While many at Bowdoin are focused on the new federal health care bill, the Office of Financial Aid is excited about a virtually unpublicized attachment to the legislation that eliminates bank-based loans for college students. The Student Aid Bill, presented by the Department of Education, will simplify the loan process for Bowdoin students and parents.
Since the 1960s, loans for schools have come from banks, which are in turn subsidized by the federal government. This program, called the Guaranteed Student Loan Program, requires students to shop around for banks to find loans, called Stafford Loans, with the lowest interest rates and the best repayment policies, sometimes requiring students and parents to acquire loans from three or four different lenders.
Associate Director of Student Aid Gary Weaver explained the history of this process and the burden it places on both the federal government and students and parents looking for loans.
"As of 2007 there were over 4,000 lenders participating in the Guaranteed Student Loan program, said Weaver. "The cost for the government went from a few million dollars in the 1960s to 81 billion dollars in 2007. It became big business and as more and more banks piled on it became very competitive and very lucrative for banks."
In 1993 President Clinton questioned this method of student aid and introduced the Direct Loan Program, which took student loans directly from the federal treasury, saving the government money and attempting to streamline the application and payment process for students.
"The bank-based lenders saw a huge competitive threat, which it was, because the cost of capital to the feds is a lot cheaper," said Weaver. "For 20 years there has been this competition between federal-based and bank-based loan programs."
The final straw for the Federal Government came last year when the credit market dried up in the recession and banks no longer had money to lend to students. Weaver discussed the actions of the Obama administration to end bank-based student loans.
"Obama has other spending priorities. He needs savings of that 81 billion dollars to meet his educational priorities and in spite of unbelievable lobbying efforts from the banks, he signed the death knell for bank-based student loans [on Wednesday]," said Weaver. "The bill was attached to the health care bill because of the politics of the health care bill and the need for the use of some of this money for other things."
The new system will route all student loans through a single Web site set up by the Department of Education. All loans will come from the federal treasury so that students will have one number to call and one source of loans to worry about.
"It's essentially one stop shopping. They go to a federal loan Web site. All it means is that instead of the bank providing the capital the taxpayer through the Department of Education will provide the capital. It will be a much simpler process for students and parents and there will be no question about the availability of money because they are borrowing directly from the treasury," said Weaver. "So anything happening in the private market will not affect the ability to borrow. None of the terms and conditions of the Stafford loan program have changed, it is just simplified to work through the federal government."
As far as Bowdoin is concerned, the only changes made to financial aid will be administrative in order to deal with the new system of loan distribution. Since Bowdoin is a no-loan school, the Office of Financial Aid does not need to adjust aid packages to accommodate the elimination of bank-based loans.
"We're small players in this. Some of the big schools like the University of Pennsylvania and University of Texas, these are the schools that impact a lot of lenders and their decision makers had to make some serious investments in infrastructure because they are so dependent on these loans," said Weaver. "Northeastern was an early follower of these loans and many schools watched them to see how it went and the transition went better than a lot of people thought."
In terms of attracting prospective students based on financial aid, Weaver believes that this bill will eliminate that element of competition between schools.
"The competitive issue for schools like Bowdoin has less to do with loans and more to do with grants. Bowdoin is a no-loan school. We don't package loans into financial aid, so the demand for lending will always be there," said Weaver. "The direct loan program benefits everyone equally. It neutralizes that competitive advantage because all the terms are the same."
Bowdoin jumped on the bandwagon early as well and began offering federal loans in place of bank loans as early as a year ago. Currently, Bowdoin students and parents are loaned about six million dollars a year, with 30 percent of that volume coming from the Direct Loan program. Fifty percent of that volume still borrow bank-based loans, which will be phased out with the passing of the new legislation.
"A lot of it is upper-class people who are used to a bank-based system and have stuck with it. Another 20 percent of our sources are oddball loan programs," said Weaver. "We'll graduate out all the bank-based lending now and I think people will have a very easy time submitting applications for this new program."
While the new program will be a huge benefit to students seeking federal loans, there is the possibility of a downside. Since the new loans are the product of a bureaucratic government instead of a profit motivated bank, there is the potential for slower service and impersonal attention during the repayment phase post-graduation, said Weaver.
"There is always the possibility that students will get lost in the shuffle and that's what the bank-based lobby based its resistance on," said Weaver. "They do personalized care. That is one point of view. What federalizing does, for better or for worse, is eliminate the profit motive among these banks. I'm concerned only that there will be some inefficiency concerning repayment after a student graduates. So, while they will be treated fairly and equally, it's possible that the service will not be as immediate."