Changes in Student Loan

The federal government has two loan programs that provide money for college and graduate schools. Both programs allow students and parents to lock in interest rates and later consolidate loans, but there are some important differences:

(i) The Federal Family Education Loan Program (FELP) was introduced about 40 years back. FELP allows students to receive money through guaranteed bank loans. Banks profit off interest payments made on those government-subsidized loan, while the government guarantees the loans against default. The government subsidizes loan repayments to private lenders when the borrower's interest rates are below market rates.

(ii) The Federal Direct Loan Program was enacted in 1993. In this case the government loans money directly to students and collects on the interest payments, which help pay for the program. These loans are funded by private companies contracted through the government.

A new bill sponsored by Rep. Thomas Petri (Republican-Wisconsin) is currently under consideration in the House, which would provide financial incentives for schools to switch from FELP to the direct loan plan, thus reducing government subsidies to lenders. However, a majority of schools prefer FELP because they get more services and support from lending groups in administering financial aid than from the government.

Changes to either program would not affect students' ability to get a fixed interest rate. But a matter of more concern is an inevitable cut to student loans once the $40 billion in budget cuts receives President Bush's signature.

In any case we thought these are some of the developments our readers should be aware of, especially if their children are applying for a loan for the coming year.

We also want to tell you about a website we recently came across: StudentLoanJustice.org where former students share their stories of woes with educational loans.