Switch in loan programs could hurt N.C. students

U.S. senators hope to save money by eliminating indirect federal loans to students — but state university officials say the move could be bad for North Carolina.

In a bipartisan, bicameral effort, the Student Aid Reward Act of 2005 — sponsored by Rep. Thomas Petri, R-Wis., Sen. Edward Kennedy, D-Mass., and others — was introduced in the House this month.

The act seeks to encourage universities to switch from a program that receives its funds from commercial lenders to one that gets money directly from the government.

Sponsors of the bill report that, according to the Congressional Budget Office, the government will save $17 billion if universities use the program. Under the bill, participating universities would be rewarded with money to be used for need-based aid.

Every college now has a choice of loan programs.

The Federal Direct Loan program disperses funds to students directly from the government.

UNC-Chapel Hill uses the Federal Family Education Loan program, which receives its funds from commercial lenders. Guarantors pay off the interest of subsidized loans and are compensated by the government.

Shirley Ort, director of UNC’s Office of Scholarships and Student Aid, said that although she is pleased that the act’s sponsors want to funnel more funds toward need-based scholarships, such a move is implausible.

Ort also said the University does not intend to switch loan programs.

She said the state’s guarantor, the N.C. State Education Assistance Authority, saves money for students in the long run by putting a cap on interest and other measures.

“If I were to work in another state where there were a lot of cut-throat guarantors, direct lending would look a lot more appealing,” she said.

Steven Brooks, executive director of the education assistance authority, said he does not agree with the federal proposal because the direct loan programs don’t save money like the bill’s authors suggest.

“The whole thing is pretty much a fraud,” Brooks said. “If schools were lured into switching to the direct loan … then students at UNC schools would pay considerably more than their loans today.”

Brooks added that the data supporting the act is based on “phony mathematics” and that schools should have a choice between the two loan programs.

“Giving the campus a choice is fine with me, but bribing a campus seems very heavy-handed, especially when the savings aren't real,” he said.

And there is a possibility that if the act passes, universities eventually won’t have a choice.

Ort said the authors of the act intend to phase out the Federal Family Education program.

After more of the government’s money goes toward the direct loan programs, there will not be enough left to compensate commercial lenders, Ort said.

Pat Smith, policy scholar-in-residence for the American Association of State Colleges and Universities, said the organization does not think the act will pass because of opposition on Capitol Hill and in the Bush administration.

“Some members in the administration feel it will be hard to implement.”

Contact the State & National Editor at stntdesk@unc.edu.