Student Loan News

If you have, or have applied for, a federal student loan, you’ll be glad to know the U.S. Department of Education has been doing some spring cleaning in its $100 billion federal financial aid program. Between the swirling credit market and the lingering effects of corruption in the student loan industry, the availability of loans for college has been a concern for many students. The Department has done some work to sort things out and move to a more streamlined loan process.

First, four financial services companies have awarded federal contracts to manage both new student loans and the many existing student loans that may end up on the Education Department’s doorstep as a result of the credit crisis. The fact that the financial services companies had to compete for the Department’s gigantic student loan business reflects the decision to make federal financial aid a contract arrangement based on performance, similar to the way contracts are awarded in the private sector.

“The award of these contracts is another step in the Department’s efforts to ensure that all eligible students have access to federal student loans and that, in partnership with the private sector, schools and borrowers receive excellent service,” Department of Education Secretary Arne Duncan said.

From now on, financial services companies who want to offer student loans through the Department’s Title IV financial aid program will be evaluated on the quality and reliability of their customer service. Or at least, that’s the plan, which is certainly an encouraging first step. We’ll see how it works out over time.

Second, in addition to taking on any necessary management of existing loans, the government wants to make arrangements to handle all student loans from 2010 on through the Education Department’s Direct Lending program.

Loans awarded through the Direct Loan program provide money directly from the U.S. Treasury, even though contracted financial services institutions handle the loan transaction. The Obama administration wants to go with this arrangement for all students, and to abolish the FFEL program in which the private financial services institutions themselves provide the loan money. Supporters of the direct loan program argue that it cuts out the middleman and offers students lower interest rates; supporters of the FFEL program claim that private industry provides better customer service. With the Department’s decision to contract out loan servicing based on performance, we may see more financial institutions joining the federal direct lending program.

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