Plan favors the use of Direct Loans

The Student Aid Reward Act would reward colleges that use the Direct Loan program by giving them extra funds.

by Cati Vanden Breul

Some Congress members are encouraging colleges to provide student loans through the federal Direct Loan program, instead of through private lenders.

The Student Aid Reward Act, introduced in the Senate this month by Sen. Edward Kennedy, D-Mass., would reward colleges that use the program by giving them extra funds.

Student loans are provided mostly through the Direct Loan and Family Federal Education Loan programs. The government provides students with direct loans by deducting money from the U.S. Treasury, while Family Federal Education Loan Program loans are made through private lenders and subsidized by the government. The government must pay a minimum interest rate to private lenders on loans made through the Family Federal Education Loan Program.

When introducing the bill, Kennedy said the Congressional Budget Office estimated the act would save the government and taxpayers $17 billion during 10 years, which could be used to increase awards such as the Pell Grant by up to $1,000 per student. Only schools participating in the Direct Loan program would receive money from the savings.

“We waste billions of dollars in corporate welfare every year on student loans, and we cannot afford it any longer. We should use scarce tax dollarsto help students, not banks,” Kennedy said in a statement March 15 during a press conference.

Guaranteed loans, such as the Family Federal Education Loan Program, cost $11 more per $100 lent than Direct Loans, according to President George W. Bush’s 2006 education budget.

The University is a Direct Loan school, but most other schools participate in the Family Federal Education Loan Program, said Amy Lund Swalley, a senior associate director in the Office of Student Finance.

“We’re already doing what this legislation is asking schools to do,” Lund Swalley said.

The University chose the Direct Loan program because it puts money in the hands of students sooner, she said.

“The direct lending program is much less expensive to administer; overall, that helps us all,” she said.

University students received $170 million last year in Direct Loans, Lund Swalley said.

Direct Loans also simplify the loan process, she said.

“FFELP loans often involve several lenders and services. It’s hard for students to keep track of what to pay when,” she said. “Direct Loans all come from the same place, which makes it easier to make payments on time.”

But Barb Schlaefer, the Minnesota Higher Education Services Office communications director, said it is not entirely clear whether funds from the act’s estimated savings would go directly to needy students.

“We will watch this closely as the proposal and its projected impact is analyzed in the coming months,” Schlaefer said.

She said one advantage to the Family Federal Education Loan Program is competition among lenders.

“One consequence of the bill is that it limits a student’s choices on participating campuses,” Schlaefer said.

The legislation’s partner bill was introduced in the House by Rep. George Miller, D-Calif., and Rep. Tom Petri, R-Wis.