Students Receive First Funds from New Direct Loan Program

Students Receive First Funds from New Direct Loan Program

On June 8, the first Buffalo State students received their loan monies from the new federal Direct Loan program. The funds, which were disbursed to students enrolled in summer sessions, were credited to the students’ accounts.

“Direct lending to students from the federal government has been around for a while,” said Kent McGowan, financial aid director. “However, it didn’t become a requirement until the Health Care and Education Reconciliation Act was passed last spring.”

In the past, higher education loans guaranteed by the federal government were made through individual banks, which reaped the interest in return for processing the loans through the Federal Family Education Loan (FFEL) program. During the early 1990s, some lawmakers proposed that the federal government make the loans directly to students so that the interest would come to the government instead of the banks, but the idea received substantial opposition. So the Direct Loan program came into existence as an alternative to FFEL rather than as a replacement for it.

After the subprime lending crisis and subsequent market crash of 2008, the country’s banks stumbled and credit dried up. As a result, fewer and fewer banks had money to lend to students for college. When President Barack Obama signed the Health Care and Education Reconciliation Act into law on March 30, 2010, the Student Aid and Fiscal Responsibility Act was included. It stipulated that any federally guaranteed student loans issued from July 1, 2010, would be direct loans from the federal government to students.

“I think it will be a good thing for our students,” said McGowan. “We anticipate a slightly better turnaround time between when a student applies for a loan and when he or she receives the funds.” The new process, from the student’s perspective, should be very similar to the old process; students still must complete a Free Application for Federal Student Aid (FAFSA). From now on, repayment may be simpler because students will be dealing with just one lender.

However, McGowan is concerned about potentially confusing repayment issues for 2011 graduates who have been taking out student loans since they started college. “A student may have started out with a loan from one bank,” he said, “and then, after that first bank got out of the student loan business, the student got a loan from another bank. That student will have several loans to repay.” Another complicating factor is that a loan servicing organization such as Sallie Mae could handle payment processing for different banks as well as for the new direct loans. It’s possible that a student owing, for example, $200 a month on his or her student loans could receive four separate bills monthly.

“After they graduate, students may get more than one bill from a loan servicing organization such as Sallie Mae, because Sallie Mae is acting on behalf of more than one lender,” said McGowan. “It’s important that students know that they can consolidate their student loans for easier repayment.”