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Prospective Switch to Direct Loans Raises Concerns

Smaller schools say they lack the infrastructure to take on student loan tasks traditionally performed by banks.

In this tight fiscal era, President Barack Obama’s plan to provide billions of dollars in new federal student aid hinges on a potentially controversial move: ending the bank-led — and subsidy-laden — Federal Family Education Loan (FFEL) program.

 While the recent financial meltdown has reduced the capacity of some banks for loans, the Obama plan formally would require all colleges and universities to move into the federal government’s Direct Loan program. Although many schools have made that switch in recent years, some question whether smaller schools — such as community colleges or some Black colleges — could accommodate the switch easily.

“I don’t have a lot of loan infrastructure,” says Bill Spiers, financial aid director at Tallahassee Community College in Florida, where more than 40 percent of students are African-American. “And in this budget environment, it’s unlikely I will get additional staff.”

According to Spiers, a switch from FFEL to Direct Loans will require more internal college work to balance and reconcile accounts and do other paperwork often done by banks. “Community colleges are staffed at lower levels, and we have to wear more hats,” he tells Diverse. Switching to Direct Loans “is going to take time and effort.”

Yet for many nationally, the call for reform has financial appeal. The U.S. Education Department says ending FFEL subsidies would free up about $4 billion annually for higher education. The Obama administration says it would use the proceeds for annual Pell Grant increases, converting the program to an entitlement. The White House also would spend new money on college completion grants in a move to boost student success rates. As a result, some groups are focused more on how to help colleges make the switch to Direct Loans.

For the United Negro College Fund, the promise of more federal aid makes the Obama agenda a promising one, says Edith Bartley, director of government affairs.

“UNCF is in full support of Pell Grants as an entitlement,” she tells Diverse. “We understand that this is a package with [conversion to] Direct Loans.”

But amid reports that some HBCUs had tried — and left — the Direct Loan program in recent years, UNCF has been conducting a survey on the issue. Of 17 responses so far, eight institutions are doing Direct Loans “and do not have a problem with it,” she says. The other nine use the FFEL program.

Yet she acknowledged there could be transition challenges for small colleges. “It’s not unusual for smaller schools to have only three or four financial aid employees,” she says. As a result, “Many colleges have relied heavily on private lenders.”

One way to ease the transition may be for the Department of Education or Congress to provide some colleges with funds to facilitate the Direct Loan switch, she says. In addition to staffing, other challenges for colleges may be lack of a technology infrastructure to take on tasks previously performed by banks.

Bartley says Congress also could provide start-up funds for a recently authorized federal program to address the digital divide at minorityserving colleges and universities. Passed last year, the bill authorizes as much as $250 million to help MSIs address technology issues. However, the program has yet to be funded by the White House or Congress.

Within government, a senior Education Department official says Washington may be able to use existing federal student aid databases to facilitate the switch to direct lending.

The department currently has a uniform system for every college and university to originate, disburse and report Pell Grants, says Robert Shireman, deputy education undersecretary. The government could expand this system, known as the Common Origination and Disbursement (COD) system, to include loans.

It would be “an easy add-on for those schools that do not already disburse Direct Loans,” Shireman told a House of Representatives committee in late May.

“Current Pell Grant-participating institutions that move from FFEL into Direct Loans may have to learn a somewhat different process, but it is not something that is enormously complicated,” he added. Nonetheless, the loan industry used the House hearing to call for continuation of the current system, in which colleges get a choice between bank-led and Direct Loans.

“Schools utilizing the Direct Loan program tend to be larger schools, which are more comfortable dealing directly with a federal department,” says Jack Remondi, chief financial officer at Sallie Mae. Remondi says about 30 percent of public four-year colleges and universities use Direct Loans, compared with only 10 percent of community colleges that have lower tuitions and smaller staffs.

“The fact that the direct lending origination platform works for some schools does not mean it will work for all of them,” he adds. But a representative from one flagship institution says colleges may not face major disruptions if the change takes effect.

Pennsylvania State University recently made a switch to Direct Loans and has talked with smaller schools making similar moves, says Anna Griswold, assistant vice president for undergraduate education. “With adequate lead time, even most of the smaller schools will likely find converting to Direct Loans a manageable process,” she says.

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