Students who take out federal loans to pay for school this year will no longer have to pick which bank they prefer: they’ll now borrow directly from the U.S. Department of Education.
USM announced last week the switch to the Federal Direct Loan Program. Students with financial aid who take out Federal Stafford and PLUS loans will borrow directly from the federal government, eliminating the need for third party service fees, and simplifying the loan process, according to university officials.
“Economic issues, including the subprime lending crisis, coupled with changes
to the student loan industry have all contributed to our decision to exit
the Federal Family Education Loan Program,” said Keith Dubois, director of student financial aid in an e-mail to students.
While interest rates for unsubsidized Federal Stafford loans will remain the same, students will no longer have to pay third-party service fees. Interest rates on PLUS loans borrowed by parents will be lower, according to Dubois.
Bank of America, Key Bank, TD Bank and the Finance Authority of Maine are no longer offering federal loans, he said. “Lenders have had cash flow problems
– many already sold loans to the Department of Education,” he said.
“Most of our lenders have backed out in the last two years,” he said. “Students are having to borrow from lenders we’ve never dealt with.”
The switch is part of a larger national trend spurred by President Obama. The House last September passed the Student Aid and Fiscal Responsibility Act, a bill mandating that all schools participate in the Federal Direct Loan Program. The measure will likely be bundled with the health care reform bill in the ensuing senate vote. The legislation is also expected to increase the maximum Pell Grant to $5,500 for the 2010-2011 school year. The government expects to save $67 billion by not paying private lenders. Many schools have already opted to participate in the program, in expectation that the bill would pass in the senate.
“The Maine Community College System already has adopted this system, and the other six campuses in the University of Maine System also have done so, or are in the process of converting,” said USM Spokesman Bob Caswell.
Dubois said the switch should simplify the borrowing process for students. In the past, 50 to 60 percent of students who took out loans failed to identify a lender when they initially filled out loan paperwork, resulting in late disbursement of loans, he said.
“Under the old system, Financial Aid was dealing with some 80 different lenders, many with different policies governing everything from the time it took to reach a decision, to how quickly funds could be made available,” said Caswell.