This story was written by Sarah Butrymowicz, Tufts Daily
The recent upheaval in capital markets could cause Tufts to change its system of allocating federal financial aid in time for next years process.
The Office of Financial Aid faces a choice between switching to the Direct Loan Program, traditionally supported by Congressional Democrats, or sticking with the mostly Republican-backed Federal Family Education Loan Program (FFELP), which is more susceptible to fluctuations in the market.
The programs offer the same subsidized and unsubsidized Stafford loans and federally guaranteed PLUS loans, but the sources of the loans are distinct. With FFELP, schools and students go through a third-party lender to acquire money, while in the Direct Loan Program, funds come straight from the government.
It is somewhat odd that we have two programs designed to do exactly the same thing, only they run in very different ways, Tufts Director of Financial Aid Patricia Reilly said.
A university-wide group representing all of Tufts schools will consider several factors to determine what program to use.
Tufts has historically used FFELP, but the nations recent economic instability has spurred it to reexamine whether this is the best option. We are evaluating it this year because theres been so many changes in the market, Reilly said.
Until last year, FFELP borrowers rarely had problems securing funds. But this year, 135 lenders have suspended federal loans, including the Massachusetts Educational Finance Authority, the states most prolific student lender. The non-profit pulled out this summer.
One of the worries going forward this year is that more lenders will drop out, Reilly said.
Sen. Edward Kennedy (D-Mass.) is a strong proponent of the Direct Loan Program, which he considers the more efficient system because it is immune to the vicissitudes of the capital market, one of his aides, who requested anonymity due to office policy, told the Daily.
In April, Kennedy wrote a letter to the presidents of all schools in Massachusetts urging them at least to consider the Direct Loan Program.
Harvard University, North-eastern University and Boston University all use direct loans. Colin Riley, the director of Media Relations at BU, praised the programs streamlined method.
Boston University has been in the program since its inception, Riley said. Its easy to work with, to have all the loans go through one lender.
Boston College, like Tufts, uses FFELP, according to Bernie Pekala, the director of student financial strategies for BC. The school evaluates the two programs on an annual basis and has stuck with FFELP because it has given our students better benefits, better counseling and follow up, Pekala told the Daily.
But due to the current state of the capital markets, BC has applied and been accepted to the Direct Loan Program as a safety measure, Pekala said.
Operational issues constitute a main concern that the university must consider before making a change, according to Reilly. We have systems set up to process FFELP loans, she said. We have a pretty streamlined, almost all electronic process. If we decided to move to direct loans, it would require a significant amount of work on the part of the university.
Still, a slight disparity in the systems loan rates may lead the university to take a hard look at switching. The difference results from a legislative error that is still uncorrected, according to Mark Kantrowitz, the publisher of finaid.org. Currently, PLUS loans through the Direct Loan Program have an interest rate of 7.9 percent, compared to 8.5 percent through FFELP.
On Feb. 8, 2002, President George Bush signed a bill that set Staford loan interest rates at 6.8 percent and PLUS loan rates at 7.9 percent for both programs, effective in 2006.
But exactly four years later, the Higher Education Reconciliation Act (HERA) of 2006 increased the interest rate of PLUS loans that go through FFELP, while leaving the Direct Loan Programs PLUS loan rate untouched. This violation of the 2002 bills rate fixing still stands.
There have been attempts to change this, but none of those pieces [of legislation have] been successful, Kantrowitz said.
This is partly because the Democrats, who favor the Direct Loan Program, gained control of Congress in 2006. Also, congressmen from both parties may be leery of enacting a piece of legislation that could be viewed as simply raising interest rates on students, according to Kantrowitz.
While the disparity between the interest rates was due to a mistake, the difference is rational in that the Direct Loan Program is much cheaper for the taxpayer, the aide to Kennedy said. Instead of subsidizing lenders, the government is borrowing directly from itself.
Rep. Joe Courtney (A 75, D-Conn.), whose district encompasses eight colleges and universities, is a fan of the Direct Loan Program, which began in 1993, for that reason. I think it makes a much better deal, he told the Daily.
Kantrowitz disagrees. While it used to be quite clear that direct loans cost the government less, after the passage of two recent education bills, the College Cost Reduction and Access Act of 2007 and the Ensuring Continued Access to Student Loans Act of 2008, he believes that the differential has been largely eliminated. The savings are minimal enough that it would not justify eliminating one of the programs, he said.
Kantrowitz finds that having two programs is a positive. It brings a degree of competition, which requires that they are both operated at minimal cost to the government and provide solid service to the students, he said.
While FFELP remains the more commonly used program with 3,921 schools employing it, the Direct Loan Program is rapidly gaining ground. In June 2007, 1,173 schools were using the Direct Loan Program. By earlier this month, that number had more than doubled to 2,399, according to Kennedys aide.
Tufts will consider this increase in volume, and therefore in customers, for the Direct Loan Program with an eye on how it affects the programs service.
One of the things we worry about is once we make a loan to the student, what kind of service are we going to get and what kind of service are they going to get? Reilly said.
Aside from the overarching factors, there are also some little differences between the programs, according to Reilly.
For instance, although the fees associated with using FFELP and direct loans, which are distinct from the interest rates, are the same, many FFELP lenders will cover them to stay competitive.
But direct loans forgive the remainder of students debts if they work for a non-profit for ten years after graduating. FFELP does not, but similar alternatives are available, according to Reilly. Taking advantage of these alternatives is just a little bit more complicated, she said.
Under former President Bill Clinton, there was an effort to completely replace FFELP with the Direct Loan Program, but Republicans fought back with a serious counter push back, Courtney said.
Kennedy believes that the Direct Loan Program could handle all of the student loans, but he still feels it is necessary for FFELP to remain healthy for the time being, in order to avoid a mass exodus, the aide said. If all lenders dropped out overnight, that would be very disruptive to students.
Courtney said eliminating FFELP would be possible, but noteasy. It will take a president using the full weight of his office and a strong majority to really accomplish something like that, he said. I wouldnt bet much money that youre ever going to see the elimination of either.
The battle is going to be in terms of whether one program becomes the dominant vehicle, he added.Tufts has considered adopting the Direct Loan Program twice before, once when it was introduced in 1993 and again a few years ago.