Uncle Sam to handle school loans

View larger image Anthony Ring/Daily Federal Takeover The Change: As of July 1, all new federal student loans will be issued directly through the U.S. Department of Education rather than through banks. The Thinking: The change should save $68 billion over the next 11 years, freeing up money to expand the Pell Grant program and provide help for qualified borrowers with paying back student loans.

By James Heffernan - jheffernan@nvdaily.com

For millions of college students and their parents, this summer brings a significant change to the federal student loan program.

As of July 1, all new federally backed student loans will be issued directly though the U.S. Department of Education rather than through banks.

The change, part of the Health Care and Education Reconciliation Act passed by Congress and signed into law by President Obama on March 30, is intended to save $68 billion over the next 11 years, according to the nonpartisan Congressional Budget Office. The money will be used to expand the Pell Grant program for low-income students as well as provide help for qualified borrowers in repaying their loans.

Shenandoah University, a private four-year institution in Winchester, has participated in the federal Direct Loan Program for the past 14 years, according to financial aid director Nancy Bragg.

"For us, the effect of the legislation is that hopefully there will be additional grants made available to students," she said.

About 85 percent of new students at Shenandoah apply for federal aid, a figure that has held steady over the past several years, Bragg said.

She encourages new students and their parents who need help paying tuition to fill out a Free Application for Federal Student Aid online, which will determine what the student is eligible for. SU also offers a full range of federal and state financial aid programs as well as academic scholarships.

"Over the summer, those applications are processed so the funds will be there when they start in the fall," Bragg said.

Lord Fairfax Community College officials could not be reached for comment Friday. But in an interview last summer, Karen Hart Bucher, LFCC's director of enrollment management, said the college has seen an increase in the number of federal student aid applications due to the economic downturn. During the 2007-08 academic year, LFCC awarded more than $2.7 million in grants, work-study and scholarships to more than 1,200 students.

Banks, meanwhile, which traditionally have served as middlemen on federal student loans, are adjusting to the new law, in part by filling the gap between the amount of federal financing for which a student may qualify and the overall cost of their education.

"There is still a need for additional funding beyond the government guarantee loan amount, and college costs continue to rise," said John Willingham, Winchester market president for Wachovia Bank.

For the most part, government loans provide less than $7,500, far below what the typical student requires, Willingham said.

Before being bought by Wells Fargo, Wachovia was not marketing private student loans to its customers, he said. The affiliation presents new opportunities for the regional bank. In May, Wells Fargo launched its Student Loan for Parents, which comes with no origination, disbursement or early repayment fees, and the funds are sent directly to the parent, student or other loan sponsor. Customers have the option of making interest-only payments for up to 48 months while the student is in school, and the loan can be repaid over a period of 15 years.

The loss of the bank-based Federal Family Education Loan does not directly impact BB&T, since the bank did not previously participate, according to corporate spokeswoman Mary Tolbert.

The same holds true for community banks in the region, which were squeezed out of the picture nearly two decades years ago.

"Back in the '80s, all banks, including us, did student loans. It was a great way to build your business," said Harry S. Smith, president and CEO of Strasburg-based First Bank. "We put them together and sold the package to Sallie Mae. Then in the early '90s, there was an attempt to regulate the industry, and community banks could no longer produce enough [loan] volume. At that point, we had to evaluate it and we couldn't afford to comply."

Community banks offer other avenues for college students and their families, including traditional loans, college savings plans and home equity lines of credit.

"We do those all the time," said Bank of Clarke County President and CEO John R. Milleson.

However, the new system has already taken a bite out of private lender Sallie Mae. The Reston-based company recently cut 2,500 workers, or about a quarter of its staff, prompting Republican Gov. Bob McDonnell to issue a statement denouncing the Obama administration's "alarming" reach into the private sector.

Smith, too, is wary of Uncle Sam's newly expanded role in the student loan industry.

"The government does some good things," he said. "If the goal is reached, which is more money for more people at better prices, that's great. But we'll just have to wait and see if it's more efficient than the old system was."