Financial-aid applications are up by 53 percent in the past two years at Montgomery Community College, in the Maryland suburbs of Washington. Add to that the new federal mandate to convert college loans from private lenders to the federal Direct Loan Program and it鈥檚 easy to see why Melissa Gregory, the director of student financial aid, is feeling swamped.
鈥淚t鈥檚 very stressful. We multitask everyone from the front desk to approving loans to work-study jobs,鈥� said Ms. Gregory. With budgets frozen, there have been no additional hires to the financial-aid staff of 33, which serves 36,000 students on three campuses. The U.S. Department of Education has provided welcome webinars and technical assistance to help with the transition, but it鈥檚 a big undertaking. 鈥淲e all do more with less and try to be more efficient,鈥� she said.
Campuses across the country are gearing up to meet the July 1 deadline to revamp student-loan programs, as required in the federal Health Care and Education Reconciliation Act of 2010. Although overshadowed in the health-care overhaul that President Barack Obama signed into law in March, the higher education provisions of the law are significant for high school and college students and their parents, as well as for the institutions.
鈥楲andmark鈥� Law
The legislation eliminates fees the government paid to banks that provide loans to college students and uses the estimated $60 billion savings in the next 10 years primarily to expand Pell Grants. More grants will be available to low-income students, and the annual maximum scholarship will increase with inflation starting in 2013, climbing from the current $5,550 to an estimated $5,975 by 2017.
Those changes are expected to help meet the growing demand for Pell Grants and plug a potential shortfall in the program. Pell Grant recipients numbered 7.7 million in 2009, at a cost of $28 billion. In 2010, the cost is expected to grow to $32 billion, and to $34 billion by 2011, according to the Education Department.
The law ends the Federal Family Education Loan Program as of June 30 and requires colleges to make all student loans through the federal Direct Loan Program, which now makes up about 30 percent of such loans. The law also provides $2 billion to community colleges to train dislocated workers and support minority-serving institutions.
鈥淭his is a landmark piece of legislation by any yardstick,鈥� said Terry Hartle, the senior vice president for government and public affairs for the , a Washington-based organization representing higher education institutions. 鈥淚 would not be surprised if it鈥檚 the major piece of higher ed legislation for several years.鈥�
Linking the savings in bank-loan subsidies to boosting Pell Grants turned out to be a smart political move. 鈥淚t was a simple, clear, clean idea with obvious winners: low- and middle-income students,鈥� said Mr. Hartle. 鈥淚t would not have happened without the president behind it.鈥�
U.S. Secretary of Education Arne Duncan championed the proposal as part of the president鈥檚 push to increase the number of college graduates by 5 million by 2020. 鈥淪tudents are seeing the biggest increase in federal aid for college since the GI Bill,鈥� Mr. Duncan said. 鈥淢oving to direct lending will make the student-loan process more efficient while saving taxpayers billions of dollars.鈥�
Converting the Process
Like many campuses, Montgomery College started the loan-conversion process before the legislation passed. Ms. Gregory says the writing was on the wall when lenders, such as Bank of America, pulled out of the student-loan program at the college in December. So the campus began making the switch to direct lending.
The University of Texas at Austin saw a diminished lender pool in recent years and began preparing for the transition a year ago. The campus had no experience with direct lending and, with its own home-grown software system, faced a major transformation. Staff members went to conferences and visited other colleges, such as Pennsylvania State University, for guidance and put in 鈥渟everal thousand person hours,鈥� said Tom Melecki, the director of student financial services at the Austin campus, who has a staff of 60.
鈥淒irect lending is providing a somewhat more stable and reliable platform to draw loans for students. That鈥檚 a positive thing,鈥� he said.
Nervousness about the change was overstated, said Chris Lindstrom, the higher education program director for the , or PIRG, in Washington. 鈥淚t鈥檚 not as if college financial-aid offices were in the dark,鈥� he said. There was a huge push to convert early and for campuses that administer Pell Grants to use the same software as the Direct Loan Program.
Initially, members of the Association of Independent Colleges and Universities were concerned about the impact on smaller schools that serve low-income students, said Sarah Flanagan, the association鈥檚 vice president for government relations and policy. More than any other college sector, the independent schools are likely to use bank-based loans, and many didn鈥檛 gear up early, she said.
