Government's direct student loan program gets a boost

ByABC News
March 10, 2009, 11:47 AM

— -- The number of colleges and universities offering student loans through the government's direct loan program rose sharply last year, a trend that could strengthen Obama administration efforts to end subsidies to lenders that provide student loans.

The administration's budget proposes replacing the 44-year-old Federal Family Education Loan Program with direct loans from the government. President Clinton created the direct loan program in 1993, but it has historically accounted for only a fraction of federal student loans.

In the past year, though, the number of colleges and universities originating loans through the direct loan program rose more than 50%, according to the Department of Education.

More than 1,600 schools were offering direct loans in February, up 548 from a year earlier, according to the Department of Education. During the same period, the number of schools that offer FFEL loans fell 3.6%. Still, FFEL loans continue to account for about three-quarters of all student loans.

Obama's budget calls for ending the government-subsidized loan program by 2010. The administration estimates that would save the government $4 billion a year. Since the announcement Feb. 26, shares of student lenders have plummeted; Sallie Mae, the largest, is down more than 40%.

FFEL proponents dispute the savings estimates and say private lenders provide better customer service. Private lenders and loan guarantors have a system to help borrowers avoid defaulting on their loans, says Barry Feierstein, executive vice president for Sallie Mae. "That level of outreach doesn't exist in the federal direct loan program," he says.

Reasons schools are opting for direct lending:

Lower costs. Bethel University in St. Paul will switch to direct lending this fall because it's less expensive for borrowers, says Jeff Olson, director of financial aid. In the past, private lenders offered discounts on loan-origination fees and other borrower benefits that made them more attractive, he says. But legislation enacted last year, which allows the Department of Education to buy loans lenders can't sell to investors, bars lenders that participate in the program from offering such incentives.