While the recently passed Student Aid and Fiscal Responsibility Act promises to save taxpayers billions of dollars and expand financial aid and other benefits to students, the idea that its overhaul of federal student loans will go off without a hitch is one that’s not shared by many colleges in South Carolina.
State school officials have been expressing doubts that a mere handful of centralized government agencies can successfully and efficiently execute the work that until now has been handled by hundreds of nonprofit state agencies and for-profit commercial banks throughout the country (Colleges Fear Federal Takeover of Lending, The Spartanburg Herald-Journal, March 28, 2010).
Student Loan Legislation Forces Out Private Lenders
The SAFRA bill, included as part of the health care reform package approved by Congress last week and signed into law by President Obama on March 30, brings about a major revamp of the federal student loan system.
Under the previous system, colleges had two choices for their provider of federal student loans: the Federal Direct Loan Program and the Federal Family Education Loan Program (FFELP). Students at schools in the Direct Loan program obtained their federal college loans directly from the U.S. Department of Education; students at schools in the FFEL program had to obtain their loans from third-party lenders — state agencies or private banks — that were paid government subsidies to issue federally backed parent and student loans on behalf of the government.
The SAFRA student loan reforms eliminate the FFEL program, leaving the Direct Loan program as the sole source for federal education loans. Beginning July 1, all borrowers will now obtain their federal parent or student loans directly from the Education Department without going through a commercial or agency middleman.
Government Bottleneck Could Mean Financial Aid Breakdowns
Some South Carolina education officials fear that the mandated nationwide switch to direct lending, which begins this summer, will overwhelm the Direct Loan program’s capacity and create a government bottleneck, resulting in major administrative problems, delays in the student loan process, and a lack of efficient support for financial aid offices.
“I'm really not a proponent of it, and not happy about it,” said Dan Philbeck, vice president for enrollment management at Spartanburg Methodist College, a sentiment shared by many in South Carolina higher education.
“It’s going to hit everybody,” added Kay Walton, director of financial aid at Wofford College.
Possible Delays Would Hold Up Student Loan Disbursements
The most critical issue faces students, who might experience delays in receiving their federal student loan money.
Some colleges, in anticipation of such lags, have proactively moved up deadlines in their own internal financial aid processes in attempts to compensate. At the University of South Carolina Upstate, for example, the financial aid office has set a deadline of July 15 for students to complete their student loan promissory note for the upcoming 2010–11 year. But if students wait too long and their funds are delayed, “their classes are going to get dropped,” said Allison Sullivan, USC Upstate’s director of financial aid.
Default rates could also increase with the disappearance of lender-run default prevention programs. The government was reimbursing FFELP lenders for any defaults, but only partially, which meant it was in the lenders’ best interest to prevent borrowers from defaulting on their federal college loans.
“Right now our default rate at Wofford is zero,” said Walton. But “the Department of Education is saying to expect your default rate to increase [when you switch to direct lending]. So we’re going to go from a zero to who knows.”
Government Challenged to Provide Efficient Service and Support for Schools and Students
Because only about five federal agencies are going to be handling the direct-lending volume from every single U.S. college and university, the government could confront incredible challenges as it tries to serve the needs of a sudden flood of schools.
The Department of Education has informed financial aid offices that a list of customer-service 1-800 numbers will be provided for support but that it could be 10 days before action is taken on an issue — not exactly the kind of timely response South Carolina’s schools are used to receiving from the private sector or from the South Carolina Student Loan Corp., a nonprofit FFELP lending agency in Columbia, S.C., that has been providing federal student loans to nearly every college in the state.
Students may fare no better. “As far as customer service and getting things straightened out,” said Philbeck, “if there was an error or anything, we just simply had to place a phone call to [SCSLC in] Columbia and get things corrected. And that’s just not been our history with working with the federal government — getting things corrected very easily. That concerns us a little bit.”
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