Positive Changes for Student Loans are Expected
Big changes may be coming soon to the student loan industry, and those involved are preparing for the adjustments.
The Obama administration’s plan is to eliminate the Federal Family Education Loan Program, which has provided education loans to students and parents through a public and private partnership with lenders since 1965, if Congress approves the measure. Direct lending from the U.S. Department of Education will take its place.
Lenders have been getting out of the student loan business during the last few years. The Oklahoma Student Loan Authority had 42 banks and credit unions in its lender network in 2007. That number has dwindled to eight.
The authority, which was created as a public trust by the Oklahoma Legislature in 1972, processes loan applications and serves as a secondary market to provide funds to borrowers. The authority receives no state-appropriated funds.
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One reason for the decrease of lenders providing student loans is the enactment of the College Cost Reduction and Access Act of 2007. It reduces the profitability for nonprofit lenders by 1 percent and for-profit lenders by as much as 2.5 percent, said Michael Davis, the authority’s vice president.
When lenders began dropping student loan services, emergency legislation called Ensuring Continued Access to Student Loans Act of 2008 was enacted. It allowed banks to sell existing student loans to the U.S. Department of Education, freeing up funds so lenders could continue originating loans.
“There was a concern that students wouldn’t have access to money for college,” Davis said.
The reduction of lenders was the primary reason Tulsa Community College switched to direct lending in July 2008. TCC and Oklahoma State University are the only colleges in Oklahoma that use direct lending from the Department of Education.
“A significant amount of lenders either announced to us formally or we found out informally they were no longer providing loans,” said Jan Clayton, TCC’s associate vice president of student affairs, adding that about 70 percent of lenders who provided loans to her school’s students had stopped.
“As banks are making business decisions institutions who were smaller in terms of borrowing began to lose out on that relationship,” Clayton said.
TCC had to upgrade some of its technology and systems to be compatible with the Department of Education, Clayton said, and the cost of those upgrades may be one reason that other colleges haven’t made the switch.
Davis said more than 3,000 colleges still haven’t moved to direct lending and the deadline for the Federal Family Education Loan Program to end is June 30.
A request to push back the direct lending deadline to June 2011 and to extend the Ensuring Continued Access to Student Loans Act has been proposed.
“For the banks that remain in our network, I think they hate to see the (Federal Family Education) program go. They’re in it for more than the profitability,” Davis said.
Those lenders hoped to build banking relationships with those borrowers and expand their customer base, he said.
Student loan legislation is on the back burner because of the health-care reform bill, but the authority expects state legislators to address student loans early next year.