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Via: defendernetwork.com

As federal lawmakers prepare to possibly eliminate the primary program through which students currently obtain loans to pay for college, Texas universities are joining thousands across the country abandoning the bank-based system.

When the recession hit, default rates climbed and private lenders had difficulty finding capital to continue making student loans. The federal government intervened, but stopgap measures expire in June. The University of Texas announced this week that it is cutting the program under which students borrow from private lenders in favor of the U.S. Department of Education’s William D. Ford Federal Direct Loan Program .

Starting in the summer, UT students will borrow directly from the government.

“We simply can’t afford the risk of the disruption in the flow of loans to students who rely on them to pay their college costs,” said Tom Melecki , director of student financial services. Switching lenders may be inconvenient for some students, he said, but “the lenders who have supplied the majority of our loans may not be able to.”

Bank of America, which services 20 percent of UT’s loans, quit the student loan program in December, UT officials said. And other large lenders have told UT that if federal aid is not extended past the deadline , they won’t have access to the low-cost capital they need to make student loans.

Nearly two-thirds of 410 colleges and universities surveyed nationwide said they have made or will make the switch to the direct loan program, according to a November study by Student Lending Analytics .

Students and parents won’t see much of a difference in applying for the government loans, which have similar terms and conditions, but the government loans might have the same or better interest rates than private loans, college officials said. Texas A&M University also is making the switch. Texas State University has offered the direct loan program since 1994 .

“Most the schools in Texas have stayed with the (Federal Family Education Loan Program) by choice,” said George Torres , a senior advisor with the Texas Guaranteed Student Loan Corp., a public nonprofit created by the state Legislature in 1979 to administer the bank-based Federal Family Education Loan Program in Texas. “They were pleased with the support services they were getting and choice of lenders up until two years ago, when the lenders could no longer originate the loans as a result of problems in the private credit market. And then schools needed reliability of student loan capital.”

In 2008 amid the banking crisis, the government intervened, passing the Ensuring Continued Access to Student Loans Act that temporarily allowed the U.S. Education Department to act as a secondary market for student loans. The department backed private loans in case of default, and lenders had the option to sell those loans back to the government.

But that federal aid expires on June 30 , and President Barack Obama has called for ending the bank-based program and shifting entirely to direct loans, which, he said, could save taxpayers billions in interest “by cutting out the middleman.”

The federal legislation could pass as early as this weekend . Private loans not connected to federal programs won’t be affected.

“Schools have picked up the pace,” anticipating that the legislation will pass, Torres said. If the legislation passes and schools have not prepared, students may be caught without loan options, he said.

About half of UT’s undergraduates, or 18,694 in the fall of 2008 , borrowed to pay for their degrees, compared with the national average of about 70 percent of students at four-year institutions, Melecki said. In addition, 3,472 parents took out loans for their undergraduate students at UT, and 4,857 graduate and law students — or about 39 percent of that group — used loans to pay for school. About 90 percent of UT student loans are federal loans.

With the transition, students who previously acquired loans from commercial banks will have the opportunity to consolidate their private and federal loans, financial aid officials said.

Christopher D. Murr , interim director of financial aid and scholarships for Texas State, said the direct loan program “has been fantastic for our students. The program has allowed (us) to provide our students with loan funds very quickly and with minimal paperwork on their part. The short processing time with Direct Loans has generally reduced stress among our student loan borrowers, who are sometimes in serious financial need, and allowed them to better focus on their academics rather than worrying about when their loan funds will arrive.”

The University of North Texas and the University of Texas at San Antonio also are moving to direct loans, and A&M officials said direct loan applications will be available this month for the summer and fall semesters at the College Station campus.

“Texas A&M has partnered with the Family Federal Education Loan Program since its inception, and our students and parents have benefitted from the public/private partnership that we have developed while administering it,” Joseph Pettibon, an assistant provost at A&M, said in a statement. “However, as the student lending environment has changed in the last few years and with continued uncertainty about the future of the FFEL program, we are confident that a change to the Federal Direct Loan Program will enhance our ability to better serve our students and parents.”

Statesman.com