Some Student Lenders See New Opportunity In Federal Loans

New legislation aimed at bringing portions of the federal government's student-loan program back under Uncle Sam's top hat is presenting a growth opportunity for the largest lenders, while smaller players may see only the exit sign.

In March, the government said it would move federal student-loan originations--a $72.7 billion business--in-house starting this summer, eliminating billions of subsidy dollars for companies that had been originating the loans on its behalf. Unable to book fees on new loans, many small lenders whose only business was federal lending see the legislation as a big blog.

Bedfellows on Student Loans

The proposal, a version of which was incorporated into parallel legislation that the House of Representatives passed last fall, is designed to assure that borrowers turn to more-expensive (and riskier) private student loans only after they've exhausted federal, state, and institutional grants, or at least less costly federal student loans.

"Requiring school certification that confirms students’ attendance and loan eligibility -- as is currently required on all federal student loans -- discourages unnecessary borrowing which could lead to delinquency and default during repayment," the groups say in the letter. "It also gives financial aid administrators an additional opportunity to counsel students about less expensive forms of financial aid and ensures that students do not inadvertently disqualify themselves for less costly aid. Simply put, school certification will help ensure that private loan borrowers maximize their ability to borrow federal loans and only turn to private loans after exhausting federal loan eligibility."

The letter was signed by Consumer Bankers Association, the Education Finance Council, and the National Council of Higher Education Loan Programs; the National Association of Student Financial Aid Administrators; and the Institute for College Access & Success and the U.S. Public Interest Research Groups.

It is not unheard of for banks and other lenders to be on the same side of issues as financial aid officers or advocates for students; a roughly similar coalition developed around the federal government's 2007 creation of a repayment system based on borrowers' post-graduation income, for instance.

Loan changes for new graduates

Graduates don't have to fear being handed a bill with their diploma; most federal loans come with a six-month grace period.

But interest continues accruing during that time, so the sooner repayment starts the better.

The exception is with subsidized federal loans, in which the government waives interest charges until the loan comes due.

The standard payment option spans 10 years, but there's no penalty for paying off debt earlier. Of course, that's probably not an issue for those carrying huge debt loads.

Those pursuing fields that don't pay a lot will want to look into a program for income-based repayment, or IBR. The option was introduced last summer to help make debt more manageable.

Essentially, it caps payments at 15 percent above any earnings beyond about $16,000. Any debt remaining after 25 years is forgiven.

Eligibility depends on a formula that weighs education loan debt against income. A calculator at IBRInfo.org can help determine whether borrowers qualify.

Those in both the direct and Federal Family Education Loan programs can apply.

A new law that overhauled the federal lending program makes IBR even more favorable, in part by capping payments at 10 percent of income. But the changes don't go into effect until 2014 and will apply only to new borrowers.

Financial aid stories

Krista Olson, a 35-year-old mother of two, lost three jobs within the span of a year before she decided to enroll at Riverland Community College and study accounting.

Now, she's taking courses through Bemidji State University. She had help from a federal Pell Grant.

"Everything about my life has changed," said Olson.

Olson was in the library at the college Friday morning, sharing her story with a few other Riverland students and officials and 1st District Rep. Tim Walz, who came to the college to talk about recent changes to federal financial aid programs. The health care bill that President Obama signed this spring means 100 percent of the student aid funding from the direct loan program will come directly from the federal government, eliminating banks and private lenders. The Congressional Budget Office estimates the change will help save $61 billion over 10 years.

The maximum amount of the Pell Grant will increase and income-based repayment will go into effect in 2014.

Walz said he wanted to visit Riverland because it has seen 13 percent growth, many of them older than traditional college-age students.

Need more college aid? Negotiate

"I routinely advise my students, 'Ask politely for more,' " said Bruce Hammond, co-author of The Fiske Guide to Getting Into the Right College. "The recession may have made institutions a little more likely to deal."

Nationally, the average list price of tuition and fees is $26,273 at private colleges and $7,020 for in-state students at public universities, according to the College Board -- up 4.4 percent and 6.5 percent respectively from a year ago.

A sizable amount of financial assistance is available. Grants and tax benefits total an average of $14,400 per student at private universities and $5,400 at public schools. Once you add in room and board, it's easy to run up a tab of $100,000 or more over four years.

Coupled with a tough economy, it's no wonder more families are applying for financial aid than ever before. Applications for federal student aid rose 21 percent to 6.6 million in last year's first quarter, the peak period for applications. Applications from Illinois students are on a record pace this year.

Here are some tips that could sweeten a college aid offer:

UNDERSTAND THE PROCESS. Before you ask for more money, do your homework about how the aid process works and whether there's an appeals process in place. If you aren't working with a college consultant, read college planning books, go to sites such as Finaid .org or CollegeBoard.com, or simply Google "appeal financial aid" and you'll find plenty of information and advice.

Student loan overhaul to ease access, repayment

More needy college students will have access to bigger Pell Grants, and future borrowers of government loans will have an easier time repaying them, under a vast overhaul of higher education aid headed to President Barack Obama's desk.

The measure would force private commercial banks out of the federal student loan market, cutting off billions of dollars in profits for the institutions. Students will take out their loans through their college's financial aid office, instead of using a private bank.

The banks would no longer get fees for acting as middlemen in federal student loans. The government would use the savings to boost Pell Grants and make it easier for some workers to repay their student loans. In addition, some borrowers could see lower interest rates and higher approval rates on student loans.

Since the bank-based loan program began in 1965, commercial banks such as Sallie Mae and Nelnet have received guaranteed federal subsidies to loan money to students, with the government assuming nearly all the risk. Democrats have long denounced the program, saying it fattened the bottom line for banks at the expense of students and taxpayers.

The revamping of student loan programs was included in the final health care package passed by Congress on Thursday. The House approved the bill by a vote of 220-207, hours after the Senate passed it by a vote of 56-43. No Republicans in either chamber voted for the bill.

The legislation, an Obama domestic priority that was overshadowed by the health care issue, has widespread reach. About 8.5 million students are going to college with the help of Pell Grants.

Congressional allies of the student loan industry attacked the overhaul as an over-reaching government takeover that will kill banking jobs. The legislation substitutes an expanded direct-lending program by the government for the bank-based program, directing $36 billion over 10 years to Pell grants, for students from low-income families.

Colleges respond to Gov. Nixon's proposal to cut student aid

Speaking at the Springfield Business Development Corp. annual meeting, the governor outlined some budget cuts the state must make to begin to plug an estimated $500 million hole in next year’s budget.

Gov. Nixon may partially plug that gap by diverting financial assistance to students at private institutions – a move students and administrators at the state’s independent colleges and universities — including four Baptist institutions — have decided to fight.

Missouri is reportedly the first state to consider cutting off aid to private school students.

A public letter-writing campaign and telephone bank drew almost 600 students, several faculty and staff, and a few parents at Missouri Baptist University’s St. Louis campus March 22. The turnout also caught the attention of most of the area’s media, including the Associated Press.

In his Springfield speech, the state’s top politician pointed to “vital” services that cannot be cut, such as the Highway Patrol and public school teachers.

Cuts, then, must come from nonessential services, including funding that gives students more college choices, he said.

“We also need to make changes in another well-intentioned area: financial aid for higher education,” Nixon told the Springfield business community. “Currently, many of our state college scholarship programs — both for merit and for need — provide financial support to students whether they choose to attend public or private colleges. In some cases, students at private schools actually get larger scholarships than students at public institutions.