Monday, March 29, 2010

It passed with little fanfare in the slipstream of health care reform last week, but a looming overhaul of the nation’s student-loan market may bring just as large a policy revolution in higher-education finance as Obamacare does for the nation’s medical-delivery system.

Private lenders are angry, and many colleges and universities are scrambling to adjust in the next three months, following passage by the Senate and House of a bill of “fixes” to President Obama’s signature health care reform. Congressional Democrats used the must-pass bill as a vehicle to push through the long-sought student-loan package as well, making the federal government - not the private sector - the direct provider of federal loans to some 8 million students nationwide annually.

“We were very disappointed,” said Elena Lubimtsev, government-relations officer for Tennessee-based Edamerica, one of the nation’s largest private providers of student loans. “… We lost our business. Congress took it from us.”

But reform backers said the change - revamping a system that dates back to the mid-1960s - will cut out the unnecessary middleman in college lending, the private commercial lenders who originate the student loans and collect fees from both the borrowers and the federal government for their efforts.

Proponents say that having the federal government directly issue the student loans will free up about $61 billion over the next decade that can be used for loans to help more families meet soaring tuition costs.

“For middle-class families, one of the biggest challenges comes when their children reach college age,” said Senate Health, Education, Labor and Pension Committee Chairman Tom Harkin, Iowa Democrat. “The questions around the kitchen table are: How do we pay for college? … The reconciliation bill addresses these challenges head-on.”

Under the new law, money previously used to pay private lenders will be used in part to increase the Pell Grant program for students from low-income families by about $36 billion. The maximum Pell Grant an eligible student can receive will rise and, starting in 2013, the maximum loan level will be indexed to the Consumer Price Index for the first time.

With President Obama set to sign the bill early this week, schools across the country will be scrambling to rewire their financial-aid programs directly into the Education Department by the July 1 deadline. Many schools, sensing the shifting political winds in Washington, weren’t waiting for Mr. Obama’s signature.

Rebecca Sanchez, financial-aid director at California Baptist University in Riverside, Calif., said the private Christian school in an anticipatory move shifted its lending program from Federal Family Education Loan Program (FFEL) to Direct Loan - linked directly to the Education Department - even before it was mandated by the government.

“We felt it was the best decision to be pre-emptive,” Mrs. Sanchez said. “We were anticipating that it was going to be mandated because it has strong Democratic support.”

The new law provides $50 million for colleges and universities to pay for the transition to the Direct Loan network.

Despite the changes in the market, student borrowers should not notice much difference, since most of the work is done behind the scenes.

However, students who will accept loans for the 2010-2011 school year must fill out a new master promissory note, a contract between lender and borrower, and complete a new entrance counseling session and exam if their school was previously participating in the FFEL program. Mrs. Sanchez said that once the fall 2010 semester starts, there will be an estimated 4,000 students facing the new requirements at a school with a total enrollment of 4,105.

Parents will benefit with the new legislation. Those who apply for a Parent PLUS loan will save money on interest rates. Private lenders’ interest rates were as high as 8.5 percent, while the Direct Loan rate is capped at 7.9 percent.

The overhaul also tried to simplify the repayment process and allows for only one payment to be sent to one lender. Students who take out loans in 2014 will have the option of applying for “income-based repayment,” a plan that gives borrowers monthly payments capped at 10 percent of their income. Those already repaying their loans can sign up to cap their bill at 15 percent of their annual income.

The Obama administration said the private sector will still play a major role in servicing the loans, and Democrats may even see a political benefit from the fight.

While health care reform was a difficult political sell, a CNN/Opinion Research Corp. poll late last week found that 64 percent of those surveyed - including a slight majority of Republicans - approved of the change to have the government directly provide loans.

But many in the industry are bracing for the worst.

Edamerica’s Ms. Lubimtsev estimated the industry could see some 30,000 jobs lost because of the changes. Student-loan giant Sallie Mae has said that the overhaul law will lead to major internal consolidations and layoffs of more than a quarter of its 8,600 employees.

Apart from losing jobs, Ms. Lubimtsev said that private lenders were concerned for the schools and students.

“We see some bit of a disregard for our schools,” she said. “We continue to stay in the mix, and we’re trying to work with all of our lawmakers to make sure that this bill brings some fairness to students and colleges and universities.”

She said the only positive aspect of the reform is the increase in Pell Grant money. But she added that that “didn’t have to come [at the] expense of the industry.”

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