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.