When Todd Johnson's daughter went to college, he spent a day with a spreadsheet comparing the discounts that lenders offered for good behavior and the fees they charged for service. It was a big hassle for Johnson -- and he runs a business, College Admission Partners, helping families figure out how to pay for school.
That's all set to change. Tucked into a package of "fixes" that Congress added to the health care bill are measures designed to improve the health of student loans and make college more affordable.
The biggest change is the end of banks as middlemen for federal student loans. Federal loans will be dished out directly from the government instead. The switch should save $61 billion over the next decade, according to the nonpartisan Congressional Budget Office. Some of that money will be used to shore up the imperiled Pell Grant program for low-income students and fund other measures to improve college access.
Going direct should also help to streamline the process and eliminate confusion.
Many parents lack the time or feel unqualified to make educated decisions about which lender is better than another. Even worse, some families mix up the difference between private loans and government loans. Financial aid officers tell horror stories about students who unwittingly take out pricey private loans with high interest rates and less favorable terms, thinking that all student loans offered by banks are the same.
For the 2007-08 school year, nearly two-thirds of private loan borrowers borrowed less than they could have in federal loans, according to numbers from the Project on Student Debt. This change makes it crystal clear: Always consider student loans from the government first. Then research your options from private lenders.
Banks will stop offering government-guaranteed loans as of July 1. But many colleges -- from private universities to beauty schools -- proactively made the switch, and University of Minnesota has been a direct-lending institution for a decade. Data from the Minnesota Office of Higher Education show that 70 out of 130 colleges, universities and career schools in Minnesota already offer direct loans. For a look at which schools are offering direct loans around the country, visit: www.federalstudentaid.ed.gov/datacenter, then click on "Programmatic Volume Reports" and find the "Direct Loan Program."
When going direct, students must sign a new promissory note and go through entrance counseling, said Kathy Ruby, dean of student financial aid at St. Olaf College in Northfield. After they graduate, she added, they'll likely have obligations to multiple lenders: "When they go into repayment, they'll need to do a little extra work to keep track of loans."
