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Direct student loans save federal funding

U.S. Department of Education officials told Congress Tuesday that the five-year-old direct-student-loan program will save the government more money than the federally guaranteed loan program.

"Department of Education analyses indicate that overall per-loan Federal costs for the William D. Ford Direct Student Loan program are substantially lower than those for the Federal Family Education Loan program even when Federal administrative costs are included," according to the report.

The Department said direct-loans will save the federal government $4 for every $100 lent. The government will pay $14 for every $100 in federally guaranteed loans.

Direct loans come straight from the federal government.

About one-third of American colleges, including the University, participate in the direct loan program.

The remaining institutions of higher education use federally guaranteed loans.

Federally guaranteed loans are made by banks who receive government subsidies.

The banks are guaranteed to be paid by the federal government if the borrower defaults on their loan.

The report is "the most complete apples-to-apples comparison of the two programs' costs ever undertaken," said Marshall S. Smith, U.S. Department of Education deputy secretary, in his remarks released on the report.

Yvonne Hubbard, director of the University's Office of Financial Aid, said the University gave federally guaranteed loans to students until the direct loan program was introduced.

"Five years ago the banking industry was not providing good services to students," Hubbard said.

"We were getting 20,000 checks a year ... and it was taking six to eight weeks for the kids to get their money," she said.

The direct loan system sends the money electronically, which greatly reduces the overhead.

"However, the banking industry has responded to the competition and improved its industry immensely," Hubbard said.

She said the University now is looking into the federally guaranteed program again.

"We have no complaints, but our students deserve that we look into the entire industry," she added. "Students may be able to get a better deal."

"Students and schools are served by healthy competition in the student loan programs, which has created marketplace incentives for both programs to improve," Smith said in the report.

"That's why the Department supports two strong loan programs," he added in the report.

Marshall said in his remarks that the government makes $580 million from the interest generated from the $30 billion in loans it makes every year.

The Department's report was prepared in response to a request from U.S. Rep. John Porter, R-Ill., chair of the subcommittee overseeing appropriations for the Department of Education.


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