SOURCE: NextStudent

June 05, 2008 14:23 ET

As Colleges Scramble to Find Lenders, Problems in Student Loan Industry Persist Despite Legislation Aimed at Fixing Them

PHOENIX, AZ--(Marketwire - June 5, 2008) - Although the Ensuring Continued Access to Student Loans Act, which was signed into law last month, was designed to assist lenders that are struggling to issue federal student loans, the rescue effort may come too late for students who are attending colleges and universities that have already been dropped by lenders and are scrambling to find new ones.

While the legislation is expected to make it easier for lenders to remain in the student loan market by giving the U.S. Department of Education the authority to buy student loans from struggling lenders, more than 100 lenders and counting have either stopped offering federal consolidation loans or completely suspended their participation in the Federal Family Education Loan Program altogether.

The act may be the lifeline still-active lenders need to continue issuing federal college loans as an estimated 17 million college students prepare to begin their studies for the 2008-09 academic year. But financial aid administrators predict the lender changes may leave students confused about how to locate a new lender. Financial aid offices at affected schools are having to contend with not only finding new lenders but notifying their students of the changes.

With the ongoing lender departures from the FFEL program, which provides federal student loans to students and their families through private lenders, more schools are switching to the Direct Loan Program, which allows students to borrow directly from the Education Department. According to the U.S. Department of Education, 288 colleges and universities have already applied to join the Direct Loan program this year, compared to the 80 schools that applied in all of 2007.

But not all schools are making the transition. Occidental College in Los Angeles, Calif., is sticking with the FFEL program even though the majority of its borrowers have their college loans with lenders that are no longer issuing federal student loans.

The school is informing its 1,000 returning students who were awarded student loans as part of their financial aid package that they will have to sign new master promissory notes and choose new lenders -- a plan that Maureen McRae Levy, the school's director of financial aid, describes as "a nightmare." Beyond the headache for administrators, the lending dilemma may mean many students will graduate with a host of student loans tied to multiple lenders.

New graduates could find themselves needing to repay three different lenders: their original FFELP lender, the new FFELP lender they were forced to switch to when their original lender stopped issuing student loans, and the federal government, if their school ends up switching from the FFEL program to the Direct Lending program.

Although graduates with multiple college loans have the option of consolidating their federal student loans into one federal consolidation loan to help simplify repayment, the disruptions in the student loan industry have affected student consolidation loans as well. The Department of Education is still offering federal consolidation loans, but with fewer FFELP lenders offering federal student loan consolidation programs and many remaining FFELP lenders raising the minimum consolidated balance they'll accept, graduates and their parents simply have fewer options for consolidating their federal college loans.

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