Thank you, Bill Mack.
Thank you for asking me about one of my favorite topics.
The loan program in question was started decades ago and was titled the “Guaranteed Student Loan” program. The GSL program was set up to have banks make the loan to the student, without the student needing to pass a credit check. The federal government "guaranteed" the loan, acting essentially as the student's co-signer. Because it was a federal program all of the lenders offering the loan had to offer the loan at the same terms (i.e. the same interest rate, repayment schedule, deferment options, etc.). When students picked the lender from which they wanted to borrow they would decide based on their or their parent’s prior banking history, the location of the bank branch or which bank offered them a free Frisbee.
The banks participated in the program for several reasons. The government was guarantying the repayment of the loan; the government was paying the interest on the loan while the student was attending college and the government was paying the bank a fee to compensate them for the cost of processing the loan. The bank was in a position of investing their depositor’s funds in a very safe investment, student loans.
The loan program in question was started decades ago and was titled the “Guaranteed Student Loan” program. The GSL program was set up to have banks make the loan to the student, without the student needing to pass a credit check. The federal government "guaranteed" the loan, acting essentially as the student's co-signer. Because it was a federal program all of the lenders offering the loan had to offer the loan at the same terms (i.e. the same interest rate, repayment schedule, deferment options, etc.). When students picked the lender from which they wanted to borrow they would decide based on their or their parent’s prior banking history, the location of the bank branch or which bank offered them a free Frisbee.
The banks participated in the program for several reasons. The government was guarantying the repayment of the loan; the government was paying the interest on the loan while the student was attending college and the government was paying the bank a fee to compensate them for the cost of processing the loan. The bank was in a position of investing their depositor’s funds in a very safe investment, student loans.
The advantage to the government was that it could provide students with a loan program without needing to raise the capital needed to fund the loans.
Since then, the government has had a change in philosophy regarding the raising of capital. They are now willing to do so.
In the early 1990s the federal government began the William D. Ford Federal Direct Loan Program (Direct Lending). It began as a pilot project with 10 schools. In the second year it expanded to as many as 50 schools. The Clinton administration reviewed the results and made the program available to all schools. Since then many schools have signed up to participate.
This brings us to today’s situation. Right now there are two programs. The Federal Family Education Loan Program (FFELP) and the William D. Ford Federal Direct Loan Program. Both are part of the Robert T. Stafford Loan program.
The recent law has eliminated, as of July 1, the FFELP portion of the program. Students who are currently in school and have been borrowing through a bank will now borrow, under the same terms, from Direct Lending. When the student graduates he/she will be able to consolidate their loans into one program. The impact on students will be minimal. If the student has been attending a school participating in FFELP they will need to sign a new promissory note for their future loans from Direct Lending.
The repayment provisions of Direct Lending have been updated so that students who elect to repay their loans using a program that bases their maximum payment on their annual income will have any remaining balance due forgiven after 20 years. The previous rule forgave the unpaid balance after 25 years. It is expected this will impact very few students. The usual repayment term is 10 years, and most students elect for that option.
I hope I have answered your question. If you would like to follow up with me I can be reached at ----
Sincerely,
Bill Mack
Financial Aid Experts, Inc.
Karen at Chase Bank Student Loan Services was asked what the legislation means exactly:
"The government will now be the direct lender, banks are not going to manage the loan anymore...Sometimes federal loans will not cover the students needs, but will still have our private student loans."
How will this affect students?
"It will not affect the students negatively at all. The terms are the same."
How does Chase feel about this? Aren't you losing business?
"Hahaha we are not worried. We are not worried at all, we still have our own private loans."
A Live Chat session with a FAFSA representative:
A Live Chat session with a FAFSA representative:
New party ('John Matulovich') has joined the session:
John Matulovich: Hello, thank you for contacting the Federal Student Aid Information Center. How may I help you?
Daisy Geoffrey: Hello, I am a student at the New School University in NYC, and I was wondering what you at FAFSA think about the recent legislation regarding student loans- is this going to be good for students?
John Matulovich: I can help you with the fafsa, if you have a problem, we're an information center, we're not supposed to be giving personal opinions. Interest rates are supposed to go down which is good though, if you're talking about the loans being through the department of education, that's good because they offer certain loan forgiveness programs that other lenders do not as well.
An Access Group representative, Lisa, was asked how the legislation would affect lenders and their employees?
"Well, I don't know yet. We're still going to be servicing other loans."
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