Student loans rank right up there with term papers and final exams on the list of college ordeals and anxieties.
There’s the application process that seems to generate as much paperwork as a short hospital stay. Then the sometimes excruciating wait for the check.
Finally, there’s the stress over whether the education that the loan is buying will bring a job that can repay the debt.
But a reform of federal student loan procedures is underway that would change all of this. Four Illinois schools are among 104 nationally helping to introduce the new direct student loan program this summer.
The streamlined approach involves applications made directly to the federal government, which disburses the money directly to students. If the program works, the U.S. Department of Education, which is overseeing the changes, hopes all eligible schools will adopt the new system within five years.
Winners in the process would be students, who receive loans quicker without the bewildering array of forms, and taxpayers, according to direct-lending advocates, including Sen. Paul Simon (D-Ill.), the program’s main congressional sponsor.
Losers will be the middlemen-the banks and loan-guarantee agencies-that required all the paperwork and, through their service fees, kept costs of the traditional student loan program unnecessarily high. Understandably, banks and loan-guarantee agencies have emerged as the major opponents of direct lending.
The University of Illinois at Champaign-Urbana, Bradley University in Peoria, Fox College in southwest suburban Oak Lawn and DeVry Institute of Technology in west suburban Addison were the Illinois schools chosen to be in the first wave of this student-loan reform. The initial results are encouraging.
David Pardieck, financial aid director at Bradley, says he’s two months ahead of schedule in parceling out federal loan money to students.
Likewise, Craig Munier, a financial assistance official at the U. of I., says his office will disburse federal loan money next month to students in record time-72 hours after receiving their signed promissory notes.
“I’ve been in financial aid for 20 years, and in that time I’ve become pretty cynical about the Department of Education and government in general,” Pardieck said. “But this time they’ve pulled it off-at least the first year.”
Simon said the new program “benefits everyone except for bankers, the guarantee agencies and the secondary market like Sallie Mae.” Sallie Mae is the nickname of the Student Loan Marketing Association, which acquires and resells student loans.
The new program is designed to take advantage of modern efficiencies brought about by computer modems.
In applying for a loan, a student fills out a standardized form and presents it to the college loan office. The office then electronically transmits the form to a private processing company working for the government.
Usually within a few days, the school is electronically notified about whether the loan has been authorized. If so, the school sends a promissory note to the student. The student’s loan account, kept by the college, then is credited once the signed note is returned.
By contrast, the current byzantine process requires the student to contact a bank or other financial institution and complete financial-aid forms. Once the loan is approved, it goes to a guarantee agency, which essentially ensures that the bank will get all its money back if the student defaults.
The bank and the guarantor charge fees. They also often spend hours on the phone or days in correspondence with each other or college financial-aid offices to clear up confusion caused by the involvement of so many participants.
Finally, a check appears that the student must then sign over to the school.
So much paper is generated that many critics compare the current system to the health-care industry.
“It’s a wonder we have any trees left in the country with all the paperwork,” said Sarah Myers, of suburban Baltimore, whose son William attends Bradley in Peoria.
Myers and her husband already have put a daughter through college. They said the old system required them to set aside an entire day during Christmas vacation to fill out the numerous forms. Completing the single new form for a loan for their son took less than an hour.
Bradley is a private university with 6,000 students, 60 percent of whom receive federal loans, Pardieck said. He has converted 3,500 of those students to the new program.
Only one family has phoned the school to express concern about the change, Pardieck said. And that was because the student’s father missed the convenience of having the monthly payments deducted from his paycheck by his credit union.
The lack of complaints “really says something,” Pardieck said.
Besides accelerating the loan process, the new program also addresses repayment with an eye toward cutting the 17 percent default rate.
With direct loans, repayment is pegged to income as well as whether a student’s education has paid off.
If a graduate has a low income, then payments can be reduced. And if, after 25 years, there’s no indication that the person benefited from his or her schooling, then the government forgives the loan.
“Education is a good investment, and for almost everybody it pays off,” said David Longanecker, assistant secretary for post-secondary education at the Department of Education. “But (when) it doesn’t, this is the ultimate guarantee. We used to guarantee loans to banks. Now we’re guaranteeing them to students.”
