schools would get federally guaranteed loans through banks or other lending institutions. Colleges that didn't participate in FFEL were in the Direct Loan program, with loans coming straight from Uncle Sam.
That structure has changed, an unlikely part of the new healthcare legislation, says Patrick Kandianis, co-founder of SimpleTuition, a student loan comparison site. "Starting this July, all lending from the bank-based FFEL program will be transferred to the Direct Loan program. Private banks will no longer make government-backed loans to students, and all federal loans will originate in the Direct Loan program."
Thus, all colleges and universities that want students to have access to federal student loans must be in the Direct Loan program. "The money is there," Kandianias says. "There shouldn't be a shortfall in the federal Direct Loan program, so college loans will be available."
The types of loans available won't change, just the funding mechanism. This should streamline a process that often confused the people it was designed to serve and was misused by unscrupulous lenders and college administrators. Equally important, some federal student loans may become easier to obtain and carry lower interest rates, while new repayment rules will provide a better deal for loans made after June 2014. Advisors hope the changes will ease clients' anxiety about college funding and encourage them to focus on their own financial needs, as well as those of their children.
SIMPLIFYING THE SYSTEM
What difference will the new law make? The entire process will be far less confusing for families, says Deborah Fox, who heads Fox College Funding in San Diego. "In the past, families found it difficult to understand the differences between the two loan distribution systems and determine which application process applied to them."
Kal Chany, president of Campus Consultants, a financial aid counseling firm in New York, concurs that the new system might be less cumbersome for students. "They won't have to shop around to find a lender as they did with the FFEL program," he says. "After they have a loan, they won't be dealing with different entities-a lender, a guarantor, a servicer-as they might have had to do with FFEL loans." Indeed, by cutting out the middlemen, the Congressional Budget Office figures the government will save $68 billion over the next 10 years,
According to Fox, shopping for a FFEL lender was far from simple. "Families had to figure out which lender to use, so most would choose a lender from the college's 'preferred' list," she says. "Those weren't necessarily the lenders that offered the most competitive rates and terms." (Fox notes that the student loan scandals that erupted in 2007 revealed that lenders were providing schools with kickbacks in order to be included on the preferred list.)
"These private educational loans have variable interest rates with no caps, potentially much higher origination fees and no qualification for the more flexible repayment terms that are available through the Direct Loan program," she says. "With all loans going through the Direct Loan program, the whole process will be streamlined." The student or parent will inform the school they want access to a federal education loan, the college will provide a Master Promissory Note for them to fill out and the loan will get funded by the federal government.
