2/14/95 Direct Loans Work For Students

US Education Department Press Releases

"Getting a student loan was easier than I ever imagined," says Jennifer Phillips, a graduate student at the John F. Kennedy School of Government at Harvard University.

"I didn't have to shop around to find a lender and wait for all the paperwork to be processed. Instead I went to the financial aid office to coordinate all my student financial aid. There's so much to be done when you're going to school, and this was one less important thing to worry about. It was a tremendous relief."

Students like Phillips -- and financial aid administrators across the country -- are praising the new William D. Ford Federal Direct Loan Program, which allows students to borrow directly from the federal government through their schools instead of through banks and other third-party lenders.

Schools cite a number of benefits to direct lending: it's simple, with less paperwork, less money spent on staff overtime and phone calls to lenders, and much quicker turn-around time for loan processing; improved cash flow; and flexibility to structure the loan program to fit their particular needs and capabilities.

"The program is so much simpler than the FFEL (Federal Family Education Loan) program that we've completed awarding aid to 800 more students this year than we did at the same time last year," said a financial aid administrator at SUNY-Brockport just a few weeks into the program.

And at the University of Idaho, the financial aid director said, "The biggest joy of direct lending is having the money ready for the students when they expect to receive it. Our students have definitely been the beneficiaries of better service."

The University of Florida pointed to other administrative benefits: "...a happier, more in-control financial aid staff who are better able to meet their customers' needs and an overall cash flow improvement for the school."

These are just some of the comments from the 104 colleges, universities and trade schools participating in the first year of the direct loan program. Beginning July 1, the total number of schools in the program will climb to about 1,400, or 40 percent of total loan volume, as set by law. More than 2 million students are expected to receive direct loans next year.

Benefits for students were summed up by University of Michigan President James J. Duderstadt, "With one-stop shopping, students have been able to obtain their loans in record time. By the end of the first month of school this year, there was a 43 percent increase over 1993 in loans originated and funds disbursed to students."

In addition to having loan money earlier in the school term to pay for books and other up-front expenses, students also report that they borrow less because it is now so easy and simple to obtain additional funds if needed compared to the hassle under the FFEL program.

Borrowers with direct loans also benefit when it's time to pay back their loans. They can open an Individual Education Account (IEA), giving them the option to repay their loan in one of four ways, to switch repayment plans as their financial situations change, and to assume more control over their finances and career choices.

The four repayment options are:

Pay-as-you-can or income contingent plan -- monthly payments are based on a percentage of annual income, family size and loan amount, with payments rising and falling as income fluctuates. Extended plan -- monthly payments are a fixed amount over a period of 12 to 30 years, depending on loan amount. Graduated plan -- payments are lower initially and then increase every two years over a period of 12 to 30 years. Standard plan -- monthly payments are a fixed amount for up to 10 years.

Taxpayers also gain from direct lending. From the Student Loan Reform Act that created direct loans, the government expects to save an estimated $6.8 billion from FY 1995 to FY 2000 by eliminating unnecessary payments to lenders and taking advantage of the federal government's ability to borrow at a lower interest rate. The administration's FY 1996 budget proposes speeding-up the phase-in of direct loans to 100 percent of loan volume by academic year 1998, for an additional $5.2 billion savings ($12 billion total savings).

"We are determined to take the expense and confusion out of how students finance and pay for higher education," said U.S. Secretary of Education Richard W. Riley. "We're determined to make the loan process simple, easy and efficient, and it's working. Both schools and students recognize that direct lending accomplishes these goals -- and saves billions of dollars at the same time."

Last month, the Education Department held a meeting in New Orleans to provide schools who will begin direct lending in the 1995-96 school year with training and technical assistance to get the program up and running smoothly. Campus officials from the 104 schools that began direct lending this year also attended, sharing their start-up experiences and describing its advantages.

One benefit cited by many financial aid directors was the importance of being in control of their own programs and funds -- an impossibility in the guaranteed student loan program, which involves over 7,000 lenders, 42 guaranty agencies and more than 50 secondary markets. Assuming control of the loans, they said, means corrections and adjustments are easy to do and the whole process flows more smoothly.