Colleges scramble to adjust as student loan overhaul nears passage

An overshadowed aspect of congressional health care bills involves new provisions for student loans. As Ben Tracy reports, sweeping changes are in store throughout the U.S. for college lending.
By Nick Anderson
Friday, March 26, 2010

As Congress approved landmark higher education legislation Thursday, hundreds of colleges and universities were racing to overcome a major logistical challenge: switching within three months from private lenders to the U.S. Education Department as their provider of federal student loans.

The lending overhaul, which would eliminate a 1960s-era program that subsidizes banks and other providers of federally backed loans, was included in a health-care bill the Democratic-led Senate passed Thursday afternoon on a 56 to 43 vote. Democrats pushed the bill through the House hours later on a 220 to 207 vote, clearly it for President Obama's signature.

The legislation would save the federal government about $61 billion over 10 years, with more than half of the savings channeled into Pell Grants for needy students. More than 8 million students depend on those scholarships, a cornerstone of financial aid. For that reason, many higher education leaders support the overhaul.

Key to the savings is a speedy transition. By July 1, universities that participate in federal lending must have their financial aid systems wired into the Education Department's direct lending program. In recent years, more than half of postsecondary schools opted for the private lenders over the government's 17-year-old program. But the landscape for a market that accounts for about $95 billion a year in loans is rapidly shifting.

As of March 18, federal data show, 2,462 schools, or nearly 48 percent of the nationwide total, were "direct loan ready." About 2,094, or 40 percent, were in transition or had taken steps to prepare for it. About 600 had taken no steps toward a transition or were inactive.

Among Washington area schools moving toward a switch, officials said, are the University of Maryland and the University of Virginia.

"This isn't an easy transition," said Justin Draeger, vice president for public policy for the National Association of Student Financial Aid Administrators. "But I think colleges and universities are going to do everything they can to ensure that students have an uninterrupted supply of loans this year. Now it's crunch time. It's going to take some resources, some time, some outreach to students."

Republicans denounced the lending overhaul as a needless government takeover and opposed the bill en masse.

"We want students to have as many lending options as possible," said Steve Wymer, a spokesman for Republicans on the Senate Health, Education, Labor and Pensions Committee. "To make the federal government, the Department of Education, a monopoly bank is not the best thing for students."

Some aid administrators whose schools have converted said the transition was painless. It involved, they said, computer system adjustments and making sure that student borrowers submit a new promissory note.

"The process is very simple," Walter O'Neill, assistant vice president for financial aid at Roosevelt University in Chicago, said Thursday. "I can't even come up with an example of a hiccup."

Anthony Erwin, senior director for university financial aid and scholarships at Northeastern University in Boston, said that he had encountered "overly burdensome" rules and regulations in some past contacts with the federal government but that the university's move to direct lending in 2008 went off without a hitch -- "an absolutely different experience."

Some administrators said they remain partial to private lending but are resigned to dealing with the government.

"In any large operation," said Robert M. Shireman, a deputy undersecretary of education who helps oversee financial aid, "there's going to be room for improvement, reducing errors and making sure everybody's getting the care and attention they need."

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