Can Education Dept. Handle Student Loans Solo? Starting July 1, banks and private lenders will be out of the federal student loan picture, and students will get their loans directly from the Department of Education. The direct-lending program already accounts for almost half of all federal student loans, but that number will more than double in the next three months.
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Can Education Dept. Handle Student Loans Solo?

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Can Education Dept. Handle Student Loans Solo?

Can Education Dept. Handle Student Loans Solo?

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Fresh from their historic victory in passing health care reform, congressional Democrats passed another sweeping proposal yesterday - but not quite as sweeping. This one will transform the federal government's 45-year-old student loan program. The plan put forward by the Obama administration ends the government's current partnership with private lenders. It makes the U.S. Education Department solely responsible for issuing government-backed loans. As NPR's Claudio Sanchez reports, that makes some colleges and students nervous.

CLAUDIO SANCHEZ: Now that Congress has passed the Obama administration's direct lending proposal, banks and private lenders won't be allowed to issue federal student loans. Instead, beginning July 1, these loans will come directly from the U.S. Department of Education.

Ms. MELISSA GREGORY (Director of Financial Aid, Montgomery College): We'll see how that goes.

SANCHEZ: Melissa Gregory is director of financial aid at Montgomery College in suburban Maryland. Over 22,000 students at this two-year college rely on government-backed loans. Gregory, though, isn't sure the Education Department can handle the jump in student loan applications with private lenders now out of the picture.

Ms. GREGORY: Can they handle the service component? Calls from students explaining things to students that will be a real challenge for the Department of Education, and it's one they say they're ready to handle.

SANCHEZ: It's not that the department hasn't done it before. The direct-lending program has been in place since 1993 and already accounts for almost half of all federal student loans. But that number will more than double in the next three months.

Twenty-year-old Marianne Mullan has her own concerns. She's graduating from Montgomery College in May and will have to borrow $25,000 to attend a private four-year college in Ohio in the fall. She worries about having only one lender to choose from now - the U.S. Department of Education.

Ms. MARIANNE MULLAN (Student, Montgomery College): Getting completely rid of the private sector, I'm not sure would be the best idea. I think that direct lending has great reviews right now, but what is that going to look like in 10 years, would be one of my concerns.

SANCHEZ: Some of the theater majors at this rehearsal of "A Midsummer Night's Dream" are a little nervous about the switch to direct lending too. But not 22-year-old Richard Dancy. He says he hates dealing with banks.

Mr. RICHARD DANCY (Student, Montgomery College): Because of my immediate need for funds I had to go and get the money from a private lender and the interest rate is double on the private loan - 12.5, 13 percent.

SANCHEZ: Direct lending, says Dancy, can't possibly be more stressful or complicated than what's been in place until now.

Mr. DANCY: You kind of take all the middlemen out and so the money that's being made off loans is funneled right back into the government rather than going to these banks.

SANCHEZ: The government is paying private lenders over $8 billion a year in subsidies right now. Once the shift to direct lending is complete, most of that money will go towards a $425 increase in the Pell grant for the neediest students.

Nothing wrong with that, says Senator Lamar Alexander. He's a former U.S. secretary of education and one of the Republican leaders in Congress who oppose direct lending. If the Obama administration really wants to give students a break, though, Alexander says, why not use those savings to cut the interest rate on student loans? Otherwise, says Alexander...

Senator LAMAR ALEXANDER (Republican, Tennessee): This is going to cost the students about $1,700 to $1,800 in higher interest payments over 10 years on an average $25,000 loan. And I think when students get their loans and they start going back to school in the fall, they're not going to be very happy.

SANCHEZ: Proponents of direct lending say Alexander's figures and his argument are misleading; interest rates are not going up. Under direct lending, students won't pay more than the fixed rate set by Congress 6.8 percent.

And so the switch to direct lending is a done deal and not just because the Congress passed it. As Melissa Gregory observes, before private lenders and banks were pushed out, many had pulled out on their own.

Ms. GREGORY: I think we're to the point now that trying to do student loans through the banks is just too risky for us as a school. I need to go with something stable.

SANCHEZ: Montgomery College has already processed its first 80 direct student loans without a glitch. By July 1st, all 5,500 colleges in the federal student loan program will have to do the same whether they want to or not.

Claudio Sanchez, NPR News.

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