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At Texas State, student loan program eliminates the middleman

Money borrowed directly from federal government rather than from commercial lender

By Ralph K.M. Haurwitz
Austin American-Statesman Staff
May 9, 2007

SAN MARCOS -- Signing up for a federal student loan was a snap for Kendra Williams. She never even had to go into the financial aid office at Texas State University-San Marcos.

The junior from Lubbock, who is majoring in criminal justice, simply followed online prompts after receiving notification from the aid office that she was eligible for grants and loans.

Texas State University-San Marcos is one of a few Texas schools that offer federal direct student loans. Financial aid assistants Peggy Picasio, left, and Elda Cruz, center, help student Irene Pedraza.

Texas State University-San Marcos offers students federal direct loans and private loans. New students are steered into direct loans, while transferring students can keep their debt with private lenders. Financial aid assistants Peggy Picasio, back left, and Elda Cruz, back right, counsel students.

Williams, who is on the hook for $5,000 and expects to owe as much as $15,000 to Uncle Sam by the time she graduates, said, "It was easy to do."

It's easy for Texas State as well, according to officials of the financial aid office, who credit a program under which students borrow directly from the U.S. Department of Education rather than from banks, credit unions or other lenders backed by the federal government.

"We cut out the middleman," said Mariko Gomez, director of student financial aid at Texas State. "I would definitely recommend it."

Only about 1,100 of the nation's colleges, universities and other post-secondary institutions have opted to participate in the direct loan program. That amounts to about 20 percent of the federal loan pie.

Some studies show that direct loans cost taxpayers far less than private-lender loans, as much as $5.89, or 78 percent, less for every $100 loaned.

Banks and other lenders say they dominate the market by offering lower fees and interest rates than the government. But critics say the industry has engaged in questionable practices.

SLM Corp., known as Sallie Mae, reportedly offered Indiana University $3 million for student loans if it left the direct loan program. The university said the payment played no role in its decision to drop direct lending.

A nationwide investigation by New York State Attorney General Andrew Cuomo has revealed payments by loan companies to some colleges that list them as preferred lenders, as well as ownership of loan company stock by some college financial aid administrators.

University of Texas System regents are expected to be briefed in closed session today by the system's general counsel concerning a review of conflict-of-interest allegations by Cuomo's office against Lawrence Burt, the financial aid director at UT-Austin. Burt formerly held stock in the parent company of a lender he placed on the university's preferred list.

The various developments have created new interest in the direct loan program, which was established in the early 1990s. The National Direct Student Loan Coalition, an alliance of participating colleges, has fielded inquiries from dozens of schools in recent weeks.

"A lot of people are now saying that those schools that went into direct lending really avoided much of the current controversy and, in hindsight, did the right thing," said Craig Munier, chairman of the coalition and director of scholarships and financial aid at the University of Nebraska-Lincoln.

Proponents of direct loans say they save taxpayers money by eliminating fees and other subsidies paid by the government to lenders. In addition, they note, borrowers pay interest to the government rather than to lenders. Interest rates are similar for both programs.

Bush's 2007 budget shows that direct loans cost taxpayers $1.70 for every $100 loaned, compared with $7.59 for loans by private lenders, according to an analysis by the student loan coalition.

If every school in the United States participated in the direct loan program, taxpayers would save about $4.5 billion in one year, the coalition said. The Congressional Budget Office and the White House Office of Management and Budget also have concluded that direct lending is cheaper for taxpayers.

Banks and other lenders contend that those studies rely on accounting rules that exaggerate the cost of the Federal Family Education Loan Program, the one they participate in, and understate the cost of the William D. Ford Federal Direct Loan Program, named for the late U.S. representative from Michigan who sought to broaden educational opportunities. The private lenders say their discounts on loan fees and interest rates result in a better deal for students.

"The cost savings are not nearly as great as portrayed by advocates of direct loans," said Fritz Elmendorf, a spokesman for the Consumer Bankers Association, which represents lenders. "We believe strongly that students get better service from private lenders."

The debate has taken on a partisan tone, with many Republicans in Congress defending private-sector involvement and Democrats arguing that the direct loan program should be expanded.

In Texas, 41 schools--most of them for-profit trade schools--participate in the direct loan program. A few Texas schools, including Prairie View A&M University, dropped out of the program about 10 years ago because of paperwork glitches and heavy demands for record-keeping. UT-Austin opted to stick with private lenders in 1993 because of concerns about accounting and data-processing services that might have to be added, officials said.

Texas State has deep experience with both direct loans and private lenders. The university was among the first 100 or so colleges to sign up for the direct loan program.

The prospect of dealing with one lender rather than many appealed to the university's president at that time, Jerome Supple.

Texas State also offers federal loans through private lenders. First-time borrowers are steered into direct loans, while students transferring from other schools who already have debt with private lenders can continue taking out loans with them.

Gomez, the financial aid director, said the direct loan program is simpler to administer. She is thinking about dropping the private-lender program.

Some financial aid administrators seem to have an emotional attachment to the private-lender program, she said. "I don't want to say they're brainwashed," Gomez said. "Possibly, service has improved, and they see no impetus to change."