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Direct Lending - Coming To A College Or University Near You

Not-for-Profit

By Kurt Herdman

In all the publicity of the health care reconciliation bill that passed Congress on March 25, 2010, one of the more interesting components was the Student Aid and Fiscal Responsibility Act (SAFRA). Yes, I said the health care bill and student aid all in the same sentence, and yes, this will have a significant impact on the higher education community. Regardless of your political views on the bill and the much-debated process of getting the legislation passed, SAFRA appears to be here to stay, and institutions of higher education need to be prepared to address the key components of the act.

Historically, colleges and universities processed federal student loans through either a federally guaranteed student loan program, or through the U.S. Department of Education’s Direct Loan program. The federally guaranteed student loan program relied on private lenders to fund the program, all at a guaranteed return for the lender, while the Direct Loan program is funded by the U.S. Government, but relies on private services, like Sallie Mae, to service the loans. Historically those loans were referred to as the Federal Family Education Loans, otherwise known as FFEL. Under SAFRA, the FFEL program is terminated, and all colleges and universities that issue federal student loans will need to utilize the Direct Loan program.

Proponents of the bill point out that Direct Lending will ultimately save the federal government approximately $61 billion over 10 years, which will be used to fund an increase in available student financial assistance through an increase in Pell Grants and other programs.

Institutions that have yet to implement the Direct Lending program will need to be proactive in preparing for the change, which becomes effective July 1, 2010. The Department of Education is conducting numerous webinars to prepare institutions for change to direct lending. Also included in the bill was a provision to provide $50 million to provide assistance in the form of technical support, training, materials, technical assistance and financial assistance. Overall, these changes promise to be more efficient and effective in the long-run; however, institutions need to be prepared for the changes ahead.

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