Students lose out on loans
A call placed by The Daily Orange to the SUNY-Albany financial aid office reveals the confusion that clutters the college loan process.
The receptionist was asked who lends money to SUNY-Albany students with Stafford or PLUS loans: the government or private lenders. He confessed he didn’t know the answer and put the phone down to ask someone else.
If the financial aid staff doesn’t have it figured out, how are students and parents supposed to? Better yet, does it matter as long as the bill gets paid?
It matters because one type of loan costs taxpayers more than ten times as much, requires more manpower from university staff and is improperly managed, according to government reports.
This is the type of loan Syracuse University offers.
It’s called a Federal Family Education Loan, or FFEL. At SU, Stafford and the Parent Loan for Undergraduate Studies, the most common, fall under the FFEL program. Students borrow money from private lenders, like a bank, that collect interest while the loan is repaid. Meanwhile, the government guarantees the loan against default. If the student can’t pay, the government pays the bank and saves the day.
The other type of loan is called a direct loan, where students borrow directly from the government. The government also collects the interest during repayment. Christopher Walsh, dean of financial aid at SU, says FFELs through private lenders are better for SU students.
‘Students have more choices with private corporations. There is no choice under direct loans; you have to borrow from the government,’ Walsh said. ‘It’s a better deal because banks sometimes give students discounts.’
Bank of America, for example, gives students a two percentage point rate reduction once they make 48 consecutive on-time payments. These small percentage point reductions late in the repayment stage may be wiped out by additional processing costs incurred by university staff. For this reason, Ohio University gives students access to direct loans instead of FFELs.
‘We only have to deal with one form instead of different forms from different lenders,’ said Jill Llallier, associate director of operations and financial aid at Ohio University. ‘It cuts out the middle man, and the entire process is quicker for students.’
Direct loans aren’t just cheaper for university staff. The government guarantees FFELs against default, but the bank gets the interest payments. Students have to pay up to four percent in fees to help defray the costs to the government. With direct loans, taxpayers bear the same risk, but collect interest payments to cover costs. Taxpayers get compensated for their risk. Students save four percent.
Better than having to work 48 months to save two percent.
Whether direct loans are cheaper for taxpayers is up for debate in financial aid circles.
‘There’s a lot of contention on both sides of the issue,’ Walsh said. ‘So I don’t really know which is less expensive.’
Studies by private lenders show direct loans cost more. One widely circulated study conducted by Mercury Public Affairs puts that figure at $1.4 billion. But Mercury does public relations for Sallie Mae, the largest private student lending institution in America, The Washington Post reported last month. Private lenders stand to lose billions in interest payments if colleges switched from FFEL to direct loans.
Investigations by The Government Accounting Office, Congressional Budget Office, Office of Management and Budget and U.S. News and World Report all reached the same conclusion: direct loans save taxpayers billions. The President’s 2005 budget shows the government pays $12.09 of subsidy for every $100 spent on student loans. It pays 84 cents on direct loans, a savings of 93 percent.
Right now, only 25 percent of post-secondary schools participate in the direct loan program. A 15 percent jump to 40 percent would save the government $12 billion, according to the CBO. That’s enough to raise every single Pell Grant for low-income students by $1,000.
Comparing the programs is useful, but the FFEL’s inadequacy stands just fine on its own. The president’s budget office, in its mandatory analysis of all appropriated programs, found evidence of ‘significant cost inefficiencies in the program.’
The budget office also found ‘the (education) department has not yet completed a comprehensive unit-cost measurement system for the student aid programs.’
The free market is the most efficient way to run an economy, but that competitive mechanism is not operating properly with student loans because government guarantees eliminate any risk for private lenders. All banks are doing is supplying the money, which the government can do quite well. After all, it does print the stuff.
‘If the government direct loans are found to be cheaper and there’s an opportunity to pass on the savings to students,’ Walsh said. ‘Then we’d definitely switch.’
All signs point to a switch – so do it.
DREW BLAND IS A JUNIOR POLITICAL SCIENCE AND BROADCAST JOURNALISM MAJOR. E-MAIL HIM AT DDBLAND@SYR.EDU.
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