Wow, I have stacks of reports to read through, especially since the presidential election. This may end up being the first part of a series of posts related to our financial educational future. From what I've skimmed over so far, things aren't going to be as promising as expected. We'll hold that thought for now, because I have some interesting history to share in another post.
If you've followed the student lending crisis over the past year and a half, you'll remember that our government cut federal subsidies to lenders which caused many lenders to cease making student loans through the Federal Family Education Loan Program. In addition, students received borrower benefits such as a reduction in the interest rate for direct deposit payments, or no upfront fees taken out of disbursements. Those days are mostly long gone.
Last May, the government provided a bail-out to lenders by offering to purchase the lender's loan portfolio. This allowed an influx of cash to lenders which in turn allowed them to make more loans to students. However, only loans made between May 1 2008 and July 1 2009 were eligible for purchase.
Congress has recently expanded its bail-out option to lenders by extending the program through 2009-10 and purchasing loans back to 2003-04. What does this mean for you? Expect lenders, especially the big players like Sallie Mae, to remain in the FFELP student loan lending business if they take this option. The downside? Our government just goes farther into debt.
Don't be surprised if your school exits the FFELP program and goes into Direct Lending. Both programs award Stafford Loans. Direct Lending eliminates a lender and funding is sent directly from the Department of Education. With Direct Lending, you sign the Master Promissory Note with your school instead of a lender. With all the lender hoopla over the past year with cancelling borrower benefits and terminating loan applications, many schools are exiting FEELP and joining the Direct Lending program. The Department of Education has seen a 50% volume increase in Direct Lending this fall alone.
If your school does stay with FFELP to process Stafford Loans, hopefully there won't be another mass exodus of lenders with the bail-out option. I know how hard it has been for our office to keep up with lenders dropping out of the program, I can't imagine how students can possibly follow their loan paper trail with various lenders.