Education Department Prepares for Switch to 100% Direct Lending

Washington — Congress has yet to decide whether to adopt President Obama’s proposal to end the bank-based guaranteed-loan program and move all colleges to direct lending by the 2010-11 academic year. But the U.S. Education Department is already preparing for just such a transition.

Mr. Obama has said the government would save $4-billion annually by eliminating the guaranteed-loan program — which provides government subsidies to banks that issue the loans — and moving all colleges to the direct-loan program, under which the Education Department issues loans directly to students through their colleges. The president plans to use the savings to bolster the popular Pell Grant program, which provides money to low-income students.

On Wednesday the department began sending letters to colleges outlining steps it is taking to ease the switch to direct lending.

The department has expanded its computer system that distributes direct loans, created accounts that allow colleges to transmit loan records electronically, and awarded contracts to four companies that will service the loans, the letter says. The companies will handle billing, collections, payment processing, and customer service.

Congress is set to decide on the president’s proposal this month. Several Republicans have voiced strong opposition to the plan, saying it would cost thousands of jobs and prevent colleges from choosing among competing loan programs.

Yesterday, on the e-mail list of FinAid, an independent financial-aid Web site, several financial-aid officers said the Education Department’s letters present the president’s proposal as a done deal.

Christopher Brown, director of admissions and financial aid at Soka University of America, in California, wrote that a representative of the department’s Federal Student Aid office told him the switch to direct lending was “inevitable.” —Austin Wright