FFELP versus Direct Loans: HR 3221

Recently the House voted on HR 3221. This is a bill designed to eliminate FFELP lending and transfer every Title 4 college's business to Direct Lending. The Senate is now working on their own version of this bill.

Health reform is the top domestic priority at the moment, which means that HR 3221 and its ramifications have gone largely unreported. The House bill was pretty much guaranteed to pass, but the Senate has yet to come up with a comparable bill. For those of us who work in the FFELP industry as lenders, servicers or marketing representatives, the battle is now in the Senate.

So why does the average student or parent care?

If the Senate comes up with and passes a similar bill, then every FFELP lender, good or bad, will go away. While this eliminates competition, the bigger loss is service.

Direct has a notorious reputation for sub-par customer service. Recently they put out a contract for current servicing agencies to bid on their business. The servicing agencies which won this contract will not be assisting Direct in all of their processing.

The companies which inevitably won these contracts happen to be some of the same companies which were investigated by the New York attorney general Cuomo and found guilty of most of the illegal activities he cited as problems in the student loan industry. They are now paying fines to make up for their illegal dealings.

Out of the sixteen investigated companies nationwide, only two of them were investigated and determined clean of all charges. Neither of these companies was awarded a Direct contract. Therefore the reward for playing it straight and not abusing student's money for financial gain was watching other companies who did use these illegal activities gain a reward for their actions.

Along with the elimination of the FFELP program, schools will have to spend money and time to convert their systems over to Direct processing. Direct uses a different system than FFELP, which means every school in the nation would be forced to divert resources to this new process. For most schools this will equal hiring additional staff to train and handle the higher call volume due to student confusion. For smaller colleges, in particular community colleges, this may equal dropping student loans altogether since they do not have the same volume of income as larger schools and may not be able to afford the switch.

For servicers, this switch will mean layoffs. Any left standing will continue to service the volume already on the books, but originations teams and marketing teams will have no product. If the servicing agent does not switch business quickly, the company will die. FFELP defenders estimate a job loss of 30,000 plus.

And so this post is a plea to any readers I might have. Please contact your senator by phone, mail or email and let them know your position on FFELP. I hope that you would prefer defending the program, but if your opinion is the opposite then I still believe you should contact the appropriate Congressman and tell them. These bills will affect every student who enters college in the coming years, and every American with an investment in college through themself or their children should make their voice heard.

Related news articles:

http://chronicle.com/article/House-Passes-Bill-to-End/48499/

http://studentlendinganalytics.typepad.com/student_lending_analytics/2009/06/and-the-winners-aredepartment-of-education-awards-servicing-contract-to.html

Opinion Piece The Quietest Trillion: http://online.wsj.com/article/SB10001424052970203440104574405154157021052.html