Proposed direct lending program would take banks out equation

President Barack Obama’s proposed 2010 budget would create mandatory funding and increases for Pell grants and replace subsidized loans made by private banks with direct government lending, a university official said.

If the budget passes as written, students would no longer go to private banks for student loans, said Mike Scott, director of scholarships and student financial aid. They would instead go directly through their college campus for a government-funded loan, he said.

“There are pros and cons to direct lending,” Scott said. “Direct lending would make the process simpler for the university; we would have more control over the process. The negative is trusting the government to effectively and efficiently run a program this large.”

The budget initially passed both the House and Senate, but the two chambers must still meet to reconcile differences and create a final version of the budget. According to the budget proposal, the government will be working out further details on the loan program in the coming weeks.

According to the budget proposal, Obama’s budget recommends the elimination of the Federal Family Education Loan program and the origination of all new loans through the Direct Loan program.

Senior engineering major Jeremy Jenkins said that although he receives a private loan from a bank right now, he is in favor of the proposed direct lending program.

“It’s good because having the government take control of the loans will lessen interest rates and cut out the third and fourth parties,” Jenkins said. “The only downfall is the loan and credit restrictions will most likely be more strict because it is the government.”

According to a New York Times article, under the FFEL program, the government pays lenders like Citigroup and Bank of America with both the subsidy and the maximum interest rate for borrowers set by Congress. Private lenders still provide valuable marketing, customer relations, billing, default prevention and collection of delinquent loans services, according to the article.

According to the budget proposal, the Direct Loan program would make campus-based, low-interest loans more widely available. The funds to support this program would operate at the federal level. Replacing the FFEL program with direct government lending would save $94 billion over the next decade, money Obama said he would use to expand Pell grants, according to the proposal.

Scott said the proposal would make the Pell Grant program mandatory to provide guaranteed government funding, something the university supports. The proposal also recommends making permanent the $2,500 American Opportunity Tax Credit created in the stimulus package, Scott said. The tax credit allows those paying for the first four years of post-secondary education to write off a portion of their bills, he said.

“It is one of the few ways the government helps middle to upper-middle income families pay for college,” Scott said.