Bill would cut banks out of the student lending equation

Tacked on to health care reform that the House passed over the weekend were sweeping changes to how government student loans are handed out.

The move would get private banks out of the government student loan business. Billions of dollars in fees banks collected to service loans would instead be used to increase aid for needy students.

It's called direct lending, and it's how many Minnesota colleges already handle their financial aid.

Right now some Minnesota college students choose from a list of private banks to act as a middleman between them and the government in a student loan deal.

Kathy Ruby, the dean of student financial aid at St. Olaf College in Northfield, says under direct lending students wouldn't have that choice.

"They would instead get the money directly through the school who would be connected to the [U.S.] Department of Education and get the funds directly from the government," Ruby says.

That's how the student loan process will work at all U.S. colleges as of July 1 under legislation passed by the House. The issue will be taken up by the Senate this week.

It's actually the process St. Olaf has used to get loans to its students since last fall.

Ruby says getting student loans straight from the government without the help of private banks has worked just fine so far. "We were able to get the money when we needed it and when our students needed it and it was a fairly smooth process," she says.

Direct lending is not a new idea. One of the first Minnesota colleges to forgo private banks and deal only with the government was Minnesota State University in Moorhead.

Carolyn Zehren, director of financial aid at MSU-Moorhead, says the college started direct lending in 1999.

"As we've reviewed it over the years we've maintained that it was, and still is, the right decision for students to borrow through the direct lending program," Zehren says.

Zehren found direct lending meant more flexible payment plans for students and lower fees.

Private banks have lobbied against the move to require direct lending at the nation's colleges. They fear it will mean thousands of layoffs in the industry.

The Congressional Budget office says the move will save $61 billion in fees that would have gone to the banks in the next 10 years. The Obama administration plans to use that money to provide financial aid to needy students instead.

Some financial aid officers are concerned with how colleges will make the change to direct lending.

Jeff Olson, director of financial aid at Bethel University in St. Paul, said the college switched to direct lending last fall.

But with the proposed deadline for all colleges to switch less than four months away, Olson says he wonders how well the transition will go at colleges not prepared to make the change.

"And does the Department of Education have the customer service capacity to now coach thousands of schools through this transition process?" he said.

Even though the package containing the measure still has yet to pass the U.S. Senate, colleges in Minnesota who haven't switched to direct lending are preparing to do so now.

Many private four-year colleges have already made the switch, as has the University of Minnesota and 11 schools in the Minnesota State Colleges and Universities system.

Twenty-one MnSCU colleges would need to make the switch by the July 1 deadline, but MnSCU officials say they'll be guided by colleagues who have already gone through the process.