March 9, 1995
Beginning next semester SF State students will receive their student loan checks at least one month sooner thanks to a new federal program, SF State's financial aid director said.
But, the program is being criticized as too costly by some U.S. Republican congressmen and bank loan guaranty officials.
The Direct Loan Program, as it is called, was passed in 1992 with the goal of saving the federal government billions of dollars while speeding up the delivery of student checks.
It makes the government the bank for student loans instead of private banks.
When UC Irvine became one of the first schools to use the Direct Loan Program in Fall 1994, students got their checks 24 to 48 hours after finishing the paperwork, said Otto Reyer, UC Irvine's financial aid director.
Now Rep. William Goodling (R-Pa.), chairman of the House Economic and Educational Opportunity Committee, has introduced a bill to stop the Direct Loan Program from expanding until its impact can be studied.
Sherry Schweitezer, a representative for the U.S. Department of Education, said SF State's Direct Loan Program will not be affected even if Goodling's bill passes because the program is already in place and will start in Fall 1995.
At SF State, Tom Rutter, director of financial aid, said students will have to wait a little longer to get their checks than at Irvine -- one to two weeks initially. He said the waiting period will get shorter as the system gets in place.
The Direct Loan Program, created in 1992 by a Democratic congress, saves money by using lower interest rates and not paying fees to private banks, Schweitezer said.
If all colleges are using direct lending by the target date in 1998, the federal government could save $12 billion by the year 2000, Schweitezer said.
House Speaker Newt Gingrich (R-Ga.) said in a February Washington Post article, he would like to abolish direct lending because the country's savings are exaggerated by the Education Department.
Goodling added in the article, "The department has not expertise to undertake something like this."
Colleges and universities are being phased in over a five year period ending in spring 1998. Last year five percent, or 104 schools, switched to the direct loan program.
Next semester, SF State is included in the 1,500 schools that will have direct lending.
SF State hired MGT Inc. of America, a management consulting company, last November to help coordinate the different university departments. When MGT Consultant Kim Handy was asked how much the company was being paid she said $32,000 and then she checked with her supervisor and revised her previous statement, "just say $90 an hour."
According to Rutter, the department may need to hire one or two additional staff members because of the direct lending program.
Last year, about 50 percent of college students received loans totaling $23 billion, according to Schweitezer. According to Ed Apodaca, vice president of enrollment services, SF State students received $22 million in financial aid this year.
Reyer said lenders and guarantors are trying to stop the direct lending program because of the loss of high profits. A bank's second most profitable item is the student loan program, he said.
Direct lending also has more flexible payment plans to meet a borrower's income, Rutter said.
USA Group, the nation's largest loan guaranty agency, criticized the program because one direct lending repayment plan has students paying monthly payments smaller than the interest rate on the loan. This means more debt for students, according to Susan Conner, vice president of public affairs at USA Group.
Under this option, if a student hasn't paid off the loan in 25 years, the government will pay off the balance. But the student will be taxed by the IRS for the amount of the loan, Conner said.
Schweitezer said the optional payment schedules provide flexibility in case the student's financial situation changes.
"That's $500 to $600 a year you could put into something else," Schweitezer said. "That could mean a lot if you're on a tight budget."
How the government will collect on the loans is uncertain.
Rutter said the Internal Revenue Service might be the collection agency because of its access to taxes. But, the IRS is already overburdened with work, he said.
In the 1970s the federal government was involved in student loans but had too many defaults, Conner said.
"There's a question mark as to if the government will collect this time too," Conner said.
Apodaca, who was the financial aid director in the late 1960s at SF State, said, "In 1968 and 1969, we were giving out a lot of loans without even questioning them."
During those years, people were obviously using false information, but the government gave the money regardless, Apodaca said.
"They would put all kinds of crazy things," Apodaca said -- "'My birthplace is Disneyland,' and it was accepted. Ten years later, we couldn't find them because we didn't have any address or any information."
Reyer said comparing the government loan program in the 1970s to the current program is "ludicrous" due to technology and safeguards that have been implemented in recent years.