Student Loan Proposal: 5 Things to Know

Last Thursday, the U.S. House of Representatives approved a proposal to overhaul the federal student loan program. The proposal hasn’t provoked anything like the uproar over health insurance changes, but it’s had its fair share of fierce debate — and where there’s ideological debate, there’s often a loss of basic information.

Here are 5 things you may not know about the new student loan proposal:

1) Federal student loans only. The new changes to the student loan program will not apply to all student loans — only to student loans provided by the federal government. Those are: Stafford Loans (both subsidized and unsubsidized), Perkins Loans, PLUS loans for parents, and PLUS loans for graduate students. If the student loan proposal is approved in the U.S. Senate, then starting in July 2010, students who take out federal Stafford loans, Perkins loans, or PLUS loans will get them solely through the Direct Lending program. (The Federal Family Education Loan program, or FFELP, will stop operating.)

2) Application process won’t change. There won’t be any change to the way students apply for Stafford Loans, Perkins Loans, and PLUS loans. The application process will stay the same as it’s always been: filling out a FAFSA each year a loan is needed. The only difference students may notice is that the FAFSA will be simpler, with fewer questions and pages, and on the online form, the option to transfer financial information directly from the student or parent IRS income tax form.

3) Private banks can still offer private student loans. Free market competition is not being eliminated — private financial institutions and commercial student-loan lenders will still be able to offer all the private student loans they want. They just won’t be middlemen for federal student loans any more, or get the federal government subsidies that rewarded them for offering student loans with the low interest rates, low fees, more inclusive application rules, and greater protection that the federal government required.

4) A few private institutions will help out with Direct Lending customer service. After the FAFSA stage of the loan process, there will probably still be a few private student-loan companies involved in handling the loan agreement and maintenance on behalf of the Department of Education. These companies will be paid a fee for providing this customer service to students, and will be selected by the Department through a competitive bidding process.

5) Don’t worry about the FFELP student loans you have now. If you have any current FFELP Stafford, Perkins, or PLUS loans, just keep making your interest payments or loan repayments as you have been all along. If the new student loan proposal becomes official, the transfer of existing loans from the FFEL program to the Direct Lending program will be handled by the Department of Education and your school(s). If your school’s financial aid office needs you to do anything, it will let you know. (And if you’re about to apply for a federal student loan, check with your school to see if it has signed up for the Direct Lending program. Probably no point in getting a loan through the FFEL program now.)