As some 17 million students prepare for college in the fall, financial aid offices across the country are scrambling to find new student loan lenders to replace those that are no longer offering federal student loans at their institutions.
Arguing that the College Cost Reduction and Access Act of 2007, which cut $21 billion in federal subsidies to private education lenders, rendered federal college loans unprofitable, more than 100 private lenders to date have suspended their federal student loan programs, leaving many schools without the lenders they’ve worked with for years.
In an effort to help stem the exit of lenders from the Federal Family Education Loan Program and to avoid a crisis in student loan availability, President Bush signed the Ensuring Continued Access to Student Loans Act (H.R. 5715) last month.
While the act may have come just in time to keep some struggling lenders afloat, financial aid administrators are concerned that students may become confused when attempting to switch lenders.
Schools Mobilizing to Notify Students of Lender Changes
Thousands of college students may still not be aware that they’ll need to find new lenders, with colleges and universities still in the midst of the time-consuming process of contacting their students to let them know that a lender they’ve formerly used is no longer available.
At the University of Wisconsin at Madison, administrators have just begun notifying the students who will need to switch FFELP lenders for the 2008–09 academic year — a group of 2,000 among the 17,000 returning students who are on financial aid.
Financial aid administrators at Occidental College in California will be informing all 1,000 returning students who are receiving financial aid that they too will need to find new lenders and sign new master promissory notes for their federal college loans.
Instead of contacting students personally by phone or mail, Luzerne County Community College in Pennsylvania posts an updated lender list on its website to let students know which FFELP lenders are still available.
Schools Consider Direct Lending Alternative
Some schools, wanting to avoid a situation where their students may have to repeatedly switch lenders as lenders continue to exit the FFEL program, have initiated a move from the FFEL program to the Federal Direct Loan Program, which allows students to borrow directly from the U.S. Department of Education. By switching over to the Direct Loan program, college officials also hope to ensure their students have ready access to the federal college loans they need to be able to pay for school.
Of 428 college administrators surveyed by Student Lending Analytics, a data provider for financial aid professionals, almost 40 percent said they were considering the switch to Direct Lending because of the rate at which FFELP lenders are suspending their federal student loan programs.
According to the Department of Education, 4,654 schools currently use the FFEL program, whereas only 1,158 institutions are using the Direct Loan program. But with the recent loss of so many lenders from the FFEL program, 288 colleges and universities have already applied to join the Direct Loan program this year, compared to the 80 schools that applied in all of 2007.
Two-Year Colleges May Be Hardest Hit
As schools contemplate making the move to Direct Lending, community colleges are facing an additional challenge over their four-year public and private counterparts: Some student loan lenders, including two of the nation’s largest, Citibank and JPMorgan Chase, have announced that they will no longer offer student loans at community colleges or other two-year institutions, since student loans at these schools tend to have higher default rates and smaller college loan amounts that are less profitable.
If other lenders follow suit, some of the nation’s neediest students — with lower tuition and flexible class schedules, community colleges often attract lower-income and working students — may end up being affected the most. Unable to get the low-cost federal student loans they need to pay for their classes, community college students may turn to high-interest credit cards, costly private student loans, or may be forced out of college altogether.
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