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For decades, the federal student loan program has paid private lenders and banks a subsidy for loans they make to college students. The Obama administration wants to bypass banks. It would have the federal government lend directly to students. Some schools have already switched to direct lending, and NPR's Claudio Sanchez explains why.

CLAUDIO SANCHEZ: Eight billion dollars worth of student loans dried up in the last 10 months of 2008 as some of the nation's biggest banks and state guarantors of student loans either scaled-down or stopped making loans altogether. Across the country, students and their parents didn't know what was going on.

Ms. ANNA GRISWOLD (Director, Financial Aid, Penn State University): At the rate many lenders were leaving the program, how certain could that parent be that that lender might be there for them that year, but what would happen the following year?

SANCHEZ: Nobody knew, says Anna Griswold, director of financial aid at Penn State University. But at the time, she says, 40,000 students were in danger of losing access to federal loans. Eventually, other lenders stepped in and most students got their money. But by then, says Griswold...

Ms. GRISWOLD: It was very clear and a no-brainer as to what made the most sense for us here at Penn State.

SANCHEZ: What Penn State did was switch from the Federal Family Education Loan Program, which depends heavily on private lenders, to the direct lending program run by the U.S. Department of Education. Penn State was not alone. In the last year, over 500 colleges have made the switch — for good reason, says Robert Shireman, deputy undersecretary of education.

Mr. ROBERT SHIREMAN (Deputy Undersecretary, Department of Education): We can be sure that the families, the students who need loans will have them available when they need the funds. And we won't have a last-minute problem of a lender pulling out because of something that's maybe happened in the stock market or in credit markets.

SANCHEZ: Reliability, says Anna Griswold, is the biggest difference now that Penn State is a direct-lending institution. The switch she says was simple. For students, little has changed. The financial aid office certifies a student's eligibility for federal aid online, processes the application and sends it to the U.S. Department of Education via a secure system online. But opponents of direct lending say the Penn State example does not address a bigger issue.

Mr. JOHN DEAN (Special Counsel, The Consumer Bankers Association): To me it boils down to competition and choice.

SANCHEZ: John Dean is special counsel to the Consumer Bankers Association. He says about 2,000 private lenders and banks today participate in the federal student loan program. Replacing them with a single lender — the federal government — would destroy competition and choice. Besides, says Dean, colleges have had the option to switch to direct lending since 1994, so why have eight out of 10 schools chosen not to?

Mr. DEAN: They obviously think that the customer service is going to be better.

SANCHEZ: The Education Department's Robert Shireman disagrees. He says this is all about creating a more efficient, cheaper way of lending money to students.

Mr. SHIREMAN: We can't afford to spend the money for an institution to choose something that costs taxpayers more.

SANCHEZ: Shireman says once private lenders are out of the picture, the $8- to $10 billion in subsidies the government has been paying them will go back into federal aid for students. The House of Representatives has already voted in favor of direct lending. It'll soon come up for a vote in the Senate where passage is less certain. But the administration is so confident it will pass, the Education Department has drawn up plans to issue all loans through the direct lending program beginning next summer.

Claudio Sanchez, NPR News.

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