Loan Battles in Banks and Congress

Direct lending supporters accuse some lenders of delays on consolidation; Democrats and Republicans trade charges in Congress.
March 16, 2005

The battle over student loans is being fought everywhere -- on campuses, in banks and in Congress.

Reports have been circulating in recent days that some lenders are intentionally delaying the process by which students can consolidate loans in direct lending. And in Congress on Tuesday, a bipartisan group of lawmakers introduced a proposal to encourage more participation in direct lending -- and were promptly criticized by Republican leaders.

President Clinton and Congress created the direct loan program in 1993 as an alternative to the Family Federal Education Loan Program, in which banks and other lenders provide loans to students and parents that are guaranteed by public or private agencies and reinsured by the U.S. government against default. Under the direct loan program, the government provides loans directly to students through their colleges or universities (not unimportantly, cutting lenders and guarantors out of the process).

While direct lending has lost momentum since President Clinton left office, its consolidation program has been popular. It gives borrowers with multiple loans the option of combining them into one direct loan. To do so, however, borrowers must obtain a Loan Verification Certification from their original lenders. Officials at a number of institutions report being told that some lenders are holding these up, creating problems for those seeking to consolidate loans.

Eileen O'Leary, chair of the National Direct Student Loan Coalition and director of student aid at Stonehill College, said that some lenders are using these delays to try to protect their market share.

"This is unconscionable. They say that they are working in the best interests of students and they are holding up a process that the student has requested," O'Leary said.

John Dean, special counsel to the Consumer Bankers Association, said he was familiar with the concern, but had not heard of any recent problems. "I would tell any member who came to me to start processing the forms promptly," Dean said.

He said that the problem in the past has been that some lenders believe that individual borrowers are not eligible for loan consolidation. But the Education Department has ruled, Dean said, that it, not lenders, will decide such eligibility issues.

And the department has sent letters to lenders urging them to be prompt with the verification forms.

While disputes continue over the existing loan programs, members of Congress are debating whether to change them. A coalition of Democrats and some Republicans announced a plan Tuesday to encourage more colleges to use direct lending. Supporters of the plan said that direct lending saves the government money (a view disputed by the banking industry and Republican leaders). By giving colleges some of the savings from switching to direct lending, the supporters of the bill say, more money will become available for Pell Grants and other student aid.

While the proposal has some Republican support, it will face tough going in Congress. Rep. John A. Boehner (R-Ohio), chairman of the House Committee on Education and the Workforce, issued a statement Tuesday opposing the bill.

He said that most colleges "don't like" direct lending and that it "has never achieved the savings it was supposed to achieve."

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