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Obama plan would take private lenders out of federal student loan program

The days of shopping to find a federal student loan could be coming to an end for Florida college students.

President Obama on Thursday proposed doing away with private sector lenders such as Sallie Mae and Citibank in the federal loan program.

The changes, if approved by Congress in the 2010 budget, would make Uncle Sam the only game in town under the federal aid program.

Students would never again have to surf the Web in search of a bank willing to make a federally backed loan, though they could still take out a private loan to supplement their Stafford or Perkins loans.

And that sounds just fine to some Florida college officials, who have been rattled after a year in which some lenders abandoned the federal loan program because of the credit market crisis, leaving some students high and dry.

On Thursday, Hillsborough Community College officials said they were already seriously considering the move.

"It would take a lot of the guesswork out of it for the students," said Kenneth Ray, vice president of student services and enrollment management.

He said the college hasn't made a final decision and wants to make sure switching won't increase its default rate on loans. But officials like the idea of protecting students from what has been a confusing marketplace.

"I believe it's easier for students, and in some ways it's easier for the college," Ray added.

Staring in the 2010-2011 school year, the proposal calls for federal aid to be distributed only through the long-established Direct Loan program. It eliminates the subsidy currently paid to private lenders who issue federal loans and lends directly to students.

The University of Florida has been part of the Direct Loan program since the program's founding in the mid 1990s. For years, the school was in the minority nationally; in 2008 about 1,100 colleges and universities participated, while 4,600 schools used private lenders as middlemen in the competing Federal Family Education Loan program.

"A lot of schools had to delay payments to students until they got the money (from private lenders)," said Karen Fooks, director of financial aid at the University of Florida, referring to recent problems. "Schools said, 'We can't put students on the hook like this. We have to have the money at the start of the term.' "

Most Florida colleges and universities — including Florida State University, the University of Miami and the University of South Florida — still participate in the private-sector program.

And many like the idea of letting the free market continue to compete for student business. Under the Federal Family Education Loan program, lenders such as Bank of America issue government-backed loans and typically bundle and resell them as securities that investors can purchase.

"We have seen great benefits with having both programs operating simultaneously," said Bill Spiers, financial aid director at Tallahassee Community College and a spokesman for the Florida Association of Student Financial Aid Administrators.

"It's going to require additional workers at the (federal) Department of Education," he added, if the switch is made to direct lending. "People (in the lending industry) are going to lose jobs. And they have never been able to prove the cost savings."

In good times, private lenders offered fee discounts, though such incentives have largely disappeared over the past year.

And with banks on shaky ground in the slumping economy, free-market benefits are less evident at some Tampa Bay area schools. Last year, Stetson University College of Law was one of several hundred schools nationally to join the Direct Loan program.

Federal officials say making the switch by the fall of 2010 would save taxpayers $47.5 billion over 10 years by making the process more efficient and eliminating the subsidy to private lenders.

Tom Marshall can be reached at tmarshall@sptimes.com or (352) 848-1431.

Obama plan would take private lenders out of federal student loan program 02/26/09 [Last modified: Friday, February 27, 2009 12:12am]
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