鈥淚t was a bit of a workload issue and a philosophical issue. They believed that the competition and choice had been good for students,鈥� she said. In the end, the growing turmoil in banking and elements negotiated out of the bill led the association to back the proposal.
鈥淚f they had fears the conversion would be difficult, those fears have not been realized,鈥� Ms. Flanagan said of independent colleges. 鈥淚t鈥檚 not that it鈥檚 not work, but they are managing.鈥�
Mary Baldwin College, a women鈥檚 college with 800 students in Staunton, Va., began the transition well before the law was passed, sending some of its five-person staff to conferences for training, said Ashley Buchanan, the associate director of admissions and financial aid. Staff members are finding the new process is simpler for both the student and the college since there is one website to go to, rather than various places for an application, credit check, master promissory note, and certification, as was the case when dealing with multiple lenders. Complying with the law has not been a significant drain on resources, and the college expects to be ready by July 1, she said.
Customer service from banks left a lot to be desired, so Parkland Community College in Champaign, Ill., made the switch to 100 percent direct loans in 1995, said Tim Wendt, the director of financial aid and veterans services. 鈥淚t鈥檚 been a positive for us.鈥� With a common origination-disbursement center, financial-aid offices can originate Pell Grants, direct lending, and parental loans in a one-stop shop, he said.
And with the new law, students will have increased access to Pell Grants, one lender for loans, and better repayment terms.
鈥淭his is one of those rare moments when Washington is actually working. Everything is just the way it should be for the student,鈥� Mr. Wendt said. 鈥淎fter all, that鈥檚 why we are here鈥攖o give students access to education and, at community colleges, often giving them a second chance.鈥�
If schools successfully make the conversion, most students and parents won鈥檛 see a radical difference in the loan process. Eligibility rules, interest rates, fees, and loan amounts are identical under the Federal Family Education Loan and Direct Loan programs.
The new law does offer students more favorable repayment terms. As of 2014, students can cap repayment at 10 percent of income above a basic living allowance, instead of 15 percent. Recipients with responsible repayment histories can have the balance of their loans forgiven after 20 years, as opposed to the current 25 years. It will also be simpler for borrowers because they don鈥檛 have to worry about multiple lenders or having their loans sold to another bank.
鈥淥n the affordability front, it ensures that when graduates hit the ground, they are not plunged into a financial hole,鈥� said Mr. Lindstrom of PIRG. 鈥淭he generous repayment terms are exactly what we needed to do to make aid more responsive and flexible.鈥�
While the new system is more efficient, some financial-aid administrators, such as Montgomery College鈥檚 Ms. Gregory, are concerned that students can do much of the loan transaction online and, therefore, miss the one-on-one counseling needed to impress on them the responsibility of repaying the loan. 鈥淭hey can put ever
thing on the Web, and it鈥檚 just a click away,鈥� she said. 鈥淗ow do I make the student click the button? That鈥檚 the question.鈥�
Watching and Waiting
While the legislation received broad support, the direct-loan mandate encountered skeptics. Some criticized the government for taking over the loan program and eliminating private jobs.
On the whole, it鈥檚 a compelling package for colleges and one that is good for student access, said David Brime, the vice president for government relations at the American Association of Community Colleges. 鈥淚t seems to be working well in the main without a lot of snafus,鈥� he said. 鈥淭here are people who don鈥檛 support the law who will be scrutinizing the transition very carefully,鈥�
Last June, the National Association of Student Financial Aid Administrators surveyed institutions that had switched. While 48 percent of respondents said they initially believed that converting to direct lending would be somewhat to moderately difficult, 80 percent responded that the actual switch was easy, and 73 percent said it was easier than expected.
As of May 19, the Education Department more than 3,100 schools, or 61 percent, had the capacity to originate a direct loan, and the remaining 2,000 were in transition. The naysayers are amazingly quiet, said Ms. Flanagan of the National Association of Independent Colleges and Universities. 鈥淭he debate was had; 鈥� there was a vote. Now they are being good citizens and trying to make sure students get their money,鈥� she said. And July 1? 鈥淭he vast majority will be ready.鈥�
