Student lending shifts to direct loans

Come summer, student loans will no longer be available through commercial banks through the Federal Family Education Loan Program.

President Obama proposed eliminating FFELP because he said it funneled billions of dollars in government funds to banking institutions. He charged that those funds could be better dispersed via direct loans from the federal government.

The passage of the Health Care and Education Reconciliation Act of 2010 earlier this year will bring FFELP to an end, and no new loans will be made under the program after June 30. Instead, students will have to access funding directly through their schools and the U.S. Department of Education’s Direct Lending program.  

On-campus adjustments
While existing loans are not affected, students who have FFELP loans in place will have to complete new entrance counseling and master promissory notes before starting their next semester with the switch to direct lending, said Jackie Lewis, assistant director of financial aid at Missouri State University.

The change also will have implications for schools.

“We’re going to have to beef up financial literacy (and) contact with students who are delinquent, things like that, because the Department of Education is not fully set up to handle all the services that the lenders provided,” Lewis said.

About a third of the schools already are prepared for the end of FFELP, said Jane Glickman, press officer and public affairs specialist for the U.S. Department of Education.

“Last year when so many banks were pulling out of the loan program because of the crisis in the financial markets, more schools started moving over anyway to Direct Loans,” she said, noting that the switch will simplify funding access for students because they can visit the on-campus financial aid offices.

Bank shift
Banks will have to adjust to the switch as well.

Commerce Bank, which operates branches in Colorado, Missouri, Kansas, Illinois and Oklahoma, has been handling FFELP loans for about 45 years, said Carl Bradbury, director of consumer card products and student services for the Kansas City-based bank.

“To this point, probably 90 percent or more of our student lending volume has been in the FFELP lending business,” he said.

According to Commerce’s 2009 annual report, student lending comprised only 3 percent of Commerce’s total loan portfolio, and as FFELP lending winds down, Bradbury said Commerce will direct its focus to other lines of student business, namely home equity or other loans that parents can access to supplement federal loans.

The demise of FFELP essentially puts an end to student lending for Arkansas-based Arvest Bank, according to Jason Kincy, vice president of marketing.

“We do a lot of student lending in Missouri,” he says, noting that the bank also was the third-largest student lender in Oklahoma.

The biggest loss for banks, Kincy said, goes beyond dollars and cents.

“A student loan with someone going to college is a great way to start building a banking relationship that you expect will continue and would grow in the years,” Kincy said. “I think that’s the greatest impact to us – just that loss of connection with the borrower.”

The Missouri Higher Education Loan Authority, a nonprofit institution that at one point worked held and serviced student loans for more than 300 Missouri banks, is repositioning itself to service federal direct loans, said Will Shaffner, MOHELA director of business development and governmental relationships.

Because MOHELA earns its revenue by servicing loans rather than making them, the move away from FFELP doesn’t negatively affect the organization, Shaffner said.

“We generate revenue over the life of the loan, so we still have a tremendous amount of loan volume on our system from loans made in the past that continue to generate revenue,” he said.[[In-content Ad]]