Changing federal student aid

A student fills out an application for a chance to win one of 30 scholarships worth $30,000 which will be given out on as she takes part in Cash for College, a college and career convention, at the Los Angeles Convention Center on Dec. 8, 2010 in Los Angeles, Calif.

Jeremy Hobson: Today a House Committee will be looking at how the student loan business is faring following big legislative changes last year. Student loan debt is expected to hit $1 trillion this year and the biggest provider, by far,
is the federal government.

Amy Scott has more now from the Marketplace education desk at WYPR in Baltimore.

Amy Scott: As part of last year's student aid reforms, private banks can no longer offer federal student loans. They used to get big subsidies for doing so. Now the federal government makes all the loans directly.

Christine Lindstrom with the U.S. Public Interest Research Group says the bulk of the savings went to shore up the Pell Grant program for low-income students.

Christine Lindstrom: Things are so much better in the college affordability world now that we have that money actually going to students.

There have been some complaints, though. Justin Draeger with the National Association of Student Financial Aid Administrators says overall, the transition has been successful. But he says some schools miss the financial literacy and debt counseling programs private companies used to provide.

Justin Draeger: We're working with the Department of Education right now to fill that gap, but schools have said that there's a noticeable absence of some of those materials that they relied heavily on in the past.

Materials that may be more important than ever, with student loan defaults on the rise.

I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.
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The fact that these loans are still being securitized is enough to tell me that students are still being taken advantage of, regardless of where the loan originates. If these new rules really posed serious threats to banks and the financial industries, they would be screaming bloody murder and have more lobbyists on the street that OWS protesters. From the comments here, I am reminded of the changes to health care, which allowed private insurers and HMOs to provide “choices” for consumers, and ending up with people unwittingly signing over their Medicare benefits to insurance companies who then extracted a profit (Making a Killing – HMOs and the threat to your health). Costs rose for people. In order to truly control costs and give students a fair deal (in the absence of folding higher education into a progressive tax base and extending it to all), student loan debt should simply be dischargeable in bankruptcy. The market will figure the rest out for itself.

Katie KT, 100% direct lending has occured for the last 16 months. Do you think this a large enough sample size to account for the rise in the default rate? If you dug below the surface you may be able to find other scapegoats for the incerase of defaults (http://www.huffingtonpost.com/2011/09/12/for-profit-colleges-student-loa...). Under the old system (FFEL) students were given the ability to consolidate their federal loans and they would end up as Direct Loans. Additionally, banks are able to sell their loans to Direct Loans and once they collect their fees most did. They had already captured their incentive after origniation.

Also, under the previous FFEL program (before all stafford loans became Direct Loans) you would pay your gurantor and not the banks. Many people chose lenders such as Sallie Mae but when they wrote a check it was to Great Lakes. What you are experiencing is not at all new.

Well, at least Linda knows where her loan is. The wonderful direct lending mess has thousands of loans that can't be located or loans that have been put with the wrong agency. Mine included. I can't wait to see the big interest accrual after another 2 years of trying to locate my loan.

People focus on the subsidies and the evil banks. The fact is that no bank would give a non secured loan to a 17 year old kid with zero credit. That's why the govt guaranteed the loans. Otherwise there was no incentive for lenders to throw money at kids.

For those who praise the Direct lending program take a look at their default rates. Nearing 10% on federal loan defaults these days.
The fed and others continue to used default rate as a measure of success when in fact they should be concerned with delinquency rates. The fed is looking at the problem when it's already too late.

Linda, it is better for tax payers because the bank is not soaking up the interest, the interest is actually going to taxpayers.

Wow, SIX companies I've never heard of! For the WHOLE country! Chosen by some appointee in the most DINO presidential administration the country has ever seen! Gee, I feel so much better about my personal finances!

Wow, SIX companies I've never heard of! For the WHOLE country! Chosen for me by some appointee in the most DINO presidential administration this country has ever seen! Gee, that makes me feel so much more secure about my finances!

Linda, your loans are being serviced by one of the 6 agencies chosen by the Department of Education to administrate the repayment schedules for borrowers. Why does this stir up such consternation? You can either consolidate all your loans with another servicer or pay several entities, it's up to you. What's the big deal?

The president's plan is a bit disingenuous. I just finished school, and now owe $5500 to some company I've never heard of, "Great Lakes Borrower Services", rather than to my credit union or Sallie Mae, as I have in the past. How is this better for students or taxpayers>

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