Written by Blake Mathews
President Obama signed into law Tuesday a package of changes that will take private banks out of the federal student loan process. After July 1, all college students looking for government-backed financial aid will be dealing with the same lender: the U.S Treasury.
With banks no longer being paid as middlemen, Obama said $68 billion will be freed up over the next decade. However, according to Dr. Jon Roberts, financial aid director at Harding, most students will not reap any benefits from those savings.
Roberts said 65-70 percent of undergraduate students at Harding pay for college using student loans. In the past, the money for those loans came from private banks, which were subsidized by the government to make the loans more affordable. This program, called the Federal Family Education Loan Program, also protected lenders against defaults by requiring that students buy insurance from nonprofit guarantee agencies. If a student becomes unable to repay a loan, the private lender collects the unpaid debt from the guarantee agency.
Under the new law, no new loans will be given out under the FFELP, meaning that private lenders and agencies will no longer profit from the federal student loan business.
“I didn’t stand with the banks and the financial industries in this fight. That’s not why I came to Washington,” Obama said Tuesday, speaking to students at North Virginia Community College. He added that he and the legislators who supported the law “stood with America’s students.”
However, that does not mean that students will be paying less for college.
“That’s the unfortunate part of all this … there was a certain interest being charged to students to generate enough profit for these private entities to stay in the program. The government is now issuing the same loans at the same rate,” Roberts said. “The student doesn’t benefit at all.”
Proponents of the switch to direct loans point to the Pell Grant program, which will receive more than $40 billion of the money being saved. Pell Grants are designed to help students from low- to middle-income families, and Roberts said 20-25 percent of Harding students benefit from these grants.
Because more students are qualifying for the grants, the program had been experiencing a budget shortfall, but Obama said he plans to award 820,000 additional Pell Grants by 2020.
The government savings will also go toward community colleges and institutions that historically serve minority students.
Banks and other private lenders are not completely out of the student loan business, however. Federal loans have limits based on dependency status and income, and students may need to borrow more in order to make ends meet. Roberts said roughly 25 percent of Harding students get these “private educational loans,” which are given by private lenders and are not backed by the government.
But Roberts warned that the student loan overhaul has added new “additional disclosures” to the process of getting a private educational loan. This translates into more paperwork for students to fill out and a longer waiting period. Before the overhaul, banks could have disbursed loans within 48 hours after receiving the applications, Roberts said. Now, students may be waiting three weeks to a month for their money.
“The moral of the story is to do it early,” Roberts said, speaking about the loan application process.
For Harding students, the priority deadline is April 15. Any student who completes his or her application and paperwork by then is “essentially guaranteed” to receive disbursement before the fall semester begins.
Federal loans will still be available for students who do not make the priority deadline, though Roberts said students risk paying interest without having the money by the first day of classes.
When asked why the new law added so many new disclosures and extended the waiting period, Roberts said, “to basically make it not quite so easy to get student loans beyond what the federal government provides.”
The traditional Free Application for Federal Student Aid will still be used under the direct loan program, though students must now take additional steps to secure their money, a fact Roberts said might catch most students off guard.
The first time a student applies for financial aid, he or she must complete five steps: fill out the FAFSA, fulfill the list of requirements, accept the financial aid, complete student loan entrance counseling and complete a master promissory note. Each year after that, the student only needs to complete the first three steps.
Now, students will need to revisit the last two steps of the process: the entrance loan counseling and the master promissory note. No student can receive any federal loans until those two conditions are met.
Student awareness of this fact is probably low right now, Roberts said, though after fall registration closes the Financial Aid office will conduct an informational campaign through e-mail, student mail and chapel announcements.
